When I was about 12 years old, I was the neighborhood’s favorite babysitter. Every weekend, I was babysitting at least one night and quickly turned my $2/hour evenings into a little stash of cash. I wasn’t the only one who knew about it though, and more than once had my sister say something to me like, “Hey, do you want to go to Fry’s to buy some treats? Okay go get your money and we will go.” And before I knew it, my babysitting money had turned into our favorite combo of Tootsie Rolls and strawberry milk. It. Was. Awesome.
A few years ago when we started doing our deep dive into the world of financial independence, we heard a lot about savings rate. All of these super hardcore members of the FIRE (Financial Independence Retire Early) community had these BONKERS savings rates! (Cue my mocking/I’m super jealous voice for the next quote…) “All you have to do is save 90% of your income and live on $12,000 a year and you can retire in two years!” Okay, maybe the examples weren’t quite that extreme. But for someone who had never tracked or even paid attention to our savings rate, I wanted to simultaneously cry and punch people when they would talk about it.
Last year we finally decided to start tracking our savings rate. The last half of 2019 we had worked on getting our monthly expenses down by doing things like switching to Mint Mobile, getting new auto and home insurance, and cancelling a couple subscriptions we didn’t really use. Once we had everything whittled down, we decided in January of 2020 to start tracking.
We really didn’t have any idea where we would end up for the year. We decided on the goal of 40%, and I thought that was straight up ludicrous. In my mind, the savings rate was made up of whatever we didn’t spend at the end of the month that we could transfer to our savings account. With that mentality, I just didn’t see how in the world we could get to 40%. Luckily, Philip does the math, remember? So after reading up on it, and talking to our economist friend and getting a spreadsheet from him, Philip was able to track our savings rate more accurately.
What do we count?
So everyone can calculate their savings rate how they want, but here is where we have landed. We count any money that has been contributed to a pre-tax retirement account, such as Philip’s 401K and my Simple IRA from last year, as well as our HSA. We also look at our mortgage statement every month and see how much of our mortgage payment went to principal and count that. Then we count any money that we put into a post-tax retirement account, like our Roth IRAs. And lastly, any money that we transfer to our high interest (well, it’s not super high, just higher than our local credit union) savings account gets added to our total also.
So all together, we add up our mortgage principal, pre-tax and post-tax retirement contributions, HSA and then savings account contributions. When we have that number, we divide it by our total pay AFTER taxes are taken out. So for ease of numbers (these are not necessarily ours), let’s say all of those contributions were $4,000. Then our income after taxes was $10,000. So we would use the equation 4,000/10,000=0.4. We would multiply it by 100 to turn our decimal into a percentage, and it would give us 40% for our savings rate. Ta-Da! Easy as that.
Other Savings Types
Everyone can calculate their savings rate differently. Some will include payments on any debt, including principal on student loans, credit cards or cars. Especially since doing all of those things will increase your net worth! I had thought we would have a crazy savings rate after paying off our van in November. However, we decided that since our cars are depreciating assets, we wouldn’t count it. I’m not going to lie, I was kinda bummed about it. Some people also will count any money they didn’t spend that
Other types of accounts could also be counted. If you have a 403B or a pension through your employer, you could totally count that! If you have 529 plans for your kids’ education, that could count. And of course if you have separate investment accounts that you are contributing to, it works! Shoot, if you liked to bury bags of money in your backyard, count it! (Though I don’t necessarily recommend that one. 😜)
So why is it that we want to have such a high savings rate? I mean, besides proving to ourselves that we can do it? Because it helps us determine when we can retire! There are a lot of things that will factor in to when we actually retire, but our net worth will be a major contributor. And our savings rate is what helps our net worth grow. So obviously, the higher our savings rate now, the sooner we can retire. Boom.
I found this chart on Mr. Money Mustache’s blog that shows how incremental increases in your savings can take YEARS off your working life! These numbers are assuming you are starting at zero, and since we already have a positive net worth, our savings rate will probably take us to retirement in a little less than 20ish years.
We recognize that savings rate isn’t always consistent though. Last year we were able to get to 46%, and this year we are hoping to cling to 40%, fully recognizing that it might not happen. And then in future years it will continue to fluctuate, especially as I work more or less, our mortgage principal increases over the life of the loan, or we have big expenses like cars or home renovations (I’m looking at you, kitchen).
What About You?
What about YOU?? Have you ever calculated your savings rate? Do you do it consistently? Are there things you include in yours that I missed? Did looking at the chart make you really want to tick your savings up a notch so you can retire sooner?