How to calculate your savings rate? Too many numbers...not sure where to begin.

[JK]

Pretty new to the world of investing and want to start calculating my annual savings rate on both my gross pay as well as my net pay after taxes. However, looking at my last year tax return, I'm having a hard time figuring out which numbers to use to get my calculations. For 2015, both my wife and I each worked two jobs as a result of a relocation, plus we made other financial moves (Rolling over 401k, IRA-->Roth), etc... that makes things slightly more complicated. Of note, my wife and I file jointly and everything is prepared by our accountant.

-From our end-of-year tax forms, which number is it best to use for gross pay? On form 1040, is it line 7, line 22 or somewhere else entirely different? I had read somewhere that line 22 makes the most sense, but after looking at my return, there are other numbers reflected in line 22 that don't seem to make sense when calculating savings rate (such as including the capital loss on line 13 or rollovers from previous years that aren't reflected in this). Should I be using line 7 then?
-Or should I be using our individual W2 forms...On our individual W2 forms, should I be using "Gross Pay," SS Wages, Federal wages, etc... I'm thinking the SS wages makes the most sense but wanted to verify. Not all of the W-2 forms showed "Gross Pay" on there, but they all showed "SS Wages." I believe my SS wages are essentially my gross pay - health/dental/vision insurance so that makes sense to use that number. Federal wages reflects the 401k money so I don't think I want to use that either.

It's a lot easier to figure out how much I've saved (retirement + HSA + nonretirement) but a little harder to assess gross pay (and eventually get to net pay).
Thanks!

[ACN]

Can't comment specifically on the above, but...

I use the app "Personal Capital."  It has all my retirement accounts, loans, credit cards, cash accounts, ect.  Grossly shows all my income, expenses, and retirement in one place.  I'm going to guess that it's close to the actual rate.  I was about $13.5k positive cash flow last year which is about 23% savings (pretty good for a resident  :lol: )

[PhysicianOnFIRE]

I don't think the exact calculation is super important.  Saving money is important and knowing that you're saving enough is important.  If you want to compare year to year, then consistency in how you calculate the number is important.

But if you're looking to whip yours out and see how it measures up to everyone else's, you'll find that people use different calculations to arrive at their number, and may very well be measuring theirs in a way that makes it seem larger.

For both net and gross, I use taxable + HSA + 401(k) + company match / profit sharing + 457(B) + Roth investments as the numerator.

For gross denominator, I use salary (gross pay) + company match / profit sharing

For net denominator, I use after-tax take home pay + 401(k) + company match / profit sharing + 457(b) + HSA

Basically, gross is divided by total compensation.  Net is divided by total compensation after taxes.

I have this laid out in a spreadsheet in A Tale of 4 Physicians.  PM me and I can send you the actual file if you might find it useful.

 

[Zaphod]

This is funny, since I wondered the same thing and made a spreadsheet myself this weekend, a bit tedious but interesting. Turns out as POF says there are different ways to measure it. Some just use retirement and emergency/checking as their savings while others use any principal paid down as well as that is truly saving future payments. Again as to the before/after tax rates. I understand the before way, but if youre not overpaying taxes you really cant do anything about that number so it makes sense to use after tax money (its also easy to say after tax/gross). Was super exciting looking up amortization tables and the like. So after taking all the different things into consideration I went with using the following since it made logical sense, and its even easier to convert to the gross pay scenario which is far less tricky. Also, the more you make when taxes are involved the harder it is for you to have a good savings rate that is no fault of your own.

Retirement+Taxable+All other savings+principal paydown/Net Pay=Savings rate.

Unfortunately unless someone makes a disclosure on their method there seems to be no way to tell exactly whats going on.

 

[Psyched]

Hi everyone---fairly new attending here and I was wondering if my loan repayments can be counted towards my savings rate for the year....thoughts? I have been plugging away at them hard and have paid off 200k of 220k in 2.5 years after residency with me working only 2 of those years (time between locums assignments as well as maternity leave). The interest rates were high and I have saved some for retirement (30k since graduating) but not lots my any means...

[Zaphod]

Psyched wrote:

Hi everyone—fairly new attending here and I was wondering if my loan repayments can be counted towards my savings rate for the year….thoughts? I have been plugging away at them hard and have paid off 200k of 220k in 2.5 years after residency with me working only 2 of those years (time between locums assignments as well as maternity leave). The interest rates were high and I have saved some for retirement (30k since graduating) but not lots my any means…

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Not the full payment but its reasonable to add the principal paydown (of any debt). Initially I didnt do this, but since I make extra payments for that purpose specifically and its reducing future costs it makes sense.

[TheGipper]

You can drive yourself crazy with this stuff.

A lot of my "savings" goes to 529s and home/rental mortgage extra principle paydowns.  I see in some places, people don't consider that in their "savings rate".  Ultimately you just want as much of your money as possible going to productive ends to build net worth, and if in high marginal tax bracket as much to go tax deferred as possible.

Instead of focusing on yearly savings rate to fit a target, maybe just try to improve every year with more and more $ going to productive net worth building.

[wideopenspaces]

I counted student loan payments as a part of my savings rate for 2015. I generally divide our money into spending, saving, taxes. Since I paid off the student loans in early 2015, I knew that for 2016 that same amount of money would go to another savings vehicle in 2016. I count the mortgage payment as spending, but the extra 1k we pay each month on the mortgage, counts as savings. I try to make sure that at least 20% of gross income is saved in retirement funds and then the other 10-15% is extra mortgage, beefing up the emergency fund, college fund, etc. I think the most important thing is just to calculate it consistently from year to year.

[PhysicianOnFIRE]

To better address the question, I have revised my savings rate calculator to make it customizable, and posted it online here.  You can input your own data directly into the sheet or download the sheet and work with it independently.  I think this is a pretty cool feature of Excel.

[TheGipper]

Thank you Physician on Fire.  This is great.

 

It calculates my savings rate at 66% net and 45% gross, which sounds about right, but it is giving me a required Nest Egg for FI of 7 million!  Ha!  Won't need near that much.

I think it is considering all nonsavings (which includes my very high daycare costs and mortgage interest) as recurring annual spending (which is I'm sure how it is supposed to work).  But these costs will be gone by retirement for most.  Maybe this is how the calculator is supposed to work.  As these expenses drop off the books, Nest Egg for FI will go way down.

 

[PhysicianOnFIRE]

TheGipper wrote:

Thank you Physician on Fire.  This is great.

 

It calculates my savings rate at 66% net and 45% gross, which sounds about right, but it is giving me a required Nest Egg for FI of 7 million!  Ha!  Won’t need near that much.

I think it is considering all nonsavings (which includes my very high daycare costs and mortgage interest) as recurring annual spending (which is I’m sure how it is supposed to work).  But these costs will be gone by retirement for most.  Maybe this is how the calculator is supposed to work.  As these expenses drop off the books, Nest Egg for FI will go way down.

 

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Those are some impressive numbers.  That kind of discipline is rare in our profession.  Keep that up and you'll be FI in short order.

Yeah, I don't actually think you'll need $7 million, either.  The savings rate calculator simply takes your current spending (calculated as take home pay - after tax investments) and multiplies by 25.  You can override the spending line with your anticipated future spending and the sheet will multiply that by 25 to give you a more realistic FI number.

[VagabondMD]

I am in the camp of POF and do not see the value of doing so. As life gets more complicated, the savings rate calculation gets less meaningful and comparable.

[The White Coat Investor]

I think it's mostly useful for two purposes.

 

#1 Make sure you're in a reasonable place. You know, 15-25% of gross. So if one method gives you 18% another gives you 22%, that's fine.

#2 Compare against yourself year to year, especially if you're not yet saving enough.

Comparing against other? Not so useful.

For what's its worth, I use gross income and I count new investments, new money in my bank accounts, and EXTRA (but not regular) payments toward debt principal.

[nopro]

great topic.

PoF and WCI,

where do you get your data to plug in the numbers into your calculators (annual tax report, annual brokerage statements)?

I am trying to understand my financial life and am interested how to simplify the data collection for my future spreadsheet. currently, I have many accounts partially because of my actions as well as constant changes by the employer...

[PhysicianOnFIRE]

nopro wrote:

great topic.

PoF and WCI,

where do you get your data to plug in the numbers into your calculators (annual tax report, annual brokerage statements)?

I am trying to understand my financial life and am interested how to simplify the data collection for my future spreadsheet. currently, I have many accounts partially because of my actions as well as constant changes by the employer…

Click to expand...

If you are an employee, paystubs and W-2 will give you most of the information you need.  If you are an independent contractor, you will need to keep track of your information on your own for several purposes.  Your 2015 tax return if / when complete will also be useful.

If you are looking to consolidate information regarding assets held in different accounts, Personal Capital does this very well, but you need to be willing to share your passwords with them.

Best,

-PoF