2million - My Journey to Financial Freedom

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Wednesday, December 14, 2005

What is your Savings Rate?

A big part of reaching my goal is saving a high percentage of my earned income. While it sounds like it is an easy thing to calculate, up till now I haven't had any idea how much of net worth increases was savings and how much has been the result of investment returns.

I know I probably save a lot more than the average personal savings rate of 0.9%. If I had to take a guess I would say that in recent years I probably save somewhere between 40%-50% of my earned income.

Unfortunately calculating how much I save on an annual basis doesn't appear to be a trivial matter. I need to start by figuring out what I consider income and what counts as savings:
1) I am going to say my earned income is that what my employer reports to me as pensionable earnings. I don't know if this is 100% accurate but its good enough for my calculations. Its more accurate than my Social Security earnings because it doesn't include life insurance benefits, etc.
2) Any capital gains, dividends, interest, investment returns, etc will not be counted as earned income or savings. I have done my best to exclude investment returns as any capital gains, dividends, interest are passive income and I don't want to count them as savings.
3) Gifts, rebates, freebies, gambling profits, etc will not count towards income, but maybe be counted as savings.
4) Rental income will not count as earned income or savings. This is easy so far because annual expenses are more than rental income, but in future years this could change.
5) I will calculate a saving rate with and without mortgage principal payoffs. I am not sure if one should necessarily count mortgage principal repayment as part of savings, but I know many people that use their savings for mortgage principal increases.
6) I will also calculate a savings rate with and without principal applied to my car loan as savings. I don't think this is necessarily accurate. However in certain years I mainly focused on paying down my car loan I think its inaccurate to discount these payments.

Based on this I will determine my annual savings by calculating the total balance change in my cash accounts, the total amount added to all investment accounts, and the total mortgage principal paid for the year. There are 2 stock investments from which I don't reinvested dividends so I need to back out the annual dividend payments to my cash accounts.

Unfortunately I can't present the details of my calculations because I don't want to reveal my exact earned income (to prevent any problems with my employer). However after crunching all the numbers I end up with an impressive savings rate:


Savings Rate

SR (No MP)

SR (No CP)













Notes: *2005 is earned income and savings through 12/7/2005
SP (No MP) = Savings Rate ignoring mortgage principal payments
SP (No CP) = Savings Rate ignoring car principal payments

I think this is a good approximation of my savings rate. Keep in mind its on the high side because I don't factor in gifts, freebies, gambling profits, etc. in my income. However, I would estimate these other incomes are insignificant and at most account for 1-2% of my savings rate.

Its a great feeling to see that I am saving over 50% of my gross income even after taxes and expenses. However its a mixed blessing because my savings rate will only decline as I move onto to future phases in my life such as starting a family, etc. I guess this means I need to focus on others ways to saving more such as bringing in more income or improving investment returns to keep the pace of my annual net worth increase.

Anyone else have estimates of what their annual savings rates are?


  • Impressive, and you should be proud. I wouldn't worry about the rate going down as you move on to other phases of life. The money you are saving now will work for you during that time, so the decline in savings rate will be offset by an increase in the rate of capital gains, dividends, etc. (as you mention in your sentence on focus).

    Our savings rate right now is just below 20% (and that's including my employer's 401K match). Not as high as I'd like, but with everything else going on in our lives I'm comfortable with it. And we'll sock away additional amounts as we can.

    By Blogger Dwight, at 12:02 PM  

  • Ours is about 45% pre-tax right now, and that's not including employer matching on 401k [they match 3%]. I stay at home with the 1.5 kids [hopefully we'll make it to 3 before my clock runs out] and we all live very modestly on my husband's income.

    People always say that having kids will blow your budget and your savings rate, but they're not as expensive as the horror stories imply once you take a hard look at child-related expenses for "wants" vs. "needs" as you surely must do with your other expenses if you're saving over 50% of your income. Many child related items are deemed culturally "necessary," but really aren't: formula, cribs, changing tables, brand new cute outfits that are just going to get spit up on and pooped on, etc, etc. We ended up choosing to use disposable diapers with our first child, but could save even more money if we switched to cloth.

    By Blogger Terri, at 8:28 PM  

  • Wow 45% on one income for a whole family. Now that is impressive. How the heck do you do that? If that one income is $75-150k (give or take) that means you would be living on somewhere between $41-$82k for all taxes, living expenses, mortgage, insurance, etc for the whole family. An impressive feat. I bet you don't eat out alot ;-).

    By Blogger 2million, at 9:59 AM  

  • Heh. We eat out about once a month, and it's always someplace cheap. I cook all of the food we eat, and we eat very little convenience food. Our now two year old went straight from the breast to table food, with just a little bit of mashing it up to transition, so there was never any baby food to buy.

    We bought a relatively modest house on the outskirts of town, 100k less than what we qualified for. [But, man, the number you qualify for these days sure is too high!]

    We buy our clothes from thrift stores -- though they rarely have maternity, so I just get XL with a stretchy waist. That saved a lot of money.

    I admit I'm pretty ruthless with our budget. Most families making our family's salary don't use powdered milk! But we have aggressive goals, and I'm keep to try to find ways to meet them.

    I'm also paranoid. My husband is in software engineering, a field which hasn't been too kind to its older workers. We are in a position that if he lost his job, and it took him a year to find a job that made half as much money, we would be okay. And I don't think that kind of scenerio is totally out of the question.

    By Blogger Terri, at 1:43 PM  

  • Wow, I just found your blog and I am very impressed with the level of financial data that you discuss. I think this is a great site and I will be visiting more often.

    By Anonymous Anonymous, at 3:40 PM  

  • i wish i were you! i understand i'm of your age and did start doing my own ways of savings last 3 years, that is the time i started earning after i finished my masters in computer sciences from a well reputed university. by simply not being in us of a, when i tried my skewed total networth it turned out hardly 35K, out of which 10K is what i solely made out of my stock investing. so it makes a difference being in us of a. keep it up man!

    By Anonymous Anonymous, at 1:58 AM  

  • I recall reading back in September that the personal savings rate actually dropped below 0% for the first time. So on the whole, Americans were spending more than they were making! It's a sad state of affairs.


    By Blogger Matthew, at 1:20 PM  

  • Hey ur blog is really filled with info.. I just started dabbling in the topics of finance, personal finance , investing etc... rite now I am a masters student and hoping to get on a job in another 6 months when I pass out..But my aim is also somethg like urs " to retire rich and early" though I havent set myself any specific targets...I jst finished an internship for abt 5 months and since I was used to the student life I was able to save up to 65% of my gross income..After I pay up my next sem fees, I am hoping to start investing some of it in stocks... also hoping that the info on ur site would come in handy lot of times..!!

    By Anonymous Anonymous, at 4:02 PM  

  • I calculated my savings rate for December to be 20.6%. But that's using a more conservative estimate, without including 401(k) match, capitol gains, debt principal paydown, and whatnot. I'll have to add those in, too, and recalculate.

    By Blogger j.a.random, at 10:53 PM  

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