One thing that I didn’t do a good job of last year was keeping track of how much I was saving and spending month to month. Because of this, I was unable to determine my personal savings rate, or the percentage of income saved.
I am now outlining my budgeted expenditures in all of my net worth updates. And while, I don’t directly mention how much I save, I can extrapolate this number by looking at my goal progression.
In order to calculate my personal savings rate I take the following steps:
- Calculate the amount of income saved
- Determine total income earned
- Divide income saved by total income
When I do this, I get a savings rate of approximately 45% of my gross income. This is for the first 2 months of 2017. This is quite a bit higher than I was expecting, but I did have three paychecks in January and received a tax return.
I live in a city with one of the highest costs of living in the nation. I make enough money to live comfortably, but I’m pretty far off from a six-figure salary. Given that I live by myself, due to my health condition, I’m pretty happy with this savings rate.
As a statistician, I like graphs, so I broke down my spending a bit further to better illustrate my savings and all other categorical expenditures. As you can see, most of my income goes towards taxes and deductions, rent, and my 401K contributions.
I know some calculate the personal savings rate based on net income, which is defined as gross income minus taxes. If I were to use net income my savings rate jumps to 60% so far in 2017.
Personally, it’s easier for me to use gross income. Additionally, since I will be paying taxes in retirement, it doesn’t really make sense to look back on net income statistics. For example, knowing that I saved 27% of my gross income towards retirement tells me I could most likely live comfortably on 75% of my current income in retirement, even if it’s taxed. The fact that I contribute to a Roth IRA should shelter me from some of the tax burden, but I’d rather overestimate the money I need as opposed to underestimate.