[Matthew]

Savings Rate
I understand savings rate methodology varies person to person. I try to model ours on the choosefi method 3.
My numerator is straightforward.

I don’t understand why pre tax savings were added back into the denominator?

I can understand why any employer matches would be added in, but why my own contributions?

Is this just to make it more conservative?

My numerator is…
HSA + 401k + employer match + IRA contributions + mortgage principal

My denominator is…
Gross income + employer match – taxes – insurance premiums

[Joel]

I’m FIREd now, but when I was working, I always divided my savings rate by my gross salary.

This meant taxes were treated as an expense and the money spent on them were in the numerator as well.

However, I didn’t include bonuses, stock awards or taxable investment income, since those were unreliable sources of income.

Shortly after I divorced my savings hovered between 30% and 50%/year.

I will freely admit that I probably should have included other sources of earned income in my denominator.

So, my savings rate might not have been quite as good as I imagined. However, I also never assumed I could spend any of that irregular income and it always wound up in my taxable brokerage accounts.

Which leads me to another point. My numerator also included contributions to my brokerage accounts, net of distributions.

Things got really complicated about halfway through my FIRE journey because I changed to a job where I had ESPP, stock grants and I started front-loading my contributions.

This meant that sometimes I was living off of my taxable accounts and sometimes I was making fat contributions to them.

[Jason]

Don’t put taxes and insurance premiums in the denominator. Those are expenses.

Why not put groceries and transportation costs in the denominator?

[Michael]

Don’t overthink this… directionally it’s important but the exact calculation is somewhat pointless.

I keep it simple, total savings / total income and the higher the percentage…the better.

[Dave]

My calculation was essentially:
1 – [ (Anything that decreases net worth) ÷ (Anything that increases net worth)]

[Bill]

Meh. It’s a directionally important metric. Track it however you want and just be consistent.

It does *really* matter in terms of the exact definition though.

[Preston]

If you count employer match in both categories, that’s a wash. Why would you calculate mortgage principal in your savings rate?

[Author]

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