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:
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?
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