Happy New Year everyone! Now that January is almost over and the craziness of the holidays has died down, I finally had a chance and go crunch the numbers to find our 2017 savings rate! Drum roll……………..
Not too shabby, but definite room for improvement. Here’s the breakdown of how I calculated it.
Net Take Home Pay: This is the amount of our paycheck that gets deposited in our bank account. It is after tax, after 401k contributions, and after insurance premiums are removed. This number was conveniently listed on our last paychecks.
Savings Account: I manually added up all of our deposits and withdrawals into our savings account throughout the year. Since this is the account we use to transfer money to our brokerage account, I did not include withdrawals to that account. Since the transfers out of our savings account and into our brokerage account would cancel each other out, I do not include our brokerage account in our overall savings number. In short, this number represents all money that went into both our savings account and brokerage account this year.
Principal Mortgage Payments: I looked at statements from the beginning of the year and end of the year to find the delta in the principal left on our mortgage. I count this as savings because it’s essentially moving liquid cash to a super not liquid asset (our house). This does not include interest, insurance, or property tax.
IRA Contributions: Includes the total amount of contributions to our IRA, not including any gains.
HSA Contributions: Mr. LSF is healthy and young, so he rolls the dice with a high deductible health insurance plan that gives him access to an HSA. This value includes money that he contributed himself, but doesn’t include employer match, which is modest anyways.
401k Contributions: Totaled up both of our 401k contributions for the year. This does not include gains or the profit sharing we receive from our employer.
Profit Sharing Contributions: Instead of a bonus or 401k match, we receive profit sharing from our employer. This is deposited directly into our 401k’s. I elected to include this in our savings rate since its a significant portion of our income, and is one of the reasons we choose to work at our employer. Also, if we got a bonus instead, we would save that money and include it in our savings number, so why not profit sharing?
Then, I plugged those numbers into the following equation:
There seems to be mixed opinions out there on whether or not to include your 401k contributions in this calculation. I’ll admit that since you’re adding together some pretax and post tax figures, it makes the math a little dicey. However, to give yourself a good idea of how much you’re saving, and as something to compare year after year, I think it gets the job done. For those of us with modest incomes, I think it’s important to include your 401k contributions in your savings rate. We are fortunate to be able to *almost* max out both of our 401k’s, but doing that consumes a large part of our income. I think it’s motivating to really acknowledge ALL the saving you’re doing. This is why I also included our principal mortgage payments. We contribute a little extra to our mortgage each month, and I think it’s important not to think of that as money just out the door, it is going toward owning the roof over our head.
So how did we allocate this 65.7% savings rate?
The bulk went into our tax advantaged accounts, especially our 401ks. Aside from the tax benefit, the best part of 401k contributions are that you never see them, at all. Saving is a lot easier when that money is never available to you to begin with. On top of our own 401k contributions, profit sharing from our company gets put into our 401ks. It’s been low the past few years due to some unfavorable market conditions in the sector we work in, but it’s back on the upswing and I’m hopeful 2018 will give us some bigger contributions.
The next biggest portion is what we put into our savings account and brokerage account, which is held through Vanguard. We already have a fully funded emergency fund in our savings account, so we don’t need to grow that account much anymore. We keep what I call “medium term savings” in a Vanguard money market fund. This savings is for known large expenses that will be coming up in the next few years, such as trips or a car. Most of the money in this category goes into investments though, VTSAX in particular. We treat these investments like retirement accounts, untouchable until we actually retire.
The last pieces are maxing out Mr. LSF’s HSA and our principal mortgage payments. We pay a bit extra to our mortgage each month to help shave some time off of the life of the mortgage. We’re almost 4 years into a 30 year mortgage, and at the current payoff rate expect to have it beat down 16 years from now.
If I don’t include 401k contributions, both ones we made and from our employer, our savings rate drops to 46.5%. This is still a respectable number, but I would have liked to see it crack 50%.
While we’ve never lived lavish lives, we didn’t start purposefully living frugal until this past spring. It’s exciting to see that we were able to achieve such a high savings rate with only half a year of more disciplined saving. In 2017 we were able to get rid of our PMI, open up a brokerage account, and finally combine our finances as a married couple. It was a year of cleaning up our financial house, but there is still work to be done. I’m looking forward to trying to top 2017’s savings rate in 2018! I’ll bring you all along for the ride as we learn new ways to optimize our spending and boost our savings, hopefully having some frugal fun along the way!
What are your thoughts about including mortgage principal payments and employer retirement contributions in a savings rate calculation? What was your 2017 savings rate? Drop a note in the comments!