Your savings rate is, in my opinion, the most important metric that you can can track/control/improve on during your journey to FI. There’s a lot of talk within the community about the best way to calculate this. I’m here to set the record straight! This is the definitive, inarguable, most perfect, most accurate, and most precisive. Just kidding, this is how I choose to do it. There are many different ways (including/excluding taxes, loan principal payments, and probably a bunch of other less common ways people calculate this). Though I don’t think this matters much. The most crucial aspect is consistency. If you have a savings rate goal that you’d like to hit month over month, it wouldn’t make sense if you changed your methodology part way through whatever time period. That just leads to messy data… and you know what they say about messy data? Well… I’m not sure if there’s a saying, but it’s bad, and you don’t want that.
I track my finances in a Google Sheet that I’ve slowly refined and optimized over the last 18 months. The following is going to be a bit of a tutorial on how I calculate savings rate. For the Excel junkies out there, this might be a little obvious, but for those who think Excel is coding wizardry, I’ll try to play nice.
Firstly, let’s define savings rate. I use the definition found on the FAQ of /r/financialindependence – simply put as:
Savings / (Gross – Taxes)
Slightly less simply,
[(Gross – Taxes) – (Spending)]/(Gross – Taxes)
The way I structure my spreadsheet is I enter whatever value for every column once a month. Here’s a snapshot with dummy values.
I have a lot of columns, but the main ones here are spending, and income. Spending is simple. Mint tells me how much I spent that much, I type the number in the cell – easy peasy. Income is a little more complicated. In this case, Total Income is calculated as (Work Take-Home + Non-Work Income + 401k Contributions + ESPP Withholdings + RSUs Vested). I use Work Take-Home instead of Gross Income because it already factors in the taxes that have been withheld. And, if your company doesn’t have a 401k, Employee Stock Purchase Plan, give some of your compensation through Restricted Stock Units, and you have no income sources outside of work, then all you need to include is Work Take-Home. And if you have any other streams of income, you’d include them in addition to what I do. Then Savings is as simple as Income minus Spending, and Savings Rate follows as (Savings/Income).
Once you start tracking savings rate, you can follow it over time and set goals. I find goals to be the most effective way to progress and improve. I set goals in every aspect of my life, and savings rate is no exception. Also, it’s basically the only financial goal I set. The other ones are the max my 401k and IRA, but those are more or less a result of my savings rate goal. I target 50%. I also don’t budget. My thought behind this is that as long as I’m saving at least 50%, then I’m doing great and I shouldn’t have to worry about my spending.
Do you calculate your savings rate? If you set a savings rate goal, are there other financial goals that you find more helpful? If so, please let me know! Also, let me know if you have any Google Sheet/Excel related questions!