How to calculate your savings rate

What's a good savings rate? Traditional 401k matching structures say 10%. The FIRE movement says 30% or more. Many of us are just saving what we can and we're lucky if we can save anything at all. But here's the math to figure out if your savings rate meets your goals. 

One great lesson I learned from the FIRE movement is how to throw out income all together when doing finance math, and focus on spending. Everybody needs a certain amount to live, and the more you can lower that, the faster you can retire. I am not a full-on FIRE advocate because I like my job and I really don't WANT to retire all that early, but I like their math.

I'm an engineer, I love spreadsheets. Excel has some great financial formulas. The idea behind FIRE is that if you can save up 25x your annual spending needs, you can stop working. If you have 10,000 saved up and invested in a nice reliable index fund, they predict that you can draw 4% a year off the top and it'll grow back every year. You'll keep having $10,000. 4% of 10,000 is the same as 10,000/25, or $400.

I don't know anyone who can live off $400 a year, so we'll need to save more than that. But how much do you need to save? 

Step 1: What are you spending?

Pull your credit cards, debit cards, cash withdrawals anything you use to spend money. Total it up over the last 6-12 months to find your average. If you save 25 times that amount, the theory says you won't need a paycheck.

You MIGHT choose to throw out some "extras" that you won't be spending money on when you retire. If you know you won't have daycare costs, plan to reduce your travel spend or sell your cars, you can throw that out of the equation. 

Step 2: What are you saving?

Now compare that to your savings. Are you putting away 10% in a 401K, $500 a month in an HSA, some extra money towards investments? Total all that up. In your spreadsheet, savings is like a "payment" towards an investment that you're trying to grow towards your 25x goal. 

Let's say you spent $40,000 last year and saved $10,000. Here's the formula:

nper(4%, -10000, 0, 25*$40000) = 41 years until you'll have the right amount saved up. 

Some people say you can count on 5% growth while you're saving, not 4%. Fine. Use 5%. I don't care. I'm just trying to show you the ratios.

Examples of good savings rates

You might read that savings rate is savings/income. This method doesn't care about income, that's why it's so much more useful - instead of income, use "spending + savings". 

Members of FIRE communities are trying to "retire early" (that's the RE in FIRE) - which means before they're 50. To accomplish this, they have to start saving around age 20 and save over 30% of their income towards retirement. That's why it's a bit of a radical movement, but we can all learn from them. And here the lengths of time it would take to save up your FIRE number at different savings rates using the rate = savings/(savings + spending) formula... 

5% - 77 years

10% - 59 years

15% - 49 years

20% - 42 years

25% - 36 years

30% - 31 years

35% - 27 years

40% - 24 years

45% - 21 years

50% - 18 years

55% - 16 years

60% - 14 years

65% - 11 years

70% - 10 years

75% - 8 years

80% - 6 years

85% - 5 years

90% - 3 years

Do you calculate savings rate before or after taxes?

Calculate your savings rate as spending/(spending + savings). Don't use your income. Now you can throw out taxes all together. 

What's a good savings rate?

I have a living goal, not a savings goal. I want my family to live off what the average household income earns in my city.  It's not actually based on my retirement projections, it's about my impact on the world and whether we can live peacefully below our means. This also means we can give to charity and save above 10% of our income, and that's good too. I'm not trying to FIRE, just be responsible, and I'm writing all these posts with the hope that others can relate to my philosophy.