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Savings Rate
I have to say that there are some really strange ideas out there about savings. The math of savings is really simple but people tend to complicate it, mostly to feel better about themselves and how much they think they’re saving.
The very simple math of savings is:
Total income — total expenses = savings
(savings/total income)*100 = savings rate
Some people will say that they figure their savings rate based on after tax income. At best this will result in a similar savings rate as including taxes but will over complicate the formula. At worst it will lead to an inaccurate figure. Why ignore a major expense?
Taxes are an expense, and like many expenses, they’re variable and can be reduced through proper planning. Taxes can also sometimes be higher than normal through certain circumstances such as capital gains or the sale of a business.
Figuring your savings rate on after tax income is a lie, a cheat, a way to make yourself feel better about something rather than facing the true cost.
Even Worse
The most egregious abuse of the savings rate calculation is including mortgage…
