Saturday, December 24, 2016

Our Personal Savings Rate in 2016

This is my first time actually figuring out our personal savings rate and I'm probably doing it incorrectly, but here are the results of my calculations for 2016.  I'm using this method and counting the extra mortgage principal payments as non-retirement savings.

Breakdown of Categories

Our income for 2016 includes:
  • Greg's regular net salary
  • Greg's net bonus (in cash)
  • and the net amount of stock options he was granted this year (not in cash, although it is reported as taxable income to us and they won't vest fully for another 3 years). (note to self for 2017: I had to calculate how much they charged us in taxes manually using my tax spreadsheet, because they didn't break it down.)
  • Additionally:
    • IRS refund
    • any monetary gifts we received that we saved
    • the Upromise cash-out (but only because I deposited into savings when I got it)
    • the money my ex refunded me for shared expenses I incurred for my daughter)
    • any gift cards earned via Swagbucks, Microsoft Rewards, our credit card rewards programs including Discover Rewards and Amazon Chase rewards
    • any Kohl's Yes2You Awards along with the Kohl's Cash resulting from Discover Deals, any promotional gifts Kohl's sent me
    • digital credits earned on Amazon that we did use
    • and any found money
  • I suppose I should include the dividends from our investments?  But those are reinvested automatically, I believe. I don't like to deal with investments and I don't even know where we stand (I should open all those emails with statements and track how our investments are doing but this is worse than doing the dishes!) so I'm going to ignore that.
  • We don't have any debt aside from our mortgage so I'm not deducting anything.

Then I added up several categories of savings. Here is what I consider "savings" this year:

  • Non-Retirements Savings:
    • Money deposited into our emergency fund (part of IRS refund, monetary gifts)
    • Money transferred to another savings account for an eventual new car (Greg's raise since June along with the money corresponding to our FICA payments once we hit the maximum contribution, Upromise cash-out, refund from my ex for shared expenses for our daughter)
    • Extra payments applied to our mortgage principal (extra sent every month, along with most of Greg's bonus)

  • Retirement Savings:
    • Contributions to his Roth (401(k) (I am not counting the employer match because Greg's employer doesn't announce their match until April of the following year, as it's based on their financial results for their calendar year which ends in March, I believe)
    • The stock options granted since they'll be invested for retirement at some point investments 
After discussing this with Greg, I didn't include the money that we are paying into a prepaid college account for our son because this is really money that we are paying him for chores he did over the past few years, only instead of giving him cash, we're depositing the corresponding amount into the prepaid account. So it's an expense for us, not "savings".  He didn't think that I should count the extra money sent to the mortgage payment either, but I disagree for the reasons I state below.

So I added all of those categories and compared it to our income and came up with a Personal Savings Rate of 61.26%. 

Not bad at all, but I think we can do better, considering that Greg earns a very good living and our expenses are pretty low if we stick to needs and not give in to the I wanna's. I think we need to up our game in 2017! 

A note: this rate might change slightly by the end of 2016 as we haven't contributed to IRAs yet for this year, but we intend to look at doing this next week. I'm not adjusting the rate, in case we don't get around to doing it (I know us too well, we don't actually enjoy dealing with money!). But if we do contribute to them at the maximum allowable, our personal savings rate would go up to 70.33% because we would be using money that has been sitting in our investment account.

Here is how we applied our savings:
  • Emergency Fund: 2.55%
    It doesn't sound like a lot, but our emergency fund was already funded for about one year of bare bone expenses.  The only money we put into that savings account this year is part of our IRS refund and a monetary gift that Greg received from his mom.

  • New Car Fund: 4.13%
    I really would like to pay cash for our next vehicle because I think it's silly to pay interest. Also, I intend our next vehicle to be a used vehicle. If Greg's truck bites the dust, he'll likely want to treat himself to a brand new vehicle, though. We'll cross that bridge when we get to it. I'd love to be a one-car family but there is no public transportation worth mentioning where we live and biking to do my shopping isn't going to be possible unless they build an Aldi right in our little town. And then there's Greg going to visit his family several states away for a couple of weeks at a time, and I couldn't remain without a car during that time. So we'll be a 2-car family for the foreseeable future, but when my large SUV bites the dust, I'm definitely downsizing to a much smaller vehicle.  This is being funded by a few "revenue streams", mainly the amount corresponding to a raise that Greg got in June as well as the money that was earmarked for FICA contributions on his paycheck, once we reached the maximum contributions.  I also deposited my ex's refund of some expenses incurred for our daughter, along with the cash-out check that I had obtained from Upromise/Saving Star. In all honesty, this might end up being the fund from which I pay for our trip to France, if we end up going.

  • Paying Down Our Mortgage: 24.27%
    As the author of the article I linked to in the opening paragraph explained in a reply to a commenter asking if any money paid towards a loan principal should count as non-retirement savings, this is money that is translating into equity in our home so I'm definitely counting it as a savings. After all, paying down the principal is going to save us tens of thousands of dollars!  Right now we're looking at paying off our house in about 3 years or less. If I'm honest, we won't recoup the money if we sell the house, only because it hasn't appreciated enough and we would have to undertake lots of expensive repairs and much needed renovations, but I'm still counting it as money going to savings, so there :)  We sent extra money corresponding to what our 2 car payments had been once we finished paying them off, and when Greg's bonus hit our bank account, we agreed to apply it all to our mortgage principal. It's very important to me that we be mortgage free by the time our son graduates from high school. Growing up poor and being a non-working spouse, I would like to not have to worry as much about losing the house should Greg become disabled or pass away.  We won't be able to live here forever (the house is not and cannot be accommodated for disabilities and it's too big for just the two of us and it's old so it's very maintenance intensive), but it would be nice to live several years without a mortgage. Let's keep our fingers and toes crossed! Our plan for the next couple of years is to apply any bonus that Greg gets to our principal. Hopefully we can stay the course.

  • Retirement Savings: 30.31%
    This is probably where I'm not calculating this "properly" because I'm including our Roth 401(k) contributions, any IRA contributions and also the stock options that Greg was granted this year.  As noted above, they won't vest fully for another 3 years, but in the meantime they're on our books as income for 2016 as far as the IRS is concerned, and we can't touch any of them until they've vested and when we do, they'll be invested with the goal of using the proceeds once Greg is retired.  It sounds like a huge amount but we really ought to be saving for retirement much more aggressively, especially since we're approaching 50 and we didn't contribute anything for many years.

Looking to 2017 and beyond

Well, it's easy to say that we should be saving more in the future, but the truth is that until our house is paid off, it might be hard to put more cash into some kind of savings account.  Let's consider this:
  • We have doubled the amount of cats that we have so our expenses have and will continue to double as well.
  • We can still claim my daughter on our 2016 taxes, but we will also have to declare whatever income she made in 2016. We're going to have to pay more in taxes, consequently.  And then, starting in 2017 and continuing a pattern that we started with the older siblings, we will stop claiming her as a dependent as she will be solely responsible for supporting herself and filing her own taxes. So the amount we will pay in taxes will increase since we will lose a deduction.
  • We will keep her on our car insurance, though, and since Greg didn't make his 2nd daughter pay 1 cent of car insurance while she was in college, my plan is to do the same for my daughter.  Should she elect to purchase the family car from us (but I don't think she will), we will sell it to her at a deep discount and then we'd have to purchase a new family car as our son should be able to obtain his permit in January and I want him to learn to drive on a manual transmission (both my SUV and Greg's truck have automatic transmissions). So that would also mean another vehicle to insure and eventually, when our son obtains his driving license in 2018, then another driver to insure.
  • On the other hand, it'll be one fewer mouth to feed, clothe, etc.
  • My mom is getting older so I'll probably have to take more trips to France to spend time with her.
  • Greg has grandchildren now so that means more presents to be bought and more trips to be undertaken as well.

Note To My Readers

Although it is very eye-opening to go through the calculations, don't get depressed if your Personal Savings Rate is much lower than this.  The thing is, many people just don't make enough money to be able to pay their bills, much less put money into savings. 

However, you can look at how you spend your money and it may very well be that you're hemorrhaging money left and right that you could easily put into paying down debt or into savings instead, but listen: I remember being a young mom and we were making very little money and had a mortgage and credit card debt and my single, newly divorced 40-something friend was urging me to put money into a 401(k) and I was looking at her like she was crazy because there was no way for me to find any extra money to put into retirement savings!  Of course, I was much less frugal than I was now, and you can't squeeze money from a stone either. And we did manage to put some money into Series E.E. Bonds and IRAs, believe it or not.  

The worst mistake my ex and I made was to not try to pay off our credit cards more aggressively... and to have children before we were out of debt.  Children are expensive. Childcare is unbelievably expensive (and yet at the same time, childcare workers are being paid a pittance!). Multiply this by several children and suddenly your dream of the happy little family with the white picket fence, the family dog and vacations to Walt Disney World can turn into a nightmare.  Think things through before you let emotions sway you. Couples can have children much later than they used to, nowadays.

It is very important to know where your money is going, whether it is to debt or to savings.  You absolutely need to keep track of every penny that comes in and every penny that goes out. This is the only way you'll ever be able to get ahead.  There is no Savings Fairy who is going to come and fund your emergency fund or your retirement account. The lottery, let's be honest, is a very long shot. So very, very long.  Take control of your finances. It might be hard to face the truth at first, but the most important way to get to where you want to go is to have a plan.  Without a plan, you'll be going in circles and never get anywhere.

As for us, I will plan on keeping track of our Personal Savings Rate throughout the year in 2017 so maybe I'll be inspired to reduce our expenses (hello, Christmas expenses!) and motivated to save even more.  Life isn't going to get any cheaper, even with fewer children at home.  We're getting older and who knows how long Greg or I would have to look for a job, any job, if he were laid off or disabled.  If you're younger than us, you have time and compounding interest on your side!  Make every effort to take advantage of it!