How Should You Calculate Your Total Household Savings Rate?

If it’s the last week of the month, odds are that Alison Southwick and Robert Brokamp are going to amble over to the Motley Fool Answers mailbag to find out what their listeners really want to know. And for added gravitas and expertise, they’ve brought in reinforcements: Naima Barnes, a financial planner with Motley Fool Wealth Management, a sister company of The Motley Fool.

In this segment of the podcast, they help out a listener who feels like he and his spouse have fallen behind on the quest to save money for retirement, and who’s pushing hard to get back on track. But what is saving, really? Does part of your mortgage payment count, because it’s going toward an asset you own? Your car payment? The Fools suggest a less comprehensive, more specific approach to measuring savings, and offer a little bit of reassurance to folks who likewise might feel they aren’t hitting their savings benchmarks.

A full transcript follows the video.

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This video was recorded on May 29, 2018.

Alison Southwick: The next question comes from David. “Following a suggestion I heard on this show, every last day of the month I put together a financial summary for my family that includes things like income, assets, expenditures, savings, and investments. I also give us a grade. What things did we do well this month? Which things not so well? I print it out and we talk it through as a family.” So cool!

Robert Brokamp: Yes, that’s pretty impressive.

Naima Barnes: I love it.

Southwick: “One of the more challenging elements of the numbers is our savings rate. I wanted to track this on a monthly basis because I was of the opinion that we started late to savings. We’re an average of 40 years old and have saved around 3x our income in my 401(k). We also have a one-year-old son and wanted to make sure we were saving enough for his education. Our aim has been to maintain at least a 40% savings rate every month.

How should this be calculated? My working formula currently takes the amount we save or invest, adds what my employer contributes to my 401(k) plan, then divides by our after-tax income. Is it right to include the employer contribution? Am I right to use the after-tax income number? I also split the mortgage payment into the interest and principal. The interest is classified as expenditure and the principal is classified as savings because it pays down a debt and increases our net worth. Similarly, our auto loan principal repayment is classified as savings as are our HSA contributions.

In a nutshell, my question is how we ensure that the 40% we think we’re saving is the same 40% you think we should be saving in our situation?”

Brokamp: First of all, I would say you’re actually not behind on your savings. There are various analyses that look at how much you should have saved at various ages. We’ve talked about them in previous episodes as a multiple on your income.

Recently MarketWatch tweeted out that the average 35-year-old should have twice their income, and there was a lot of jokes and scorn made about that. But to the extent that you believe in this study, Fidelity thinks you should have 3x your income by age 40, so you’re actually on that target. T. Rowe Price’s analysis is you should only have twice your income at age 40, so you’re actually doing fine.

That said, how to calculate your savings rate. I would say you include any asset that you are willing to spend for that specific goal. I wouldn’t necessarily calculate an overall savings rate, although I think that’s still interesting, but I would do it based on each goal.

For example, for retirement include what you’ve contributed to the 401(k) as well as your employer match and do it as a percentage of gross income. That’s how most of these are calculated, so doing an after-tax income is actually making your savings rate look a little higher. I would do it as gross income.

I would not include the car payment in your savings rate, because that’s basically a loan to buy a depreciating asset. Unless you are investing in some sort of antique car that you plan to sell in retirement or as a retirement asset, I wouldn’t include it.

The mortgage and HSA are a little different. They’re a little trickier. We talked about HSAs. Chances are you’re not going to spend most of that money, and it will be a retirement asset. How much will be in that, though? How much you’ll need I don’t know, so I think it’s safer to not include it.

Mortgage is also a little trickier because generally speaking, when you look at your retirement, you look at just what’s in your portfolio [your IRAs, 401(k)s and other things like that]. Although as we talked about on a previous episode, more and more financial planners are saying you should be incorporating your home equity.

I think this is an evolving view. I still tend to side with the folks who say that really you should look at your home equity as a big, fat emergency fund and not plan on spending it. In that case, then, I would not include the mortgage in my savings rate. I think it’s quite possible, as I think about this more as the years go on and appreciate the fact that really people have more in their home equity than they have in their 401(k)s. Then I might change my opinion on that a little bit.

Southwick: But for now…

Brokamp: But for now, I would just factor in that. And for the savings rate for your son’s college education I would just calculate how much you’re putting into the 529.

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