What is my saving and investing rate?
22 May, 2022
Recently, a question came in via email asking, “how do you calculate your savings rate, please, Ruth?”. I thought it was a question worth elaborating on with a blog post.
First up, why even take the time to work out how much you are saving? This chart should be motivation enough for someone who is thinking about tracking what they save and invest:
Source: Mr. Money Mustache
Put simply, the higher your savings rate, the faster you will have saved up enough money to retire or make going to work entirely optional. If you’ve not read the Mr Money Mustache blog post I took this from; I encourage you to do so. While I don’t strictly adhere to that chart, it is still good to use it as motivation to save and invest as hard as possible.
As much as I can, whenever I can.
The reality for me is that I only loosely track our savings rate; I can’t commit to saving and investing $X or X%. This is precisely what people want to hear from me; sadly, I’m about to disappoint! Jonny and I are predominantly self-employed, plus I have a small variable part-time PAYE income. In short, our income is a complete rollercoaster! Although I have minimum amounts that I invest to ensure I never miss a month of investing, if I only stuck with them, we would never be able to retire. So, I invest as much as I can, whenever I can.
‘The Vibe’ method of investing.
I’m not a mathematician by any stretch of the imagination, and as with most of my household financial management, I’m more about ‘the vibe’ #TheCastleMovieQuote. I keep an eye on things to ensure we are always spending less than we earn that month which ensures I can always save a portion of our monthly income.
Plus, there is one key point to get out of the way early on. If I was to monitor anything at all, it's our investing rate, not our saving rate:
Investing means money I have deposited for the long term into an investment such as ETFs and KiwiSaver. The ETFs are what will fund our early retirement.
Savings are small amounts of money that I move weekly into other bank accounts where I am saving up for something and will spend that money in the short/medium term. I have ‘sinking funds’ for pets, car repairs, holidays, schooling, car insurance, tax, and power bills.
Every month, my main way of tracking is by simply looking at the totals for the month that PocketSmith serves up to me. I’ve found that they are relatively accurate:
Our savings rate calculated in PocketSmith.
However, this is really just showing the money left over after we have done all our spending for the month (and it was quite a spendy month due to a $943 annual car insurance bill!) When I dig into where that difference of $2,142.04 went, that’s when I can accurately work out what we invested for April.
Another spanner in the works is, of that earned income of $6,671.11 the majority of it is from our self-employed incomes. Although both Jonny and I set tax money aside BEFORE we pay ourselves each month, although we do our best, we are never quite sure if our calculations are correct. We may have under or overpaid ourselves, and we never quite know until our accountant does our taxes. So, although I consider that earned income of $6,671.11 to be net (or after taxes), I might be a little off.
“But why can’t you work this out exactly, Ruth”, I hear you ask? Because it’s honestly not worth my time to do so because there are many variables at play. My accountant offsets the tax I’m due to pay from self-employed income from the tax I have overpaid (usually from my Smartshares investments). And then there are imputation credits to add to the mix. I will leave that to the experts!
I ensure we are moving in the right direction.
You will now see why “the vibe” is so essential when calculating our investing rate. I think that if more household CEO’s concentrated on just getting a general overview of earning and spending, they would feel more relaxed about actually taking an interest in household budgeting. There are just so many moving parts to money. They are different for every household, so I do encourage you to track your income and expenses as best you can (whether that be in minute detail or much more loosely) and just ensure you are moving in the right direction, i.e. growing your wealth instead of sinking further into the red each month.
Working out how much you have invested is easy.
How did I calculate how much I invested in April 2022?
Using bank statements and logging into our KiwiSaver accounts, I looked for the value of each deposit we have made into each investment and totalled them all up. Jonny and I have fully combined our money, so I look at all of our accounts as a collective.
ETFs: $1,621
KiwiSaver: $256.56
Total Investment: $1,877.56
Investment ÷ Net Income = Savings Rate
$1877.56 ÷ $6671.11 = 28%
Given that our total household income for the month was $6,671.11, we invested 28% of our income. Therefore, PocketSmith was not too far off with its 32% calculation. When looking at all the variables of the month, although higher would be better, all things considered, I think we did OK.
We invested a further $120 of our take-home pay into investments for our daughter (plus, she invested 50% of her income, too), but I don’t include this because I view it as hers and not ours. I track her net worth separately from ours as well.
We also moved quite a bit of money into individual sinking funds throughout the month, our savings for future known expenses.
Our KiwiSaver contributions include voluntary monthly contributions from our take-home pay and small employer and employee contributions from my part-time PAYE job. I include all of these. We invest the minimum to get the yearly government contribution. Still, because we know we will retire early, the majority of our investing is done ‘outside’ of KiwiSaver so that we can access it one day when we need to draw income off our investments. I just want to be clear that only investing ‘the minimum’ in KiwiSaver (as far too many of us do) and investing nowhere else will give you a pretty dire retirement! Hence our investing elsewhere.
If there had been “reinvested dividends” on one of our investments for that month, I would have just included those in my total (as both income and invested money). Otherwise, you add another layer of confusion by saying, “we invested X of our incomes, PLUS reinvested dividends giving a total of XYZ”.
Sometimes rough enough is good enough; I’m not trying to balance the books of an NZX listed company here, just for my whānau of three!
Sidenote: If you are a number cruncher and your spouse is not, you will literally put them off money and investing if you try to ram too much detailed money talk down their throat! The savings rate is a really good example of this. So, just ease off and try to communicate your intentions instead. I’ll just mention to Jonny “we invested 28% of our income in April” and leave it at that. He knows we are investing, the tone of my voice will tell him I’m fine with it.
Consistent calculation over time.
The key is that whatever you include or don’t include to measure your savings/investing rate, you measure it consistently over time. I probably carry out this exercise every six months or so, but as I have pointed out, the PocketSmith breakdown of Earning and Spending gives me a pretty clear picture of my ‘savings rate’ and shows me at a glance how the month is shaping up anyway.
Finally, it is worth mentioning that you might include the principal paid off your mortgage as ‘savings’. It’s up to you what you decide to include, but given that I’ve heard it said that “paying a mortgage is enforced savings”, it’s worth including, is it not? Plus, when facing a stonking great mortgage, as many are these days, it will let you feel a sense of accomplishment each month by seeing that you are making headway.
I hope that helps you work out your saving and investing rates. It is an exercise worth doing once a quarter (more often if you want to) just to make sure that you are saving and investing in line with your goals. It’s very easy to tell yourself you are good at saving, but it’s another thing to actually dig into the details and see if your savings rate is good enough compared to your income.
If you spend all the money you make, you will never be able to create savings, which means you will never be able to stop work. That is worth reflecting on.
The higher the rate of saving and investing, the more freedom you can buy yourself, the more options you will have, and that is what I want for everyone.
