Tracking savings and savings rate?

Hello, my wife and I use YNAB to track our spending and to budget monthly expenses. We also use it to keep track of some savings goals. We're having a hard time managing our savings goals which is frustrating because making sure we are saving lots of money towards our goals is our main financial goal and driver. Here is our current situation.

We have checking accounts and savings accounts on budget (and unlinked). We also have investment accounts which are off budget (and also unlinked).  Monthly expenses are fine. Every month we get money into our checking accounts and we're able to budget that for our monthly expenses. However, some of that money is slated to be saved into one of at least 5 savings categories (future baby, future house, next years travel, big vacation next year, general financial independence).

The way we handle this right now is in the budget we have a super category for savings and categories for each of the above savings goals. Every month we budget some amount of money towards each of these goals from our paychecks. Then we correspondingly transfer money from the checking accounts into the savings accounts to reflect this*. 

One big goal that we have is to have a historical record of income, expenses, and savings over time. For example we would like to be able to calculate savings rate on a monthly basis. I mention this because it motivates why the software experience causes problems for us.

The big problem with this approach is that we are accumulating our savings in the "budget" column. Unfortunately there is no budget history so we're not able to look back and see *when* we contributed *how much* to the various categories. We can only see the current total.

Another problem is we have to do a bit of math regularly to ensure the amount we have budgeted into the various savings categories matches the total amount in the savings accounts. (This could somewhat be mitigated by consolidating the savings accounts where possible but even with that the problem persists).

Possible solutions we have thought of:

- Take the savings accounts off budget. We can keep the categories but now saving will look like expenses meaning it will be tracked in a historical manner and will be clearly visible in  the spending reports. The problems with this are 1) if we just having 1 savings account for all of this it won't be clear how much money in the savings account is apportioned for each savings goal** 2) we can no longer track budgeting goals and 3) I'm not sure how this will look in a few years when we start actually drawing from these accounts because the money would then be re-entering the budget as income which would artificially inflate our income again making the savings rate difficult to calculate.

- Make multiple savings accounts off budget, one for each savings goal. This just seems like an anti-consolidation headache. We'd have so many superfluous accounts and it would be annoying keeping track of all of them. Same budgeting approach as above.

- Perhaps some of this could be solved by having multiple "budgets"? One for short term spending and one for longer term saving/spending? We haven't thought much about this approach yet.


Can anyone make suggestions for how to handle medium and long term savings, and particularly handle it in a way that makes it easy to calculate savings rate each month?

*We're aware of this post https://www.youneedabudget.com/the-relationship-between-your-budget-your-accounts-its-complicated/ but we need separate accounts because these are medium to long term savings goals and they should be collecting interest far above what is collected in a checking account.

**Actually this would be a nice feature request. A way to divvy up the purpose of a tracked account towards different goals. I guess this is basically what a budget does already... Thinking about this is what gave me the idea of multiple budgets.

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  • Beige Wildebeest said:
    *We're aware of this post https://www.youneedabudget.com/the-relationship-between-your-budget-your-accounts-its-complicated/ but we need separate accounts because these are medium to long term savings goals and they should be collecting interest far above what is collected in a checking account.

     I think you may be misunderstanding that article a bit. That article is telling you not to match an account balance to a category balance. I have about 4 savings accounts and 3 checking accounts plus CDs all on budget. I have a category called Loss of Income which would cover me for 6-8 months and I literally cannot tell you which account it is in because it does not matter at all. I keep as little as possible in my checking account but it still doesn't match any particular category. I know that most months my outgoings total $X therefore I make sure that on the first of the month my main checking account has $X+15% in it. Everything else that comes in gets moved to a savings account to maximize interest. Location and purpose of my money are 2 completely separate things.

    I also cannot tell you what my "savings rate" is. I can tell you that including employer match, 24% of my gross income goes into either 401(k) or IRA, plus I send a set amount to my taxable investments every month. I am saving up for a kitchen remodel right now, but I wouldn't count that as "savings" because as soon as I hit a certain amount (and have the strength to deal with contractors), I'm going to spend that money right down to 0. The vast majority of "savings" is just delayed spending.

    Like 4
    • jenmas It is very important to us to be able to calculate our savings rate. We are trying to retire early and savings rate is a valuable tool for calculating time until retirement. Thus it is important for us to have a time record of how much we put into savings over time, not just a snapshot of how much we have in savings at any given time.

      Like 2
      • Habanero Salsa
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      • Aquamarine_Pony.8
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      Beige Wildebeest Unless you’re going to be able just to brute force enough savings, savings rate isn’t going to provide the answer. Growth of investments is going to provide the answer. 

      Like 2
    • Habanero Salsa This is really missing the point of a savings rate.  It is a planning tool. You can calculate how early you can retire based on your current savings rate and projected withdrawal rate regardless of the balance of the account.  If you need further information on this, I recommend you look at FIRE (financial independence retire early) articles.

      I agree with the original poster - this is sorely lacking in YNAB. It is totally misleading not to factor in savings as a portion of income / as a portion of total budget.

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      • Habanero Salsa
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      • Aquamarine_Pony.8
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      Maroon Trombone Like I said, unless you’re going to brute force it, savings rate isn’t really relevant. In fact, rate isn’t really relevant at all. 80% of an insufficient income will be insufficient. 5% of a big enough income will be enough. 
      It’s about amounts and return, not rate of input. 
       

      I don’t need more info on FIRE. I lived in a house, and was taught by, a man who retired at 44.

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      • PhysicsGal
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      Habanero Salsa 

      How long it takes to save enough to live on your investments is a function of your savings rate.  It's just that, as income goes down, it becomes harder and harder to have the higher savings rates to retire early and still have a reasonable lifestyle.

       https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

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      • Habanero Salsa
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      PhysicsGal said:
      How long it takes to save enough to live on your investments is a function of your savings rate.  It's just that, as income goes down, it becomes harder and harder to have the higher savings rates to retire early and still have a reasonable lifestyle.

      How long it takes to save depends now much you save, not on your savings rate. How much you need to save has nothing to do with your savings rate. Again, saving 100% of a too low income won’t work. Saving 5% of a sufficiently high income will. It’s not about rate, it’s about amount. 
       

      You need $X to retire with a reasonable lifestyle. At a 0% real growth rate, you need to save $X/years to retire to get there. At whatever rate of return you plan to use, that amount can be discounted, but that’s the gist. Call it $Y per year for a given lifestyle. 
       

      If you need $Y to be $25,000 and you make $50,000 you need a 50% savings rate. If you get a raise to $100,000 you need a 25% savings rate. If you get to $250,000 you need a 10% savings rate. The savings rate can be calculated, but it is not what drives the necessary amount. What drives the necessary amount is the raw number or dollars you need to save. 

      Like 2
    • Habanero Salsa Say there is 0% growth rate and you want a retirement which lasts Yr=20 years. Suppose your annual expenses (now and throughout retirement) are Ew=Er=E=$50,000.  Then to retire you need an amount T=Er*Yr = $1,000,000.  Suppose your income is I=$100,000 per year.  Since your expenses (during working years Ew=$50,000 per year you save S=$50,000 per year. Your savings rate is r=S/I = 50%. The numbers of years it will take you to retire is (the number of working years) Yw = T/S = 20 years. But we can algebraically rewrite this using T=E*Yr, E = I - S and r = S/I:   Yw = E*Yr/S = (I-S)/S   *  Yr = (1/r - 1)*Yr.   So the number of years to retirement is the reciprocal of your savings rate minus one. For the example numbers I've chosen r=0.5 so the number of working years would be Yw = (2-1) Yr = Yr = 20 years. You can see that if the saving rate is very small (say 1%) it would take 99 years to retire. If the savings rate is really close to 1 it says you can retire in one year.

      The idea is that the savings rate tells you about both your savings AND your expenses. You keep saying it depends on how much you make and how that gets you to your retirement goal of $X to retire with a reasonable lifestyle. Well what determines $X? The answer is it is your expenses. If your expenses are lower then savings rates goes up, the amount you need to retire goes down and the years to retirement also goes down.

      Point being, if you want to retire earlier you MUST boost your savings rates. You can do this by increasing income and keeping expenses fixed, decreasing expenses and keeping income fixed or some combination of both. The key is that (assuming expenses now are some* indication of expenses during retirement) time to retirement is determined by your savings rate.

       

      *Of course there are many many assumptions baked into this. Just a few big ones are that 1) expenses during retirement are similar to those during working years 2) 0% growth, inflation, etc. While these are assumptions are false in practice, these calculations still give you the right gist of the idea.

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      • PhysicsGal
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      • physicsgal
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      Habanero Salsa You're making different assumptions from those used to find the graph on that page.  In the calculation on that page the assumption is, if you can live in x% of your income, and thus save (100-x)% of your income, then you can retire as soon as you can generate x% of your income from your investments after you retire.  I like this method because you know already that you can live on that income, since you already do, but that doesn't mean it's the only way to think about it.

      Personally, I think the graph and it's assumptions make more sense to me because you're already practicing living on that lifestyle while you are saving to retire, whereas, if you live on $75k and save $25k of your $100k income and then suddenly retire and have to live on  $25k, that's 1/3 of what you were living on before and is going to be a rough change for most people.

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    • Habanero Salsa 

      Habanero Salsa said:
      Again, saving 100% of a too low income won’t work

       Actually, if you're able to save 100% of your income in an ongoing manner while you're working, you can retire, regardless of what that income is. If you make $15k per year scrubbing toilets at McDonalds, and you would be able to not spend that $15k per year because your needs are met in other ways, you could retire. That is the whole point of calculating savings rate. You're right in that you need a certain return to provide a certain level of income to meet your spending needs, but again, the ability to save 100% of your income means you could retire from working right now.

      https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

      Think of your example calculations another way. Instead of saying you need $Y to be $25,000, and you make $50k, what if you make $50k and you decide that you want your savings rate to be 75%, and somehow you find a way to save $37,500, then your COL is now $12,500, so you need less to live off of, so that money you just saved is now 3 years of living expenses ($37,500 / 3 = $12,500), instead of the 1.5 years of living expenses ($37,500 / 1.5 = $12,500) it would have been if you were making $50k and saving 50%.

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      • Habanero Salsa
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      Orchid Leopard If you can do that, it isn’t “too low” an income.  My point has nothing to do with the “ability to save” but the sufficiency of the savings. 
       

      If you need to be able to save $15K a year to be able to retire under some set of desired circumstances but you only make $12K, even saving 100% won’t suffice. If you make $1,500,000 then 1% will suffice. Again, it isn’t about the savings rate. It just isn’t. 

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      • PhysicsGal
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      Habanero Salsa said:
      to be able to retire under some set of desired circumstances

      This statement is the crux of the disagreement.  I think you are just making different assumptions.  The assumption in the calculation is that lifestyle after retirement will be the same as before, so you only need to cover the part of your income that you were spending before retiring with your investments.  You seem to be assuming a change in lifestyle after retirement, which would indeed change the calculation.  The OP seems to want to keep the lifestyle the same to allow early retirement if savings rates are high enough for long enough.  If you want to buy a yacht and sail around the world in retirement, even living on beans and rice your entire life while working a low wage job,  it's still going to be darn near impossible to save enough to make that dream retirement happen.  The "desired set of circumstances" assumed in the calculation on MMM blog is that you spend the same amount of money before retirement as after retirement.

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      • dakinemaui
      • dakinemaui
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      PhysicsGal If I am aggressively saving in order to retire early, making sacrifices and cuts to allow that, I do NOT to want to continue that through all my retirement years as well.

      The general approach makes more sense to me, rather than one that can handle only the specific case of an unchanging lifestyle.

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      • Habanero Salsa
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      PhysicsGal Still has nothing to do with rate. It has to do with raw dollars. If one wants to convert the raw dollars into a rate, have at it, but that’s a derived answer, not the fundamental answer. 

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      • Superbone
      • YNAB convert since 2008
      • Superbone
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      The FIRE community calculations are based on savings rates. Nobody here is going to convince them otherwise. And yes, MMM's teachings are making the assumption that you'll live the same lifestyle in retirement that you live now.

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      • PhysicsGal
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      dakinemaui That's fine, everyone is different, it's all about priorities, so don't use that graph if that's not your goal.  Personally, I'm not really a FIRE person in any sort of hard core way, I'm just trying to stash as much as possible and only splurge on high priority things for now, so that maybe I will have the option someday to retire early. 

      It really all depends on your priorities, like everything with personal finance.  I just want to have my time to do what I want with it, I don't need a lot of money for that goal, most of the hobbies I want to devote my time too won't be costly.  I want to make more progress on my reading list (my list of books I want to read before I die would probably take my whole life even if I was just reading and nothing else, but I guess I'm crazy that way), devote more time to developing myself as a writer, get better at piano, and maybe even learn violin, do more yoga, and spend more time relaxing on my porch.  I'd be happy to live on what I'm living on now but with my time devoted to my priorities.

      I actually really like my job, so it's not even like I don't want to do job anymore, I just want more time for other things also.  Maybe once I have enough saved up, I can go part time, then I won't have to worry about covering my health insurance and will still have some money coming in?  It's something to consider.  It would probably also help to have at least some external structure.

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      • PhysicsGal
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      Superbone I think it's just a matter of different priorities.  You do you, if the assumptions behind that calculation aren't accurate to your desired retirement, then you really shouldn't use that graph.

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      • dakinemaui
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      PhysicsGal oh, totally. Just throwing out an opinion. Cheers!

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      • Superbone
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      PhysicsGal That was my point. I was talking about the FIRE community perspective. Not mine.

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  • Every category is savings in YNAB; it's only the timeframe that varies.  I mean, "savings" is merely "delayed spending" when you get right down to it.

    When financial experts talk about "saving" a certain percentage, they usually mean for retirement. 

    I think you're complicating things unnecessarily. Why do you care what percentage of income goes to those 5 "special" categories? YNAB would have you operate everything on a priority basis. The important things should get money (within the constraints of income) and if something has to go unfunded, it should be something not as important.

    Basically, if you don't have any lower priorities that are going unfunded and you still have unallocated income, you should accelerate a high priority -- possibly one of the Big Five -- regardless of whether that causes them to exceed some arbitrarily set percentage or not.

    Think about the future house, just as an example. If you want a house in X years, you're going to have to save a significantly higher percentage if you're going to buy, say, in California compared to Kentucky.

    Like 1
    • dakinemaui In our most recent discussion with a finance professional, he asked how much we were saving each month.  This was difficult to answer, even though he said he was familiar with YNAB.  My favorite part was when he asked how much uncategorized money we had each month. I asked which categories he considered uncategorized... And he actually answered. With a straight face.

      Like 6
    • dakinemaui Yes, it is best to put each dollar towards the highest priority thing at that moment. That is what we are doing. However, it is nice to be able to talk about a savings rate as this allows you estimate time until retirement. In principle knowing this number shouldn't adjust how we allocate each dollar the comes in in the future, however in practice, knowing our savings rate will allow us psychologically to make budgeting decisions even more in line with increased savings.

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      • dakinemaui
      • dakinemaui
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      Beige Wildebeest In that case, the retirement savings rate is dependent upon what you budget to the retirement category (ies) plus any pre-tax things that are not typically in YNAB (e.g., 401k). That's pretty straightforward, though.

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      • PhysicsGal
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      Move Light Sound Life What did he say?  How do you even answer that?

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      • PhysicsGal
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      Beige Wildebeest I just calculate my savings rate myself, on a monthly basis, when I also track my net worth.  I just do it in a google spreadsheet, using my paystub and adding whatever I contributed to my Roth IRA that month.  I only include retirement savings in that though, not savings for my Emergency fund, or other shorter than retirement timeframe goals.

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    • PhysicsGal He said that his "uncategorized" categories included things like insurance premiums, emergency fund, retirement contributions, gifts, etc. Essentially, any True Expense. 

      However, in conversation, it seemed that the reason he wanted this number was to calculate how much we could "roll" from our debt paydown into savings. 

      So, those two concepts don't really work together, of course.

      I just wish I could teach him YNAB. But, I can feel comfortable knowing we've got the budget down, and he'll help us with the rest. It helps that he speaks my husband's math language. You know, the kind without labels, where numbers pop up from different perspectives, and conversions happen invisibly. I can't follow it at all and I hate feeling dumb.  I'm not bad at math. 

      I'm smiling at my husband lovingly as I read this aloud. He's a great guy. 

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      • PhysicsGal
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      • physicsgal
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      Move Light Sound Life I find it amazing when people say two things in the same sentence that contradict one another without even noticing. 

      Like 1
  • Beige Wildebeest said:
    We're aware of this post https://www.youneedabudget.com/the-relationship-between-your-budget-your-accounts-its-complicated/ but we need separate accounts because these are medium to long term savings goals and they should be collecting interest far above what is collected in a checking account.

    You should read that post again, then. It actually outlines why you can put money in a higher rate account without impacting the budget. Purpose (category) is independent of location (account). It describes why you do not need to make categories match an account (and doing so is more work).

    Like
    • dakinemaui I understand that purpose is independent of location. The underlying problem is that when there is no way to track when certain amount of money were put into each budget category.  I want to know something like how much money did I budget into a particular category a certain month divided by how much income I had that same month.

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      • dakinemaui
      • dakinemaui
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      Beige Wildebeest if it's budgeted in Dec's area, it seems reasonable to attribute it to Dec.

      Like 5
  • You are way overcomplicating this. And you may be aware of that article but it doesn’t appear that you understand it. There should be no direct correlation between categories and accounts. The accounts are just containers. Some make more interest than others and that’s their only purpose while your checking account, most likely, makes little interest but is how you pay for things and receive your income. I have more in high yield savings accounts than I do in my medium to long term savings categories combined.

    As far as savings rate is concerned, you could probably calculate it using YNAB reports. Just turn on your medium and long term categories.

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    • Superbone No we can't calculate savings rate using YNAB reports. That is the problem. The reports only report on "activity" not budgeting. So if we budget $1000 towards a particular goal that is not reflected in the reports. The budget increase so we can see that we have saved more but it does not appear in the reports.

      Like 1
      • dakinemaui
      • dakinemaui
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      Beige Wildebeest the budget is the report. If you have more than one retirement category, either combine them or group them.

      Additionally, though, if you transfer that money out of the budget (which is typical), it shows up in the expense report at that point.

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    • dakinemaui Yes, I think this is actually the answer to my question. The "Budget" column for each month is a record of how much was budgeted towards that category. In this case "budgeting" towards savings (even with no spending) is what can be translated to savings. So I guess at this point what would be nice would be if the budgeted amounts for each month showed up in the reports. For typical spending categories the budgeted amount is typically close to the spending amount on that category, but for savings categories this is not the case. Even if there is budgeting every month there may not be spending for years.

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      • Superbone
      • YNAB convert since 2008
      • Superbone
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      Beige Wildebeest I was thinking more of the Income v Expense report. Income - Expenses being your savings and then savings / income being your savings rate. The problem with that though is it includes your shorter term Rule 2 fund savings as well. Of course, this is all budgeted savings. If you're like me, the majority of your savings is done pre-tax by your employer and taken out of your check before you even see it.

      Like 1
    • Superbone Ah, that makes sense. Savings may not be directly reported in that report but one can calculate savings = income - expenses.

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      • QC
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      dakinemaui 

      dakinemaui said:
      Beige Wildebeest the budget is the report. If you have more than one retirement category, either combine them or group them.

       This is what I do to track my Savings.  Then I only need to look at the Master Category Account 'Budgeted' number in any month to know my savings total which I can track against the Funds for "Month" to get my savings rate.

      Like 2
  • Ok, I'll take a stab at this one.  Why don't you reverse the idea, and be proactive, and tell YNAB how much you want to save?  So like, let's say I'm gonna be one of those FIRE people and save 40% of our income.  I have December already budgeted.  I take all of this month's income and put it in a holding category for next month.  I put a note under the January header "Save 40%" and when I budget Jan. I calculate 40% of the amount in my holding category and distribute that amount amongst my 5 biggies and budget the remainder as normal.  Boom.  

    If I make it through the month without starving to death, and I wanna push myself a little further, now let's try 41% or 42%.  Write a note as your goal for Feb.  And repeat.

    Like 7
    • Annieland Do you create a new category every month to represent the holding funds?

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    • @annieland Yeah i got your point. For this I need to buffer up atleast 1-2 months ahead, hopefully will get at it, with time.

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  • I'm curious what formula one uses to calculate savings rate? There are so many ways it can be done that it's just about pointless to throw out a number. As Superbone mentioned, there's money taken out directly as payroll deductions. There's employer matches. There's post-tax savings. What number do you use for the denominator? Gross wages? Bonuses? earned income? AGI? Take home pay?  Do you reduce by the cost of employer benefits? Do you add back in employer match?

     

    Savings rate is a figment of the imagination. Rather than figuring out a percentage that you are saving, figure out the target number needed for retirement, and reverse engineer that back to an annual dollar amount needed to be saved.

    Like 4
      • Habanero Salsa
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      • Aquamarine_Pony.8
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      nolesrule It’s even worse than that. If you save $1000 into a total market index fund and the value declines to $800, how much did you save?

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
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      Habanero Salsa Agree, although in the long term the assumption is it will have growth. Thus one would only calculate on contributions and not on growth/losses. And then technically unearned income, which contributes to AGI is generally growth. Like tax inefficient bank interest.

      But yeah, it's confusing.

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      • Habanero Salsa
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      nolesrule But you can't retire early on assumptions. I agree that people should determine how much to put aside. If you meet those targets, your savings goals are on track, but that doesn't mean your early retirement is, and that is the objective underlying the OP's questions.

      In order to assess whether early retirement is on track, you have to evaluate performance, not just savings rate. So, savings rate is complicated to determine and isn't sufficient, and maybe not even necessary, to answer OP's question.

      (And, according to my "financial advisor," the denominator is total realized income from all sources, including: gross income, employer match on retirement accounts, bank interest.)

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      • nolesrule
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      • nolesrule
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      Habanero Salsa I like how something is both growth and savable income. Way to fudge the numbers.

      Most people can't retire early on savings alone and need to invest in order to reach a safe number. Therefore one must make a reasonable projection on growth from investments, knowing that the growth is not a constant. Therefore you need to run monte carlo simulations or repeat of past historical period's performances to get you a probability of whether or not the plan will work. See cfiresim or firecalc.

      Even after retirement, the number you have still relies on probabilities to project success.

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      • Habanero Salsa
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      nolesrule Right. Which was my answer above. Unless OP can brute force retirement savings with cash, the answer lies in investment returns, not savings rate.

      I don't know that it is "fudging" numbers, which has a negative connotation. It's creating a larger denominator so that hitting a higher savings rate requires more effort.

      Believe me, I got way more information on savings rates, Monte Carlo simulations, firecalc, sustainable withdrawal rates, and the rest than your average teenager.

      Like 1
    • Habanero Salsa nolesrule pre-tax contributions, employer matches, and take home pay should be included in income. These are dollars that come into your accounts. Of course you have to take advantage of investments to retire earlier. And yes, of course to make a projection about retirement you must make assumptions about growth. You can assume a constant rate of growth (clearly has countless problems but gives a starting point) and then supplement with a fuller plan and monte-carlo methods.

      Yes you can come up with a target number for retirement but it is sort of a moving target. How much you need for retirement changes with your projected expenses (so if you start spending more you will start to need more for retirement). It also changes with inflation as years go on. However, your income changes with inflation as well so you can in principle contribute towards the number more quickly.

      It turns out all these effects are balanced in savings rate. If inflation goes up or down but your savings rate stays the same it will take you the same time to reach the amount required for retirement. If expenses go up it means you need more for retirement which means it will take longer. Of course this means savings rate goes down.

      The key is that under a (very) simplified model you can calculate how long it will take you to retire using just your savings rate. As I mentioned above there are many shortcoming of the model but it is a good place and simple place to start off the thinking.

       

      https://networthify.com/calculator/earlyretirement?income=50000&initialBalance=0&expenses=20000&annualPct=5&withdrawalRate=4

       

      https://www.madfientist.com/fi-laboratory/

      Like 1
      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 10 mths ago
      • 2
      • Reported - view

      Beige Wildebeest Seems to assume income doesn't decrease. That is an unwarranted assumption. And it's also why raw numbers work better than percentages.

      Also, are you tax-adjusting based on the type of account the savings goes into? Makes a pretty big difference.

      The real problem with trying to simplify these things is that they can't be simplified. Too many variables that don't get accounted for that can have a major impact.

      And finally, since your savings needs to be a multiple of expenses, not income, you should be comparing the amount you save to your annual expenses, not to income. Income is meaningless because at best it's very loosely tied to expenses.

      Like 2
      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 10 mths ago
      • Reported - view

      Beige Wildebeest But anyway, good luck.

      Like
      • Habanero Salsa
      • Second generation user
      • Aquamarine_Pony.8
      • 10 mths ago
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      • Reported - view

      Beige Wildebeest I wouldn’t conflate current expenses with expected expenses in retirement, though. For example, someone might buy a pricy house which increases current expenses but could still be mortgage-free in retirement. 
       

      Current expenses probably make a good starting point, though. Even then, projected expenses are kind of a moving target... maybe travel expenses go way up at first but drop as you get older. And so on.

      The good thing is, a lot of the math has already been done. Fairly conservative starting points are shooting for 25x expenses as a starting retirement pool and/or about a 4% inflation-adjusted draw down rate. Then you “just” have to figure out how to accumulate 25 times of some amount of annual expenses. 
       

      More on the original topic, though, I’d do the math in Excel and set up the goals in YNAB. If you’re meeting the goals, you know you’re on track.

      Like 1
      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 10 mths ago
      • Reported - view

      Wow. That networtify calculator sucks. It makes a lot of dumb assumptions, like Income - savings = Expenses, and that what counts expenses will be constant between now and retirement and into retirement. Pretty sure I won't be paying FICA taxes, for a start. Income taxes will probably drop too. Which means I won't need to save nearly as much.

      Edit... O h it makes some assumptions, so then you have to crunch numbers to adjust the numbers you put into the calculator to come up with after-tax income. But comparing a mix of pre-tax, tax-free and taxable savings to after-tax income can come up with some bad end-results. Garbage in garbage out.

      Like
      • Annieland
      • YNABbing every day since 2009!
      • Annieland
      • 10 mths ago
      • 1
      • Reported - view

      Beige Wildebeest How can you expect YNAB to do any of this?  It's for budgeting for groceries, saving up for a vacation, and building or maintaining emergency funds.

      Do the FIRE people (bonkers, imho) use and recommend YNAB to actively plan for dropping out of the workforce?  My personal policy when I purchase something, virtual or tangible, is for it to do one thing and do it well.  I use Banktivity for Mac to track all my personal finances, and it actually calculates a 1 yr and 30 day savings rate right on the home screen, which can be customized.  I look at it, but I don't "use" it because it has no bearing on my day-to-day decision making.

      But on a side note, you could check out https://maxifiplanner.com/.  I subscribed for a year, but didn't renew.  It just required way too much data for me to keep on top of, but I haven't seen anything else approaching financial advisor software online for the consumer market.

      Oh, and one more thing.  This is more about spending and not budgeting, but the Toolkit reports has that funky Income Breakdown.  If you have a net gain you can hover over it and see the percentage you're ahead for that time period.

      Like 1
      • Habanero Salsa
      • Second generation user
      • Aquamarine_Pony.8
      • 10 mths ago
      • 3
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      Annieland My dad was a “bonkers” FIRE person. He recommended YNAB, taught me how to use it, and wouldn’t use anything else for budgeting. He used Excel for the planning and YNAB for the implementation. That’s what I’m doing, too. 

      Like 3
      • Annieland
      • YNABbing every day since 2009!
      • Annieland
      • 10 mths ago
      • Reported - view

      Habanero Salsa I'd love to teach my kids YNAB as your dad did for you.  That was quite a gift you received from him.  I think I inherited my financial acumen from my dad too.  I recently found his financial spreadsheets printed out from the early 90's and they look stunningly similar to mine, even though it was ALL IN CAPS and he barely knew how to use any other software.  His whole goal was to retire at the exact age his pension would kick in, and I think that was 59 1/2.  Unfortunately he passed away suddenly at 55.  So I do get it.  I'm just snarky, and I want my husband to work forever because I want mo' money, mo' money, mo' money!! 🤑🤑🤑

      Like
  • Sorry, one more thing.  On the budget screen you can click on one, some, or all categories and see "Average Budgeted" and "Budgeted Last Month" in the inspector.  Maybe compare that number to the income numbers in the reports to get the savings rate you're looking for?

    Like
    • Annieland and others Thank you for all of your thoughtful responses. Here are my takeways from this thread.

      1) I think are correct that it isn't necessarily reasonable to expect YNAB to do all of this. This is one of the conclusions I am coming to. YNAB is optimized for tracking and budgeting month to month expenses. It isn't really optimized (though it can sort of work) for tracking an overall financial picture including total income, total expenses and long term savings. Based on this I am thinking about non-YNAB supplements to YNAB to help with the overall picture.

       

      2) The app does keep track of how much was budgeted into a given category each month. Looking at this number for the savings categories DOES serve as a historical record of how much was saved each month. This is definitely the start of a solution to my problem. The two issues with this are 1) that this information doesn't show up in the reports and 2) that there isn't a "transaction by transaction record" of how much was budgeted within a month. For example, if I budget a certain amount towards my big vacation at the start of the month and then budget more in the middle of the month there is no record.

       

      3) Savings can be calculated from the difference between income and expenses*. YNAB is a good record of expenses for us so if we can use YNAB or other means to determine our total income then we can calculate total savings rate using this.

       

      *Some people seem to be taking issue with this but I don't see the problem.. yes there might be subtleties in how each of these are defined  but if you're careful about it you can work it all out.

      Like 2
      • dakinemaui
      • dakinemaui
      • 10 mths ago
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      • Reported - view

      Beige Wildebeest I really don't see why a historic tally is important. All that really matters is where you are today and where you want to be... later. The fact you might have saved $10k (or even x%) last year doesn't mean anything.

      Like 2
      • bret
      • bret
      • 10 mths ago
      • 4
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      dakinemaui 

      Historical data can be a helpful planning tool! It's just like with spending reports. Can I change the past? No, but the past can be a good predictor of the future. If I only saved $10k last year, I shouldn't expect to dramatically improve on that without making major lifestyle changes.

      Additionally, historical data can be a nice motivator. When I do make improvements, it's nice to see that reflected in charts (and motivates me to keep it up!)

      Like 4
    • Beige Wildebeest I hear you, I like the reporting as well.  We solved by having a master category of "Savings & Investments", for long-term savings.  The sub-categories are Roth IRA, Solo 401k, 529s, & Emergency Fund.  We have an on-budget checking account & on-budget savings account - these are for our monthly expenses, and true expenses/sinking funds.  When we transfer the money from the on-budget checking or HYS account to an investment fund, like a contribution to a backdoor Roth IRA, then that shows as spending in our reporting.  We can get reporting on our overall "Savings & Investments" contributions, by particular investment account (bcs each is a separate category).  For a savings rate, we compare the "spend" to those investment accounts against total income.  If I want to see actual expenses (not "savings" expenses), I simply deselect the savings master category from the report.  It works really well for us, seems like it would for what you're trying to do.

      Like 2
  • I recall thinking my savings rate was the end-all, be-all in budgeting. That was before YNAB, and maybe for the first year-ish of using YNAB, too.  I had a budget template,  and I would compare it against my take-home pay to figure out the percentages. At the time it was essential to me that my spending rate be less than 60% of my take-home.  That 60% number was chosen simply because my unemployment insurance gave me 60% of my previous income in the event of loss of income, and I had been through a prolonged unemployment in my recent past. 

    When I measured my budget template against that measuring stick of a 40% savings rate, I know that I saw that as a health-metre for my finances and lifestyle. It didn't matter if the savings was for wants or needs, for medium- or long-term future spending; I just needed to see that my current plan was a 60-40 split, and that I didn't need more than 60% of my income to meet essential needs.

    And....once a year, when I'm doing my planning for the upcoming year, I still calculate my percentages for that magic 60% mark. I kind of equate this with wearing a string of garlic to ward off vampires. 😉 You don't know why it's important or if it really works, but it gives you comfort.

    Like 2
      • Annieland
      • YNABbing every day since 2009!
      • Annieland
      • 10 mths ago
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      HappyDance Heh that's funny.  40% was my hypothetical pie-in-the-sky savings amount in my earlier post.  And I went on to pretty much insinuate I would starve to death saving that much.  And here you are doing it!  That's awesome, girl. Way to go :)

      Like 1
      • HappyDance
      • YNABing consistently since 2014
      • HappyDance
      • 10 mths ago
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      Annieland 

      About a quarter of that 40% is true expenses.  I tend to view those expenses as ones I could remove from my life with enough runway time, like not needing to renew car insurance if I sold my car.

      So, in all honesty, my actual "savings" rate if you're calculating funds I can set aside and not spend within the same calendar year is closer to 30.

      Like 1
  • I've previously read the FIRE community take on savings rate and how integral it is in that community to calculating your retirement date. This week I did a little research on this topic and found that there are many different ways to calculate it out there. This method made the most sense to me:

    https://mymoneywizard.com/how-to-calculate-savings-rate/

    I calculated this year (39%) and last year (35%) for myself so I feel pretty good about that. That's about the sweet spot for me. YNAB provided some of the numbers but many I had to get elsewhere such as on my payroll site. So no, I don't think YNAB is a one stop shop for tracking savings rate.

    As far as tracking it proactively, I like Annieland 's idea. But you'd have to modify it to remove the automatic retirement contributions made from your paycheck percentage. Seems to me that you would calculate the automatic retirement portion of that rate and subtract it from your overall savings rate goal to figure out what rate you need to save from your take home pay. For example, if your retirement contributions made up for a 20% savings rate, you'd need to save 20% of your take home pay for a 40% overall savings rate. Actually, it wouldn't be 20% of take home but 20% of your overall pay out of your take home pay, whatever that rate is.

    Like 2
      • jenmas
      • jenmas
      • 10 mths ago
      • 1
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      Superbone hmmm, based on this, my savings rate is 54%. Well probably slightly lower because I still have some spending to do this year, but I can't see it knocking it too far down. . .

      Like 1
      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 10 mths ago
      • 3
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      jenmas Meh. My savings rate is 100% because there is always at least some amount of time that elapses between when money is deposited in my account and I spend it. 🤣

      Like 3
  • Maroon Trombone Here's the solution we ended up finding. First off, as some pointed out in this thread, YNAB does not have the functionality to be a total wealth management tool. Because of that we have created our own spreadsheet which does a better job of tracking our TOTAL monthly cashflow, including all income, expenses, and savings. Much of this cashflow is recorded in YNAB but not all of it.

    For income we track Pre-tax (from paystub), post-tax (from YNAB income) and other (from YNAB income also) and reimbursements (from YNAB income).

    For Expenses we track Post tax expenses (This is where YNAB shines) and Pre-tax expenses (taxes, health insurance, from pay stub)

    For savings we track Pre-tax contributions (personal and employer match from pay stub info), Post-tax contributions (these show up as expenses in YNAB into off-budget, non-tracked, investment accounts) as well as deferred spending. Deferred spending is money that we move into a high interest savings account which is on budget for the medium term goals mentioned in the OP. The deferred spending shows up as "budgeted money" each month as well as an increase in the balance of that account.

    So YNAB is able to track some of these categories but not all. And furthermore, it is slightly awkward to use "savings expenses" to track the money going into the investment accounts and moderately to quite awkward having to use the budget column to track the deferred spending.

    In any case, from all of these different categories we able to calculate a number of different savings rates of interest. The basic idea of the FIRE retirement calculators is that you compare how much money you are putting into your nest egg TODAY to how much money you expect to be withdrawing from you nest egg DURING RETIREMENT. For this I like to calculate savings rate as:

    (pretax + posttax retirement contributions)/((pretax + post-tax retirement contributions) - posttax expenses)

    Like 1
  • I love how everyone is jumping on the OP to tell them how they are doing it wrong. You people seriously need to calm down.

     

    Just because you don't have to make them match doesn't mean you can't or that you shouldn't. I think you all forget its called PERSONAL finance and what works for you won't work for everybody.

     

    For awhile I did the same thing, because it worked best for me in my current situation. FF to now with the last of my CCs paid off converted to checking accounts and now as PIF cards my budget fully 1 month ahead in addition to my regular savings and now I am in a spot where I don't have to do this, as I've moved all spending to PIF cards except rent, gas, and car payment my checking account now has so few transactions its easier to manage ynabs recommended way, now my direct deposit goes right into savings. I use future transactions and the running balance to see a month out to ensure I have just my expenses + $500 in checking.

    Moral of the story is it took me time to get tthere. im now at a point where that makes more sense for me whether its ynabs way or not.

    So calm down and let people do what works for them.

    Like 1
  • I use a spreadsheet and also Personal Capital to gauge some of what you're looking for. However, I don't have any outflows from my retirement savings (except my HSA and if I lose my job, from my income replacement fund, which are both a very small portion of the total). If you're wanting to track only your inflows as your "savings rate," might be wise to make sure that you aren't artificially excluding expenses that will exist post-retirement (e.g. healthcare expenses from an HSA).

    If you want "one tool to rule them all," optimized for your specific use cases.. you probably need to build it yourself. :)

    Like
  • Beige Wildebeest said:
    Of course there are many many assumptions baked into this.

     The main one appears to be a constant income level, which is impractical and skews the entire discussion. 
     

    You calculate that you need to save $24,000 per year for a certain amount of time at a particular rate to reach your goal for a retirement nest egg. 
     

    You make $100,000 per year this year. Your savings goal is thus 24%. You get paid on the 1st of each month and save $2000 from each check. As of December 1 you hit your 24% goal! Huzzah! You get a Christmas bonus of $10,000. Oh no! Now you’re under 24%. You haven’t met your savings rate. Are you off track? Of course not, because savings rate isn’t what will determine your success. 

    Like
    • Habanero Salsa How did you calculate that you need $24,000 per year? How did you determine the size of your retirement nest egg?

      Like
    • Beige Wildebeest You should reply to my previous comment, but just so that you know I'm playing fair I'll say that under your assumptions what you're saying DOES make sense. If you say I need $X to retire then your right that savings rate doesn't matter. All that matters is how many actual dollars you save each year. 

      But the question is how did you come up with $X as the amount you need to retire? It is assuming a certain expenses or cost of living during retirement. With your $10k bonus, ok, say you spend that entire $10k. If you now get comfortable with this extra $10k of spending every year or every few years (lower savings rate as you say) and the you go into retirement but keep your living style to be the way it was while you were working (and getting $10k bonus occasionally) then you will outspend your retirement budget and that $X you had originally come up with will not go as far as you were planning it to go.

      Traditionally personal finance is focused on setting expenses at a fixed value, figuring out how much money you need to save up to sustain those expenses during retirement and then figuring out what can be done with income to try to reach that $X amount in some period of time. The insight with focusing on savings rate (and FIRE in general) is that you can change the entire game (i.e. you can decrease the $X number and thus reach retirement quicker) if you are willing to adjust your living style to decrease expenses a bit.

      So my question stands: In your example how was $X calculated? 

      Like 1
      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 5 mths ago
      • 4
      • Reported - view

      Beige Wildebeest
      I think he was just pulling numbers out of a hat to use as an example, and there's nothing wrong with doing that. Where the number came from is not really important as part of his point and you've focused on the wrong aspect of it.

      Make sure you stick with me through  the last paragraph, because it will illustrate a really important point..


      The rule of thumb for retirement savings for a normal retirement so that you do not run out of money is 25X expenses. So you estimate your expenses. Subtract out future known income streams (pension, Social Security). Multiply by 25. If you want to keep it simple and not account for growth, divide that number by the number of years till you plan to start retirement.

      There's your raw number. That's what you need to save per year in order to hit your number with the assumption of no growth. The calculation becomes more complicated if you assume growth.

      The raw number is your target, regardless of how much money you make, so as Habanero Salsa correctly points out, the rate itself is not really relevant, because it's a function of the raw number and the amount of money you make. The Savings rate is derivative from the actual important numbers.

      I couldn't tell you what my savings rate is. What I do know is that if I keep saving my target amount of money year over year we'll hit our target number at age 62 with just 2% growth.

      But.... I got hit with a 10% pay cut this month and my wife got hit with 2 weeks of unpaid time off unexpectedly. If we were to use savings rate as our benchmark for the year, then we'd end up short of our target for the year because now our salary is lower. With the paycuts, our income is down, so the amount saved to our 401ks will be down. But our savings rate would actually go UP, not down.

      Let's say for example that we make $100k and our target for saving is $25k. That would be a 25% savings rate. Let's also say that 15% is contributed to the 401k so that means $15k of that $25k is from the 401k contributions. Now, let's say you get a 10% paycut half way through the year. Your final income for the year will be $95k. Your 401k contributions will be $14,250. That puts your total amount saved for the year at $24,250. That ends up being a 25.5% savings rate. But the reality is you saved $750 LESS than your target.

      Like 4
    • nolesrule Yes. 1) I'm very well aware of the 25x expenses rule for determining a retirement nest egg. It assumes that your expenses during retirement equal your current expenses* and that your real rate of return on your nest egg during retirement will be approximately 4% = 1/25. 2) I also follow your argument entirely. IF you come up with a target nest amount at age 40 (based on expenses at age 40) and NEVER allow that dollar amount to change THEN you and Habanero Salsa  ARE correct that your time to retirement will depend ONLY only dollar saved per year, NOT savings rate.
       

      It is now your turn to follow my argument. Your example is a GREAT one, I love it! You talk about $100k income and target savings for $25k. That would be 25% savings rate. Now say you take a pay cut of 10% half way through the year. That means first 6 months you earn $50k and 2nd 6 months you earn  $45k for a total of $95k over the year, all as you say.
       

      Lets say you hit your 25% savings rate during the first half, that means you saved $12.5k during the first half of the year and spent $37.5k. Calculating a nest egg using the 25x rule on these expenses (assuming you keep this expense rate of 2*$37.5k = $75k during retirement you would need $1.875M to retire.

      Now you talk about saving $24,250 over the whole year despite the 10% pay cut. Kudos! This is great, you only fell $750 short of your savings number despite taking a $5k pay cut over the year! That means you decreased your expenses by $4,250, and apparently all in the second half of the year! You must be good at YNAB :). If you can sustain that decreased spending then the pay cut may not delay your retirement! Let's check the math.

      During the 2nd half of the year you earned only $45k but saved $24.25k - $12.5k = $11.75k. This means your expenses were $33.25k, down by $4.25k from the first half of the year. If we use the 25x rule to calculate a nest egg using this new expenses number of (2*$33.25k = $66.5k/year) the target retirement number is now only $1.662 M. Down by almost $200k, or about a full two years worth of income. Your savings rate for the second half of the year was 26.1%.

      Note that by decreasing expenses by about $4k during half the year ($8k if sustained over the year) you decrease your target retirement number by $8k*25 = $200k. If you can sustain this lower spending now and during retirement then your nest egg amount decreases to something you can achieve sooner.

       

      Again let me reiterate, the importance of savings amount relies on RECALCULATING your nest egg as your spending habit change. You are all correct that if you take your nest egg value as fixed an immutable that savings rate doesn't matter. However, if you allow your nest egg to change up or down as your spending habits change (and extrapolate to your spending habits during retirement) then and only then does savings rate become important.

       

      *Note this was one of my assumptions in my post above where I show the algebra describing the importance of safe withdrawal rate. This is the assumption that dakinemaui is questioning. I make this assumption based on the common 25x or 4% rule for determine retirement nest egg which explicitly uses current expenses to determine your nest egg.

      Like
  • Beige Wildebeest said:
    How did you determine the size of your retirement nest egg?

    I sure wouldn't use my current expenses, but doing so seems implicit to your calculations.

    Like 1
    • dakinemaui Yes, you are correct that I am assuming current expenses equals expenses during retirement. This is the easiest assumption to make and easiest to demonstrate the dependence of time to retirement on savings rate. Two things.

      1) If instead you say retirement expenses are going to roughly some factor multiplied by current expenses, say Er = g Ew where g is number greater or smaller than 1 as you wish you would find the same result which is that time to retirement STILL depends on savings rate. You could argue that retirement expenses don't depend at all on current expenses but I would disagree. While some expenses will change during retirement many will not.

      2) You point is still fair that using current expenses to estimate retirement expenses leaves a lot to be desired. Can you please tell me how you would suggest estimating expenses during retirement for purposes of retirement planning?

      Like
      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 5 mths ago
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      Beige Wildebeest Time to retirement is a function of how much you save not your savings percentage. Savings percentage is a derivative formula that really doesn't make for a good benchmark. The best benchmark is raw dollars, which don't even require a calculation.

      If income goes up, your savings rate would go down to meet your target number at the same point in time, or if you kept it the same you'd retire early. if your income goes down, you'd have to increase your savings rate to meet the target time, or you retire later. Because it's the raw dollars that matter.

      Like 3
  • Beige Wildebeest said: @
    Habanero Salsa How did you calculate that you need $24,000 per year? How did you determine the size of your retirement nest egg?

    It’s just an example.

    The nest egg, following general principles of “safe” withdrawal in retirement is 25x expected expenses. How one gets to that number, whether one plans with real or nominal dollars, etc. is up the the person, but savings rate has nothing to do with it. 

    Like 2
  • Beige Wildebeest said:
    During the 2nd half of the year you earned only $45k but saved $24.25k - $12.5k = $11.75k. This means your expenses were $33.25k, down by $4.25k from the first half of the year. If we use the 25x rule to calculate a nest egg using this new expenses number of (2*$33.25k = $66.5k/year) the target retirement number is now only $1.662 M. Down by almost $200k, or about a full two years worth of income. Your savings rate for the second half of the year was 26.1%.
    Note that by decreasing expenses by about $4k during half the year ($8k if sustained over the year) you decrease your target retirement number by $8k*25 = $200k. If you can sustain this lower spending now and during retirement then your nest egg amount decreases to something you can achieve sooner.

     This is entirely incorrect because it makes a huge unwarranted assumption in that my target retirement number changes because my income has changed.

    This logic is completely backward. I set my target based on how much I want to be able to spend in retirement, and the amount I save is a function of that. That means the annual raw savings target does not change with income.  However, using a percentage as the savings benchmark which fluctuates with changes in income means that your target also fluctuates with income.

    That's just not useful for  targetting a specific number, and ultimately it is the specific number that matters.
     

    Like 2
  • Beige Wildebeest said:
    Again let me reiterate, the importance of savings amount relies on RECALCULATING your nest egg as your spending habit change. You are all correct that if you take your nest egg value as fixed an immutable that savings rate doesn't matter. However, if you allow your nest egg to change up or down as your spending habits change (and extrapolate to your spending habits during retirement) then and only then does savings rate become important.

     Why the heck would you want to do that? I'm saving for a certain standard of living in retirement. If I can't get there due to underemployment, then it sucks to be me. But I'd rather strive for it than get caught with my pants down because I was relying on a percentage.

    The reality is we actually max our 401ks and IRAs, do a small Mega backdoor Roth due to contribution limits, and are growing a taxable account. The amount going into taxable is a function of our current lifestyle. So the paycuts, while not great, only affect what we're putting in the taxable account, and we can pull other levers to keep it constant. Based on those numbers we are saving approximately 1 year of expenses that need to be funded by our portfolio per year. That gets us to our number at age 65 with zero portfolio growth.

    But with each year, the amount we need in our nest egg after other income sources actually decreases, because it calculated on the Future Value of those income streams on the assumption that there are no future year contributions to those income streams.... which is extremely conservative. If I used the retirement calculators and projected SS numbers, then we'd barely need to save anything for retirement because it would be paid for through SS and pension... but that assumes the status quo, which is dangerous when it comes to pensions and Social Security.

    So with each year we continue to work, the odds of our actual success go up, and it's not because of our savings rate.

    Like 1
    • nolesrule You raise valid points, and I think reasonable people can disagree on the approach taken here.

      1) To address your first response: I do not assume target retirement number changes because income changes. I assume target retirement number changes because expenses change which indicates a lifestyle change. If this lifestyle change can be sustained until and throughout retirement then you don't need as much to retire.

      2) That said, your point that one could target a certain lifestyle and thus certain expenses during retirement therefore nest egg does NOT change with expenses during working years is totally valid. This is certainly one strategy that you could take, and if this is strategy you take then you're correct that only savings dollars matters and not savings rate. I'll suggest now why this strategy might be problematic. Say you are 30 and planning for your retirement. You come up with a target retirement number using the 25x rule with your current annual expenses. Say $30k. This means you would set your target number to $750k. Now you save for a decade or two and you start approaching the $750k number. However, you've gotten promotions and your income has increased over the years. The increase in income has caused you to increase your savings some, but you've also increased your spending with the income boosts. Now, say you're close to your $750k target for retirement and your expenses are now $50k per year.  Are you really going to suddenly bump down your expenses back to $30k that you had many years ago? Sound difficult and a little unlikely.

      What's the problem? Well it's obvious. As your spending increases and your lifestyle changes you need to increase your target amount appropriately to reflect these current changes. Why did we need to adjust the target? Because expenses went up.

      I'm not saying everyone should use the strategy I'm suggesting. If you prefer estimating your nest egg once and targeting that then don't worry about savings rate, just try to maximize the dollars you save and reach that goal. You can save more by decreasing expenses and reach your goal faster then bump up your expenses during retirement or you can spend heavily slowly making your way towards retirement and making sure to notch down your spending when you reach your target so that it lasts as long as you need it to.

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  • Beige Wildebeest said:
    I'm very well aware of the 25x expenses rule for determining a retirement nest egg. It assumes that your expenses during retirement equal your current expenses

    I'm afraid not. The 25x rule is 25x of expenses during retirement. Full stop. "Current expenses" are immaterial.

    Of course, it's your call whether to estimate retirement expenses as being equal to current expenses. While certainly easy, it's unlikely to be the most accurate approach. If current expenses are greater than retirement expenses, you will unnecessarily reduce quality of life from now until retirement.

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    • dakinemaui Fair points. And yes, I agree that the 25x rule should be 25x of expenses during retirement. So yes, the section you quote from me is incorrect if you don't assume retirement expenses equal current expenses.

      For everything I am posting here I am assuming expenses during retirement are equal to expenses during working years. You might say instead that expenses during retirement are 80% or 120% of expenses during working years and the same arguments would follow.

      If you say that expenses during retirement are TOTALLY unrelated to current expenses then yes, savings rate is totally useless. I would argue that current expenses are at least somewhat of a measure of expenses during retirement and it's fair to use them as a proxy for crude estimations. Of course a real retirement plan should have some more refinement, but taking this simplest assumptions can reveal some nice principles.

       

      And one thing should be stated here. One of the tenants of the FIRE community is that we SHOULD try to decrease our expenses so that we need less money for retirement. This is in contrast to a lot of traditional personal finance advice which assumes expenses are fixed and god given and must be planned around. It is a slight change of mindset that can have powerful implications. This change of mindset might explain a lot of the difference between the approaches. You can pull retirement closer by decreasing your current lifestyle expenses (and resolve to maintain these lifestyle changes throughout retirement) so that you don't need as much money to retire and you can thus retire sooner. A good approach to retire sooner in addition to usual approaches like  increasing income and investing wisely.

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      • dakinemaui
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      Beige Wildebeest said:
      One of the tenants of the FIRE community is that we SHOULD try to decrease our expenses so that we need less money for retirement.

      No disagreement there. I will only point out that tenant deals with expenses as dollars, not as a percentage of income.

      Beige Wildebeest said:
      This is in contrast to a lot of traditional personal finance advice which assumes expenses are fixed and god given and must be planned around.

      You'll also have to understand that YNAB users are very much not "traditional". They quickly realize that to improve their situation, either expenses must be lowered or income increased. Reducing expenses is one of the first things that happens.

      (FWIW, contributions toward retirement are viewed as just another expense, the priority of which must be weighed against all the other demands on your money. An "expense" is simply defined as money leaving the budget.)

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      • dakinemaui
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      Reducing expenses is one of the first things that happens.

      A refinement of that statement: LOW priority expenses are reduced, allowing more important expenses to be funded at a higher level. If retirement is one of those higher priorities, it gets more funding and accelerates the timeline for a given level of retirement expenses.

      In YNAB, the relative priority of where your money goes is a pivotal concept.

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      • nolesrule
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      • nolesrule
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      Beige Wildebeest said:
      One of the tenants of the FIRE community is that we SHOULD try to decrease our expenses so that we need less money for retirement.

       That decrease in needs is going to be offset by an increase in wants. That extra 25% of the week you used to spend working has to be filled doing something. For some people that will be free, for others it'll cost money.

      I use YNAB as a way of decreasing my needs. That allows me to increase my wants and savings so I can be comfortable and more secure at the same time.

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    • nolesrule dakinemaui So you both agree that decreasing expenses (especially expenses during retirement) can pull retirement closer. 

      I think about it this way. Say I make a retirement plan that allows for me to eat out once a day. It will take a while to save for that plan because you need a lot of money saved up if you want to eat out once a day. But now, let me suppose one week I resolve to eat out one less day per week. True, I save a little bit extra that week and that gets me that much closer to retirement. But the REAL gain comes from the fact that if I maintain this resolution through retirement then the amount of money I need to save for retirement is dramatically reduced.

      Since these sorts of lifestyle adjustments are made throughout life it is helpful to use savings rate as a way to track how your lifestyle puts you on track for retirement. If you only keep track of how much you save then the dramatic gains you get from eating out less might be masked by the fact that the monthly or even annual savings from eating out once less per week is just a drop in the bucket compared to the total amount you need to retire. It might not seem worth it.

      That is, if you only track how much you save then sure, eating out one less day per week for a month might look like an extra $50 saved. That's not even a drop in the bucket compared to how much you need to save for retirement. However, if you think about this eating out as an increase in your savings rate (because this is a lifestyle change you are going to maintain through retirement) then this small change can actually have a very large effect on your retirement strategy precisely because it can dramatically reduce your target amount. It's sort of a double savings, you save more and you need less! Savings rate is a good way to keep this long term thinking present in mind.

      All of this said I think we're all basically on the same page, it's just a matter of how we're preferring to slice the numbers.

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  • Beige Wildebeest said:
    So you both agree that decreasing expenses (especially expenses during retirement) can pull retirement closer.

     Maybe, maybe not. Decreasing expenses can lower the amount you need in retirement or you can start retirement earlier. It doesn't necessarily mean both, because retiring earlier means more years without income and less years to save. it's a moving calculation.

    A normal retirement requires 25X expenses in order to not run out of money before 30 years guaranteed. Early retirement requires 33-40X. If you can manage to whittle down your expenses and lifestyle to the point where the raw number associated with 25X morphs into a final 40X, power to you and you can retire at that point.

    Notice I didn't talk about percentages of income, only in (multiples of) annual expenses.

     

    Beige Wildebeest said:
    That is, if you only track how much you save then sure, eating out one less day per week for a month might look like an extra $50 saved. That's not even a drop in the bucket compared to how much you need to save for retirement. However, if you think about this eating out as an increase in your savings rate (because this is a lifestyle change you are going to maintain through retirement) then this small change can actually have a very large effect on your retirement strategy precisely because it can dramatically reduce your target amount. It's sort of a double savings, you save more and you need less! Savings rate is a good way to keep this long term thinking present in mind.

     Again, the problem is anchoring on savings rate as a benchmark, rather than developing a specific plan to reach a specific goal.

    Savings rate is dependent on income in the denominator. The target number  is dependent on future expenses. Focusing on the expenses means  the income doesn't actually matter (assuming you have sufficient income to actually save to meet the number of course... and if you don't your plan is infeasible regardless of a calculated savings rate). So if income doesn't actually matter, then savings rate doesn't matter.

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  • nolesrule said:
    the problem is anchoring on savings rate as a benchmark, rather than developing a specific plan to reach a specific goal

    Pretty much this ^^. If I need $10,000 to go on a big whirlwind trip in 10 years, I'll put aside $10k / 10 years / 12 months = $83.33 per month between now and then. It's that simple. I don't care that $83 is X% of my income. All I have to do is continue socking away $83 per month.

    I think of retirement exactly the same way. Estimate amount needed and timeline. From that, the required contributions are computed. If that combined with contributions toward other things (like my current house, food, hobbies, etc.) exceed my current income, I simply cannot support that timeline AND level of retirement expenses AND all my other demands. It's that simple. My priorities will determine which of those have to change in order to become a feasible plan.

    Beige Wildebeest Look at this from our perspective... If planning with percentages is so great, why not apply this to other infrequent expenses? Things like that trip, the roof replacement, the new car, a downpayment on a new house or heck, buying a house outright? To my mind, the answer is, "because it's easier to do it a different way."

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    • dakinemaui I'm not suggesting that savings rate is the only thing you should be paying attention to. In addition you should certainly have a retirement number in mind and track how you're progress is going. I'm not advocating for decreasing savings rate for the sake of decreasing savings rate. Rather I am advocating for tracking savings rate as a metric  IN ADDITION to raw savings, income, expenses etc. to determine how you are doing financially. I am advocating that it is a useful metric (for the reasons I am giving) in addition to the metrics which you suggest (which is I guess savings per year compared to nest egg size, for example*).

      But I have to jab that nest egg size is proportional to expenses during retirement which is likely proportional to current expenses so savings per year compared to target nest egg IS related to savings rate..

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      • nolesrule
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      • nolesrule
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      Beige Wildebeest The problem here with using it as a metric are two-fold.

       

      The first is that a rate contains two numbers A change in X divided by a change in Y. The problem is that most people focus on the change in X, and tend to understand the various levers they can pull to manipulate X. But in my experience, people don't truly understand how to interpret the effects of a change in denominator, but rather tend to assume a static denominator.

      Remember how many classmates had trouble with reciprocals and inversions in math class?

      There are lots of levers that can be pulled (or are pulled for you) that change the number, so unless you understand the math behind the number, the number doesn't have any value because you can interpret it incorrectly.

      And that was my point with the demonstration of the drop in income from earlier today. I pulled a lever that most people consider to be static, and it resulted in what the calculation would suggest to be an improvement, but in reality it was not.

      The second  is the concept of anchoring. It's human nature to focus on an easy to see, seemingly simple number, and lose site into the details that are more helpful in decision making. It's worse when you anchor on a number that doesn't mean what you think it means because you don't really understand all the pieces that go into the number.

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  • Beige Wildebeest said:
    But I have to jab that nest egg size is proportional to expenses during retirement which is likely proportional to current expenses so savings per year compared to target nest egg IS related to savings rate..

    Working with a dollar amount is the general approach. If you want to estimate retirement expenses as 1.0*current expenses, that's great. If you think its (current expenses - current mortgage), that's cool, too. Or maybe you're planning to move somewhere more favorable to retirement. Regardless of how you ballpark it, you can get an answer that is applicable to that specific scenario.

    On the other hand, the percentage approach you've described seems to be a "one-trick pony". For a very specific scenario (i.e., the assumptions described elsewhere), I completely agree it gives an answer that makes sense.

    I missed the fact you're pitching percentages in addition to other approaches. However, if it's going to give the same answer as the simpler/general approach (in the limited cases where the percentage approach is applicable), what's the point? What conclusions can you draw from this metric that cannot be drawn from the simpler/general approach?

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