Tuesday, May 29, 2007

household savings rate

I thought it would be interesting to figure out what our household savings rate was. I know, not the most exciting stat in the world, but I get amused by these things, because I'm a bit of a numbers guy, so bear with me.

Basically, I wanted to know how much money we were keeping (investing in equities, mutual funds within registered and non registered accounts) when compared with the total employment income that was coming in.

Here are the results I came up with for the last year from today:

Out of $1.00 earned in gross income we were able to save $0.25 or 25%.
Out of $1.00 earned in net income we were able to save $0.34 or 34%

This was eye opening to me as this value ($0.34), is much greater than our next greatest expenditure, which is mortgage and property tax ($0.19 out of $1.00). Groceries came in at $0.07 on the dollar and electricity/water at $0.013 cents.

Of course, out of the remaining $0.66 it is not all getting burned, (or not saved or invested), as some is paying off our mortgage, and improving our home which should be viewed as investments, and are related to savings as they are positive for our net worth.


FourPillars said...

I think that the amount of principal you reduce from the mortgage each month should be considered savings.

Mr. Cheap said...

I agree with 4P (was about to make the same comment).

moneygardener (AKA investor99) said...

Thanks for the comments.

In principle, I agree that the amount of principle depleted each month should count as savings. On the other hand I am hesitant to include it because according to that system $1.00 going toward your motgage payment will be deemed to be less savings than $1.00 going toward an equity investment (ie a stock).

For example:

$1.00 in extra or normal mortgage payment might mean only 0.50 in principle depletion, so only $0.50 would count toward savings.

Whereas - $1.00 invested in Royal Bank shares would be $1.00 toward savings.

Although my current way of doing it:

$1.00 in extra or normal mortgage payment means $0.00 in savings.

Whereas - $1.00 invested in Royal Bank shares would be $1.00 toward savings.

I'm not sure which scenario makes the most sense. I guess a third way of doing it would be to include interest, so that $1 to RY shares is the same as $1 to your mortgage payment.

Mr. Cheap said...

MG: As you say, I'd view the principle portion of the payment as going towards your statement. For example, currently I pay $150.09 weekly toward my mortgage. Of this, roughly $39.44 is going to my principle (and the remaining 110.65 is lost to interest).

You're right that $1 mortgage payment is less then $1 saved in RY. Another way to look at it is say you prepaid $1 on your mortgage, obviously this would be a full dollar saved, right? So for me, $1 paid toward my mortgage (through my normal weekly payments) is $0.26 saved. I need to reduce this for reasons I'll post about in the future, but I think this would be a reasonable situation for a principle residence mortgage.

Obviously as time goes on, more of your payment goes to principle (which as it should be, more will be considered savings).