Sunday, September 30, 2007

household savings rate...updated

Back in May I posted regarding my household savings rate (HSR), which I defined as savings in the form of investments (reg. and non reg.) divided by net income or gross income. Let's concentrate on net income for now, back then I estimated my HSR to be 34%. At that time commenters, Four Pillars and Mr.Cheap noted that perhaps the principle paid on a mortgage should be considered savings as well, which I believe is a valid point but still does not tell the whole story. What I can't get past is the fact that unless you include interest paid on your mortgage, then someone who invests rather than paying down their mortgage more aggressively will look as if they are saving more money than a friend who pays down their mortgage with the same disposable cash.

On a recently run poll on this blog asking 'What % of your Net Income do you Save?' the following results were obtained:

27% of people save between 10 - 20%
23% between 40 - 50%
17% between 30 - 40%

Several financial sources, including David Bach's books like Smart Couples Finish Rich, claim that you should save at least 10% of your net income to retire well, or in Bach's words 'less than 10% and you are living above your means'. If you could save 20% of your net income you should achieve great wealth or in Bach's words be 'really rich'. From these results it looks as if several readers of my blog (40% of readers) will be really rich in the future. The factor that is difficult to judge here is what people considered 'savings'. Some people probably included mortgage payments, others included principle payments, and others did not, and only included other forms of savings.


I have recently calculated the following for my family:

HSR = 36%
HSR (including full mortgage payments = 51%

HSR for 2008 when my wife goes on maternity leave = 15%
HSR (including full mortgage payments for 2008) = 37%

If my calculations are correct, and too much unforeseen expenses don't crop up during 2008 then I will be quite pleased to still be able to save 15% of net income with our reduced employment income situation. I am still debating whether my wife will continue to contribute to an RRSP for the year at her usual rate, decrease her contributions, or hold off for 2008 all together. It is although starting to look like our income trust security blanket that we have built up may not get used, which is wonderful as I'd be quite please to roll this over into an RESP for my first child, or keep it invested and start a synthetic drip for a future child's RESP or other uses.


Anonymous said...

What about earnings from your stocks? Do you consider those to be savings?

For instance, Walgreens has a P/E of 20, so if you own $10k of WAG stock, you are purchasing an entitlement to $500/year of earnings.

However, the actual dividend paid out is only a fraction of this.

Do you consider your household earnings to be the dividend yield, or the *earnings* yield, in calculating the savings rate?

Personally I consider my savings to include earnings of the corporations that I own that are re-invested and not paid out to me as dividends.

MillionDollarJourney said...

Congrats on saving 34% of your family net income. That is quite an achievement. Even though we are pretty frugal, i think our savings rate is around 20-25%.

telly said...

Our household is in the 40-50% savings rate (of net). I do not include our home mortgage payments (principle or interest) but I do include our pre-payments (we increase our payments by 20% every year).

Including mortgage interest seems entirely wrong to me. If someone is paying an interest only mortgage, I surely wouldn't expect them to think that they are "saving".

FourPillars said...

You're doing a great job with the savings!


Trevor said...


I know WAG is a favorite of yours, and they didn't have a great day so far today.

Curious if you will be adding more to your position?


MG said...

anon, that is far too complex for my purposes.

mdj - thanks!

telly - I agree.

4P - thanks!

trevor, yes see next post...

the Wealthy Canadian said...

I don't understand how including the interest on your mortgage would be savings. Perhaps calculating the amount of interest that you saved by paying down your mortgage more aggressively might be a 'savings.' But the interest that you are forced to regularly pay is a liability to service your leveraged home in the same manner that any investment loan is.

telly said...

I agree with Wealthy Canadian.

And BTW MG, your expected savings rate while your wife is on maternity leave is very impressive (as is your current of course). You guys are doing great - kudos!

MG said...

I agree with WC and telly. I just don't know if there is an accurate way to compare the savings of someone who is paying off a mortgage aggressively and someone who is investing their money in market instruments...

thanks telly...key word is 'expected' we'll see how it goes.

telly said...

MG, Our method is to include the extra / prepayment payments in our household savings rate. This doesn't include the extra principle paydown resulting from 2 payments a month vs. just one single payment but it does include the extra 20% we've added to the original mortgage payments (which we do each year). At any time we could stop those extra payments and put them into market instruments instead so we view them as savings.

Anonymous said...

I have found your savings calculator interesting. I figure during my wife's mate leave we managed around 20% savings rate (not including mortgage payments). We also discontinued RRSP contributions because if you start early and put lots away if your a lower income earner you pay as much or more tax taking it out and having no choice (its forced @ 69 i think or close to it)

Where i start to laugh is when you state your savings rate falls when your wife is on mate leave. My wife is back to school er i mean work at school as of September. I figure our savings rate should fall into the 15% range now.

Yes thats right she works and it falls. She has this little habit called spending! LOL i suppose she may come around some day but until then saving (for Retirement) is my 'job'.

I enjoy your blog. Keep up the good work.