But I don’t think that’s the entire story.
She said her percentages were based on “take home pay”. Immediately I started doing the numbers in my head — what did that really mean? I assume that means taxes were already deducted. Was a 401k contribution also taken out? What about other expenses like medical insurance?
Then I moved on to other expenses. Did they have a mortgage? If not, living on 25% would be a lot more do-able. If they did, I don’t see how the numbers could work.
All of this got me wondering about our situation — how much did we actually live on while I was working?
I thought I had all the numbers because I pulled them when I wrote about our savings rate, so I resolved to look them over when I got home.
Net or Gross
Before we get into the details, let me begin by talking about net versus gross pay.
My philosophy has always been that I make a certain amount of money (the gross) and EVERYTHING comes out of that. By looking at net (or take home pay), things can get muddy (as noted above).
For this reason, I prefer to deal with gross pay.
From there I feel it’s ok to deduct certain things like taxes if you want, but I prefer to spell those out and starting from gross pay IMO is the only way to be really clear about it.
I realize others might have different viewpoints, but I wanted to make this distinction as the details below will deal with gross pay.
The Big Three Expenses
When looking back on our data (I’ve been using Quicken for 20+ years so we have lots of it), there were really three big “expenses” for us. I put that in quotes because many people would not consider two of them to be expenses.
Anyway, here’s how our finances broke down by percentage:
- Gross income: 100.0%
- Savings: 36.1%
- Giving: 26.0%
- Taxes: 21.0%
This means that the actual amount we spent on ourselves during the 20 years I pulled the data was 17.0%. Yes, we lived on less than 20% of my earnings for over two decades.
Thoughts About the Numbers
Obviously, there’s a lot to unpack here:
- The gross income is not only the amount I earned at my job, but also from other income sources. For instance, I had a freelance writing business, a former blog that did quite well, and eventually real estate investments that all contributed to gross income during this time.
- Savings is the amount we saved from our gross income, which was detailed earlier in My Savings Rate and Other Insights into My Financials.
- Giving was swayed heavily by two factors: 1) our family has always put a high value on helping others through giving (those of you who have been reading my writing for years will already know this) and 2) my former blog had several big revenue years and I gave away all of the proceeds from it for many, many years.
- I always want to pay my fair share of taxes, but no more. That’s one reason I use a CPA — to help me pay what’s required only.
- Even at 17% spending, we lived what I consider to be a very luxurious lifestyle. It helped a TON that we didn’t have a mortgage. Otherwise that would be another big chunk of spending. It also helped that we lived in low cost of living cities. Otherwise, our basic costs could have been 20%+ higher. Finally, 17% of a big number is still a big number…
- The fact that we had a high income made all of this possible. We could save a ton, give a ton, pay lots of taxes, and still have plenty to live on. This is why I keep hammering on the income issue (and particularly growing your career) — it simply makes things so much easier.
So, what does this mean?
Not much really, other than to reinforce what I’ve been saying through the life of this blog: earning, saving, and investing are the three steps to financial independence.
It was an interesting exercise and helps me record this information for posterity.
It also shows ESI Money readers that I actually practiced what I preach.
And it gives me something to link to when people say they can’t afford to save. 😉