The other day I was listening to a podcast where the person being interviewed was talking about living on 25% of her family’s income. The implication was they saved 75% of what they made.
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.
Summary
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. 😉
Laurie says
I am impressed! Isn’t it amazing what hard, objective data shows? What we think we’re saving versus the reality. I think it’s funny/ironic that you didn’t realize your spending rate was so low until after you were retired, though! 🙂
The Green Swan says
Your last two thoughts about the numbers are the reason I’ve never paid much attention to savings rate. You can’t pay for retirement with percentages, you pay for retirement with dollars. That’s why I’ve always focused on tucking away as much $ as possible each year. While savings rate can be an interesting stat to follow individually, it is pretty meaningless to others for the reasons you mentioned.
And I completely agree with you on the income side, that makes a world of difference!
SGS says
Curious: does your income include unrealized gains?
I ask as your taxes seem quite low. Over the past 9 years, my average total taxes as a percentage of AGI has been 37%. Whether my income (AGI) was “x” or “4x”.
Biggest difference between AGI and total income being unrealized gains.
Taxes (with average %s) include Federal (15.4%), State (4.8%), Social Security (5.9%), Medicare (1.7%), Property (9.1%).
Of course, when personal income (wage, consulting, etc) goes away, SoSec/Medi goes away.
…
If people look at savings as a percent of income, it can get skewed if savings include unrealized gains but the income they use is AGI, or another tax-related income (i.e., excludes unrealized gains).
I’m generally skeptical of such claims unless all details are provided.
ESI says
My taxes are low because 1) we had a lot of deductions (giving) and 2) we lived in a relatively low tax state.
Remember too that I’m not using AGI to calculate my percentages — I’m using gross income.
I’m not sure what you mean by including unrealized gains. If they are unrealized, the only place they would be reflected is on my net worth statement, not my taxes or budget/cash flow, right? I don’t count anything as income until it’s realized. Otherwise, it’s just speculation.
SGS says
I’ll reply more substantively soon, but for now, just ask one question.
So, you consider your net worth as “just speculation” as it includes unrealized gains?
ESI says
Net worth is a calculation of what you own if you sold everything today and paid off all your debts. As such, the value of stocks (including unrealized gains) would be included in those numbers.
BTW, when the market tanked in 2008, I also included unrealized losses using the same methodology. If you look up standard methods of calculating net worth, I think you’ll find this process to be widely accepted.
For income purposes, unrealized gains are just that — UN-realized. In other words, they are not income. They are assets (and hence count in net worth) but you have not, as yet, sold any of them and thus realized any income. If they were income in any form or fashion you can be sure the government would try to tax them.
Are you telling me that you add in unrealized gains into income each year? What’s the purpose of that? It seems unnecessarily complicated and of little benefit IMO.
SGS says
“Net worth is a calculation of what you own if you sold everything today and paid off all your debts.”
Not quite, but, in general, an acceptable assumption.
“For income purposes, unrealized gains are just that — UN-realized. In other words, they are not income.”
Again, not quite.
I get paid on the 31st for wages earned from the 1st through the 15th. On the 16th, is that not income? Of course it is. It’s money owed me. Granted in this example the issue is minimal, but the principal holds.
It’s simple. Net worth is, by definition, accumulated earnings.
Net worth (year 2) = net worth (year 1) + net income (year 2).
Net income = income – expenses.
Income = realized income + unrealized income.
Now, people may want to segregate unrealized income from realized income for some good reasons. But that doesn’t make it “not income”.
…
As a financial person for 35+ years, earning my CPA in the mid-80s, this is why I’m always skeptical: different people count different things differently. I understand why, but that doesn’t make it a) correct or b) easy to compare.
ESI says
You realize what the definition of “unrealized gain” is, right? If not, here’s a link:
http://www.investopedia.com/terms/u/unrealizedgain.asp
They relate to investments, not income you’ve earned at a job that’s not yet paid.
My numbers include everything I’ve earned, every year, in every way. If it was earned within a year, it’s counted.
Ron Cameron says
I’ve never seen so much talk about where you include unrealized gains! It would seem super duper odd to me to include those in any sort of income equation.
Erik @ The Mastermind Within says
Very interesting. Right now, my savings rate is around 50%, but to your point, it would be interesting to see what my “spending” rate is. Taxes are about 15% for me right now, so that would leave about 35% for spending.
Thanks for sharing ESI – I love the unique views you come up with each and every post.
Brian - Rental Mindset says
That is a really impressive portion to giving. There are so many people sharing their numbers on the internet, but this goes well beyond the already impressive 10%. Great stuff!
Amanda @ centsiblyrich says
17% is amazing!!! I’ve went back and forth on how to calculate savings rate…I guess as long as I’m consistent, for the most part, it works (I’ve been using gross and taking out taxes). Anyway, I like the idea of spending rate even better and may borrow that idea for next year.
Jack Catchem says
Thanks for focusing on “gross” ESI. I agree it’s harder to lie to yourself with Gross numbers than making up some net numbers. Especially if there are multiple income streams.
Erith says
I live in the UK. The vast majority of people in employment get tax and National Insurance taken off at source. Hence I more naturally work in ‘Net’ figures. Sadly my records aren’t as good as yours, I only have the last 5 years in detail, including all dividends. I could maybe go back 10 years at a push but no further…. I did a lifetime earnings spreadsheet recently. That didn’t make nice reading. I should have lots more assets!
Well done on the 17% – that’s amazing.
Full Time Finance says
I largely follow the same methodology you do, using gross. However I read Chief Mom Officers post on this not that long ago that raised the question of whether a 401k match counts in the gross. I do not count that match since it’s dependent on savings and also small, but its an interesting question.
My net would be useless as much of my savings occurs before we get to net. That being said consistency is probably much more important then which measurement you choose.
Amy @ Life Zemplified says
I like the spending rate calculation exercise, especially with gross numbers. But like the savings rate, it really only seems good for ourselves, to gauge our personal progress perhaps. With such a difference in wages and cost of living areas, people need to not get caught up in comparing percentages.
Nonetheless, very impressive ESI! Definitely proves your point about Earning more!
Mike H says
You are amazing, ESI. You have given more to to taxes than you have spent on yourself and then on top of that given 50% more than you spent on yourself / family to charity. That is really amazing.
My rough estimated numbers are not that different:
100% gross:
40% savings
24% taxes
14% giving
22% or so is spent. And this is a very luxurious lifestyle with eating high quality food and multiple pleasure trips abroad each year.
So no wonder you are Financially Independent at a fairly young age…
-Mike
Lilith Katz says
I know the popular way to report financial info is to use savings percentage. I am more interested in actual values- what we actually spend out of our take home pay, how much we saved, and our net worth. Even though our income has increased a lot, we have managed to avoid life style inflation and keep spending levels flat for the 5 of the 7 yrs that I have been tracking. The other 2 years involved a totally frivolous car purchase and out of pocket home repair due to storm damage. And we feel like we live a ridiculously luxurious life although folks would probably be shocked on how little we spend.
Liz@ChiefMomOfficer says
I’ve never calculated my savings rate – too many variables. Like Green Swan mentioned, you can’t live on percentages in retirement, you live on dollars. That being said, I like this method of seeing what you saved vs. gross income. And I love seeing how much you allocated towards giving. Two of my big financial goals are to eventually be able to open a donor advised fund, and fund scholarships to community college (where I got my start a long time ago). I’ve been through hard situations before, and would love to be a part of helping people who are also there through no fault of their own.
ajzwilli says
This is great information and a great benchmark. Can you clarify how you treat a depreciable asset purchase and disposition? For example, I assume the initial purchase of the car is not treated as an expense. You simply setup a new asset account in Quicken and transfer cash from a savings/checking account to the car account. However let’s say you sell the car in 3 years and is worth 50%. How is the loss to depreciation recognized for the purpose of this article? If the car was worth 20K new and worth 10k when you disposed of it, do you take a $10K hit in that year, do you try to enter a monthly/yearly depreciation expense in, or do you not enter any expense and just reduce the asset value.
ESI says
We set the car up as an asset in Quicken as soon as we buy it.
I then set up depreciation charges each month equal to 1/36th of the car’s value. This makes the car worth $0 after three years (on the books of course, it’s worth more than that in real life).
We ALWAYS keep cars longer than three years so we never have a balance when we dispose of them.