The most important number to know if you are on track to FIRE (Financially Independent / Retire Early) is your savings rate. Your savings rate is a calculation of how efficient you are with your money.
If you have a 0% savings rate you are not saving anything so you will always have to work or rely on Social Security / Government assistance to retire.
If you have a 100% savings rate you have no expenses and can retire soon (assuming you will not increase spending in the future).
In theory this sounds like an easy calculation:
Savings = Take Home Pay – Expenses
Let’s take a look at some different ways to calculate savings rates.
1) A lot of people in the FIRE community choose to calculate their before tax savings rate:
This savings rate will not be correct since taxes are not factored in. The other issue is that it does not include 401k contributions. In order to calculate a more realistic savings rate you should include your after tax earnings and your 401k contributions.
2) Here is how to calculate an after tax savings rate which includes 401k contributions:
Expenses: Housing, Loan Payments, Cash Withdrawals, Fees, Bills, etc
Why didn’t I include IRAs and brokerage accounts? It’s not necessary to include these. These are after tax accounts where you make contributions from your take home pay, which is already included.
I also didn’t include 401k matching or pensions even though they are essentially free money. The purpose of this exercise is to calculate how much of your earnings you are saving, not how good your benefits are.
My after tax savings rate comes out to 49.6%. I feel that this is a pretty high savings rate. The average savings rate in the US is only 5.7%. By continuing to keep expenses low and by getting raises at our jobs we should be able to grow our savings rate substantially over time.
Readers, have you calculated your savings rate? Did you use a before tax or after tax calculation?