How to Calculate Savings Rate for FIRE

Wed Mar 15 2023

Calculating savings rate is one of the most confusing and common questions clients ask when trying to understand their financial journey. 

How do I calculate savings rate?

Should I use my gross pay or take home?

What about my retirement contributions?

How do I account for my mortgage payment?

The Money Optimist personal savings rate calculator breaks down the process with a few simple inputs to give you the savings amount you need to calculate your financial independence number.

Savings Rate Calculator

How to Calculate Savings Rate

To calculate savings rate, you must first determine your take-home pay income or net income as a base and add up all your total expenses. Then, subtract your total expenses from your income to get your total savings. However, since we're using your net pay, we need to add back any savings contributions that come out directly from your paycheck. When calculating your FIRE and CoastFI number it's important to include any retirement savings, HSA contributions etc as those are all assets included in your net worth.

Divide your total savings by your after-tax income + your savings contributions from your paycheck and multiply by 100 to get your savings rate as a percentage.

Savings Ratio Formula

So the savings ratio formula used in the above calculator looks like this:

Savings Ratio Example

Let's walk through an example of the savings rate formula. If you earn $5,000 per month as take-home pay and spend $3,000, your total savings would be $2,000 from your monthly income. Now let's say you're also contributing $1,000 to your 401k. Your total savings would be $3,000/month and you would then divide $3,000 by $6,000 and multiplying by 100 gives you a personal savings rate of 50%.

How to use the MO Savings Rate Calculator

Step 1: Input your monthly total take home pay

The first step is to input your monthly take home pay. This is the amount of income that's hitting your bank account every month. It's your pay after taxes, retirement contributions, health insurance etc are all deducted.

Step 2: Calculate your monthly total expenses

The next step is to calculate your total expenses for the month. This includes all of your fixed and variable expenses such as rent, utilities, groceries, transportation, and debt payments. It also includes non-monthly expenses that you're stashing money away for such as travel and car insurance premiums.

Step 3: Input your monthly retirement and other savings contributions from your paycheck

The last step is to input your monthly retirement and other savings contributions from your paycheck. This includes all savings contributions that are deducted directly from your pay (401k, 403B, Roth IRA, HSA etc). This is the input that most people forget as we don't see it or monitor it typically on a monthly basis.

Originally I never included these numbers as I was simply thinking about my after tax pay vs how much I was spending to calculate savings. But then I discovered the Mr Money Mustache savings rate calculation and it completely changed my perspective on retirement contributions as an input to understanding my FIRE picture.

So what does my savings rate mean?

Understanding your savings rate gives you a rough idea on how long it will take you to achieve financial independence. If you're starting from 0 and you save 10% of your take home pay for example, you'll reach financial independence in ~37 years. Now if you can increase that to 30%, you just knocked 15 years off of your time to FI!


Should I include taxes in my income when calculating savings rate?

When calculating savings rate for FI/RE you need to use your net pay not your gross income. Some savings calculators use gross income instead of net income to calculate savings rate. That's fine if you're trying to understand the tax impact on your savings rate, but if you're trying to calculate your financial independence number and how long it'll take you to get there, net income take home pay is the way to go to best understand your post tax savings.

Most FI calculators are just looking at the savings ratio between your actual savings amount vs your monthly spending amount to calculate how long it'll take you to reach financial independence or COAST financial independence.

Should I include my mortgage principal and debt payments in my savings?

Yes! Paying the PRINCIPAL reduces your mortgage balance monthly and increases your net worth so including it in your savings rate gives you a more accurate estimate of how long it'll take you to FIRE. The same goes for principal payments on student loan debt etc. All of those payments are increasing your net worth as they are reducing your debt balance.

Should I include my employer's 401(k) match as part of my savings rate?

Yes, when calculating your savings rate for FI/RE, you should include your employer's 401(k) match as part of your total savings. Your employer match is essentially free money that you're receiving as part of your compensation package, and it's an important contribution to your overall savings. However, it's important to note that your employer contributions may have a vesting period, which means that you may not be fully entitled to it until you've worked for the company for a certain period of time. Additionally, if you plan to withdraw funds from your 401(k) before age 59 1/2, you may be subject to early withdrawal penalties and taxes. Therefore, while your employer's 401(k) match should be included as part of your savings rate, it's important to consider any restrictions or penalties associated with the account.

Can I include non-financial assets, such as my home equity, in my savings rate calculation?

While non-financial assets such as home equity can be a valuable part of your net worth, they should not be included in your savings rate calculation. This is because your savings rate is a measure of your ability to save and invest your income, rather than a measure of your overall wealth. We'll use your net worth, including your home equity, as another input to calculate your FI/RE number so it shouldn't be included in the savings rate calculation.

What is a good savings rate for FI/RE?

The ideal savings rate for achieving financial independence and retiring early will vary depending on your individual goals and circumstances. However, a general rule of thumb is to aim for a savings rate of at least 25-30% of your income. This means that if you earn $5,000 per month, you should aim to save $1,250-$1,500 per month. However, some individuals may need to save more to achieve FI/RE, especially if they have high expenses or low incomes. Additionally, some people may be able to achieve FI/RE with a lower savings rate if they have other sources of income or investments. Ultimately, the key to achieving FI/RE is to find a savings rate that works for you and to consistently save and invest over a long period of time.

Can I still enjoy life and have a high savings rate for FI/RE?

Having a high savings rate for FI/RE does not mean that you have to sacrifice your quality of life or live an overly frugal lifestyle. In fact, one of the key principles of FI/RE is to prioritize your spending on the things that truly matter to you and to cut back on expenses that don't align with your values. By being intentional with your spending and focusing on what brings you the most joy and fulfillment, you can still enjoy a high quality of life while saving aggressively for FI/RE.

Additionally, many individuals pursuing FI/RE find creative ways to cut costs without sacrificing their lifestyle, such as cooking at home, finding affordable ways to travel, or seeking out free or low-cost entertainment options.

Ultimately, achieving FI/RE is about finding the right balance between your spending and saving habits and aligning your lifestyle with your values and priorities.

Is a high savings rate the only way to achieve FI/RE?

No, having a high savings rate is not the only way to achieve your financial independence goals. Your savings rate determines how quickly you'll get to your FI goals, not necessarily whether you'll be successful in achieving them. If you save just 20% of your income every year, you'll hit your FIRE number in 28 years assuming you're starting from 0. So while higher savings rates of 50%+ have become the norm in the FI/RE community, it's not a requirement. It just depends on how quickly you want to get to your end destination.

How often should I track my savings rate?

I recommend that people just starting out on their journey to financial independence, track their savings rate monthly. This will give you a good sense of how you are pacing for the year and will also illuminate the seasonal trends of your spending. Once you've become really comfortable with monthly budgeting and are hitting your savings goals for an extended period of time, you can start to check in on your savings rate quarterly. Every year you'll want to revisit your annual savings rate in order to get an updated FI/RE and COAST FIRE number to see how you're pacing for financial independence.

Next Steps:

Now that you have a good grasp of your savings rate, how to calculate it, and track it over time, you should now use the savings number to calculate your COAST FIRE and FIRE goals.

I also have various other FIRE calculators you can use if you're pursuing another path of FIRE such as FAT FIRE.

Ready to take the next step on your FIRE journey today? Book a FREE 30-minute session with me to get a customized financial independence plan so you know the exact steps to help you accelerate your time to FIRE!

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