Once, for about six months, I tracked every penny that my wife and I spent. It was before our second daughter was born, and my wife wasn’t working at the time, which in retrospect made the task easier. But it was still hard to log and track every penny we spent. And after a while I realized that I just didn’t want to live like that. I’m not saying that for certain people tracking every dollar spent is a bad idea – it might work for you, and if it does I encourage you to do it. But for me, I realized that I was more concerned with how much I was saving. Like Ramit, if I’m hitting my savings targets I want to give myself the ability to buy a $4 latte worry-free. So how do I track my savings? With a savings budget – and not a spending one.
I try and save 40 percent of my income
My goal right now – with two young children in full-time child care/pre-school – is to save 40 percent of my income. I calculate this number based on my post-tax gross income, but not including any pre-tax deductions like 401(k). I realize this is not a precise calculation, but I am more interested in giving myself a consistent baseline that I can compare my monthly income against. (So, for example, if I earn $5000 per paycheck, and my net pay is $3500 after my $750 max 401k contribution, I would put $4250 into my income tab on my spreadsheet and calculate my savings rate from there – including the 401k contribution.)
I segregate my savings spreadsheet into three buckets: retirement, college savings, and taxable savings. Within retirement, I break it down by 401k, rollover IRA, and HSA. I have five taxable savings accounts: a municipal bond fund, a capital appreciation fund, a brokerage account with individual stocks, an emergency cash account, and my employer’s stock purchase plan. In terms of asset allocation, I track my contributions to those taxable accounts and aim to keep them in a ratio I am comfortable with (right now, I’m targeting 70 percent stock, 20 percent bond, and 10 percent cash. Much more on this, including all of my different taxable accounts, in a future post).
Why my savings rate is trending in the wrong direction, and what I plan to do about it
Unfortunately, since 2015, my overall savings rate has plummeted: from 53 percent in 2015, to 44 percent in 2016, to 38 percent so far in 2017. But there are good reasons: again, my wife and I welcomed our second daughter last spring, our rent has increased, and we’ve essentially doubled our child care expenses as a result. So I feel like as those expenses decrease in the near future (our older daughter will start kindergarten in the fall) we will be able to increase our savings rate back over the 40 percent threshold.
Child care expenses deserve their own post, but in our high cost-of-living location we are spending nearly 20 percent of our monthly income on full-time childcare for our daughters. More than half of one of my biweekly paychecks goes straight to their school. Yes, it’s a choice, and I think early childhood education is worth it, but the drain on our budget is enormous. I’ve had to cut contributions to taxable accounts significantly but, fortunately, we have been able to continue maxing out our respective 401ks and IRAs. We’ve even been able to continue contributions to our daughters’ 529 plans, though not nearly at the rate we would like.
Do you calculate your savings rate? If so, how do you do it? And, for those of you with children, how has your savings rate trended over time?