Savings rate calculation

Following the discussion with @TeaCup in the other tread:

How do you calculate your savings rate in Switzerland? Specifically:

  • What is your denominator: Gross or net salary?
  • Income taxes: Reducing your denominator (income), or part of expenses?
  • Second pillar contribution: Considered as both income and expense or not at all?
    • This older thread seems to trend towards not including them
  • Assets: Are you including bought assets (e.g. a new car) as part of your expenses?
  • Anything else to be considered?

My calculation: [Savings + acquired non-financial assets] / [Net income + second pillar contributions – income taxes] = Savings Rate %

Or if you track expenses it would be: [Net income + second pillar - income taxes - expenses] / [Net income + second pillar - income taxes] = SR%

Background: I have a high savings rate according to my approach, but that might be deceptive given I probably have the most inflationary method. I also have been challenged on this in the past too. My view is that this figure best represents my savings vs my actual spend. Meaning that if I reach a 50% saving rate calculated this way, I have used half my available income and saved enough for another entire year.

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This is a very interesting question @1742, I was asking myself the same.

I have just tracked my NW for two years but I have followed the approach below:

  • Denominator: Net salary (income)
  • Income taxes: included in the denominator
  • 2nd pillar contribution: exclude it since I believe it should be added both in the numerator (savings) and in the denominator (income).
  • I am curious on the asset side what others think about it. One option would be to consider it as an expense and also recognize an asset the year you made the purchase. Then year by year you run down the value of the asset in line with its depreciation so that the true cost of acquiring it will emerge over time.

My calculation: [Savings + acquired non-financial assets] / [Net income – income taxes] = Savings Rate %

Using this method I reached a 64% saving rate for 2020.

In my opinion, the only assets that should be included are things that you don’t buy for consuming. Anything that should last for a lifetime and can be priced correctly (houses). Otherwise it should be an expense (cars).

I ignore 2nd pillar in my savingsrate as. I also look at taxes as an expense. So for me: savings/net income = savingsrate. 31% in 2020. I can get different numbers if I look at post-tax savingsrate: 36%. Including 2nd pillar as income and savings at the same time gets me to 40%.

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I am tracking it the following way (acknowledging there are many ways to skin the cat, thus hard to compare):
How much money reaches me vs. how much money stays with me after the month/year.

With that in mind:

  • I don’t include 2nd pillar
  • I do include paying for the depreciating assets under expenses (e.g. leasing or buying outright); but I account for its ammortization in the NW tracking, not here
  • Just for reference, I maintain the “pre-tax” and “post-tax” view
    • “pre-tax income” = what I receive on my bank account (i.e. after 1p, 2p, health insurance - although the latter should be part of expenses too);
    • “post-tax income” = pre-tax income - taxes

Pre-tax SR = (pre-tax income - expenses) / pre-tax income
Post-tax SR = (post-tax income - expenses) / post-tax income

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I think reaching a truly comparable savings rate is hard. Do you include taxes or not, social contributions. What if you’re self-employed? Then your income is usually higher, but your costs are also higher.

  • 50k savings from a 100k net salary is 50%
  • 50k savings from a 130k gross salary is 38%
  • 50k savings + 2*7k pension contributions from a 130k gross salary + 7k employer contr. is 46%
  • 50k savings + 2*7k pension contributions from a 160k revenue as a freelancer is 40%

(running a company, you have admin costs and VAT - should you count VAT as cost?)

That’s why I suggested in one post in the past, that what matters is the relation between your current savings and your future expenses once retired (not your current expenses). Current expenses are the cost of doing business, they depend on your legal situation (married, kids?), domicile (tax haven or tax hell?), and source of income (salary, business, are margins high or low?). Future expenses is what you predict to spend in total once retired, all the costs that will need to be paid from your current savings.

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We count taxes as an expense and we do not count social contributions as income, only gross income. I am trying to use the formula that would yield the fairest result (in my opinion). I think most people have a tendency to use the formula that would yield the highest result to feel good. I wrote about savings rate calculation on the blog.

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A car should probably be accounted for as a depreciating asset, but I’m not sure I would make the effort…

I agree that for retirement planning and for comparison purpose this is the way to go.

That said I think there’s some value in tracking savings over current income for “personal use”. In this scenario the best formula can change a lot depending on the personal situation as you said, but the only important thing is to be consistent over time.

Personally I don’t include the second pillar and the denominator I use is the net salary after taxes, but I only use the end value to track changes over time, nothing else.

Why a net-net approach (net taxes and net social contributions) wouldn’t work for all cases? By net-net I mean gross salary less taxes and social contributions and don’t consider any 2nd pillar contribution in the saving component.

In this way you are only looking at how much you saved on the money that actually reached you, you can compare then lifestyle across different categories (e.g. how much does a single person with a salary of xx saves in canton ZH, and so on). It seems to be the fairest metric.

The other suggested metric is very difficult to calculate in my opinion: how do you estimate future expenses when the retirement is 30 years away?

How do you take into account different needs and lifestyle in the future? I think you can play more around with this ratio rather than the other one because you can underestimate your future expenses very easily.

Well the whole point of FIRE is not having to wait 30 years…:laughing:
I agree it’s hard but if you’re at a point where you’re seriously planning your retirement this is the only way to go

You are right on that! :joy:

However it is seems a metric very skewed towards people which are closer to their retirement age. That is all, I think it works really well in that case but not for younger people or for who just now starts approaching the FIRE world.

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Yes, for sure. You can measure your “efficiency”. That is, how much of the money that goes into your hand, stays in your hand. But it really depends on the line of business and tax environment. For companies, there exists a “savings rate” called profit margin. That is earnings/revenue or net-income/gross-income. But as you may know, profit margins vary from industry to industry. As a software company it may be 50%, if you’re a retailer then it’s well under 10%.

But why not consider 2nd pillar? You will eventually get this money, and if you can’t wait then just leave Switzerland or buy a house and you will gain access to it. Moreover, my boss gives me every year an option to pay extra into 2nd pillar to save taxes. I can pay up to 50k CHF. So if we calculated with your method, that would just lower my income.

In the end, I think the savings rate is just a ballpark number to get an idea of what is good and what is bad, and not a statistic that you can compete on (oh I got 55% and he only has 54%!). 10% is bad, 50% is good, 75% is incredible.

PS to bring savings rate to a ridiculous example:

  • Imagine an Indian programmer earning 1000 USD tax free (maybe he works illegally) and his monthly living costs are 200 USD. That’s a savings rate of 80%.
  • Then imagine a Norwegian programmer earning 10’000 USD. 5’000 goes for taxes, 3’000 fo living, he saves 2’000 USD, 20% savings rate.

Fair point, I see where you are coming from and it makes total sense.

Yes completely agree! In my experience I was looking at it when I made the move from Italy to ZH to understand how convenient it was going to be. There are a lot of misconceptions about the cost of living in Switzerland and I wanted to find out how true they were. In that case the saving rate comes handy because it gives you an idea of what you can actually save by living in a specific place. Hence why I was thinking about a saving rate driven by expenses more than anything else.

I think that your extreme example it is completely valid, it might don’t say anything about the saving rate itself but between country with different tax rate it is useful as a metric (e.g. Evaluating moving from one country to another). But again, different purpose than FIRE

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Your example doesnt make sense. If you contribute additionally those 50k to the second pillar, then there wouldnt be any difference to contributing to 3rd pillar. So both will be regarded as savings.

I’m with you on that. I guess the most benefit is to compare/track yourself over time. I personally dont keep track of my saving rate.

I assumed spending amount is what you want to track, saving rate is a proxy for time to FIRE (assuming current spending ~= FIREd spending).

Yes I do track my savings per month, so calculating the saving rates would be easy, but its just not an important metric for me. I do currently not plan for early retirement. I personally like the idea to have enough FU money. The future will tell on what I will spend it:)

It makes sense, I think you just didn’t understand it :wink:

@Tia_0 wanted to calculate savings rate as: net savings without pension / net income (cash on hand).
So if I pay into 2nd/3rd pillar then these amount will lower both savings and income, effectively lowering the savings rate.

40k/80k => 50%
30k/70k => 43% (after 10k paid to 2nd/3rd pillar)

I wouldn’t count investments as expenses (i.e. deduct them further from savings, nor income).
At least that’s the category I perceive the 2nd/3rd pillar to be in.

That way all we invest into ETFs with our brokers should also be deducted, and should we end up with SR of 0% if we invest all of the remaining cash at hand? :slight_smile:

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There is another problem with the savings rate: benefits. If someone pays for everything out of their own pocket, he will have a lower savings rate than somebody who has a generous employer. My previous employer would pay for my 1st class GA, mobile phone and home internet, lunch. Some people have free/discounted childcare. Some have a company car. If you wanted to be fair, you should calculate the value of all this as count it as income.

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@Bojack I was coming exactly to this point.

On top of other benefit my employer pays an additional 18.5% to my second pillar, I guess that if I were to include it in the formula it would only increase the saving rate for me. That is why maybe in my case it was a conservative take on this.

Hot topic. Here is my hopefully simple take:

Income = Gross Income - Social Contribution/Insurance (AHV & ALV) + Employer Contribution to Pillar 2 + Benefit (GA/car/discount on childcare, etc)
Expenses = Spending + IncomeTax + WealthTax + estimated Tax (5-10% on Pillar2 & Pillar 3) + Benefit (GA/car/discount on childcare, etc)
Saving = Income - Expenses

So saving includes 90-95% of pillar 2 & pillar 3.
Reason for including pillar 2 in both income & savings: it can vary wildly between different jobs/employers even for same age. Plus you may buy-in pillar 2 instead of bonds, etc.

AHV is accessible in most cases at ~65 year. So let it be the icing on cake you get when you are already diabetic :wink:

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