# What is your personal savings rate?



## Ben (Apr 3, 2009)

Reading today in the Globe that the personal savings rate in Canada is up to 4.7%, and 4.2% in the United States. 

Personal savings rate is a metric that I've not been able to pin down precisely. It seems there are different ways to calculate this, and I'd like to hear from you what are the generally accepted methods, preferably per Statistics Canada.

For my own rough purposes, I've used gross income as the denominator, as it is a simple number that is not subject to as many shades of grey as net income (which seems to be the basis for most accepted measures of personal savings rate).

My household:
-Contributes 9% of gross to RRSP's. Payroll deduction at source. Overall, our RRSP constribution room is maxed out.
-Saves 32% of gross as cash savings. Cash savings is the difference between our cash inflows (paycheques and tax refund, basically), and expenses. Cash savings either remain in cash, or are directed to additional mortgage reduction and/or lump sum RRSP payments. No individual stocks as yet - likely to pay off the mortgage before branching out beyond index/ETF.
-Increases home equity by 6% over the next year through regular mortgage payments, based on current bi-weekly payment amount.

So, 41% of our gross income goes directly to increasing financial assets.
6% of gross income goes toward increasing home equity.
Combined, net worth increases at 47% of gross income, in 2009.

Our savings rate is possible due in equal part to two middle-class salaries, and a frugal, even thrifty lifestyle. We spend our money very carefully.
We are fortunate to be DINKS for the time being, and this pleasant financial situation is not sustainable should either half of that anacronym change. 

What is your take on personal savings rate?


----------



## Dave (Apr 5, 2009)

Interesting post. This year, my savings rate was 40% of gross income. I am currently single with no dependents and at a stage in my career when I am too busy to have time to spend money . That, of course, will change over time hopefully.

I allocate my savings in the following order towards:
- e-fund
- TFSA
- extra mortage payments
- drips and other investments

I set specific goals for each at the beginning of the year and if I am lucky enough to get extra $, a bonus, a refund, etc., it all goes towards investments.

Dave


----------



## Jon_Snow (May 20, 2009)

Well, this thread has caused me to "de-lurk" and register to the forums. Ben, your post, and the situation you described is eerily similar to my own situation. My fiance and I tried to bank 50% of our income, but can't quite pull it off - +40% is probably accurate. Smallish mortgage payments, paid off vehicles, 2 very solid middle class incomes, and the all important "DINK" status ensures that we sock away considerable $ every month. Scary thing is, we could elimnate alot of spending (dinners out etc.) and approach 50%, but that would be no fun.

Our saving rate is such that we don't feel the need to play around with stocks quite yet. I won't enter that world until I educate myself about it further.

We have pretty much decided to not have kids, a decision which is made easier by having tons of nieces and nephews around, and I am told on good authority that this decision alone will probably allow us to retire perhaps 10 years earlier. Sounds good to me.


----------



## Rickson9 (Apr 9, 2009)

These are some really solid saving rates! Good going guys!


----------



## Alexandra (Apr 3, 2009)

We are at pretty much 40% savings (possibly a bit more). That comes from maxing out our RRSPs every year, two TFSAs, our mortgage payments, two leverage loans for stocks, and one RESP for our daughter.

We used to be DINKS and the difference in how much extra money we have every month before and after we had our daughter is insane. 

The hardest struggle has been for us to continue to do what we know we should be doing (maxing out our RRSPs, and the RESP savings vehicle) while having the HUGE added expense of childcare. 

When the TFSA came out, of course I thought it was great, but a part of me winced because I knew my compulsive nature would force me to max that out as well, further putting a kink in my already pinched bank account. So far we have managed to still maximize using all the savings vehicles we can with some extreme cut backs to our lifestyle. Thank goodness that the child makes me so tired that I hardly ever want to go out anyways ;-) . 

The one good thing this has done is shown me how easy it can be to save once my daughter doesn't require full-time childcare. I have already made a list of all the home improvements I will make with that extra $400 per week I pay.


----------



## steve41 (Apr 18, 2009)

I feel it is time to get on my _"Every household has more computer power available to it than NASA had when we first went to the moon, so why do we persist in these primitive 'how much' simplistic questions?"_ soapbox.

Look... why not plunk in the pertinent numbers:

-your salary
-age, (now & planned retirement)
-amount (reg, nonreg& tfsa) already saved
-mortgage size, rate, length. Remember, your savings rate will change drastically once you have paid off your mortgage 
-future windfalls & cash calls (selling real estate, inheritance, planned purchase)
-estate goals (do you want to pass on a certain estate, or just die broke?)
-future rate estimates (market&cpi)

Maybe a dozen simple data elements. Is this such a big endevour?


----------



## Alexandra (Apr 3, 2009)

steve41 said:


> Look... why not plunk in the pertinent numbers:
> 
> -your salary
> -age, (now & planned retirement)
> ...


While I agree that without some context, you cannot get a FULL picture of someone's financial health, the question still holds on it's own. Especially since we're talking about the RATE of savings.

I think some people have already talked about having kids or not, which is one aspect that can have a huge affect on the amount you are able to save. Maybe people can post their rate of savings and then what factors have most affected their ability to save (or not)?


----------



## stephenheath (Apr 3, 2009)

Most times savings rates have come up, usually in response to a newspaper article saying our savings rate is at or below 0, they don't count debt payment as savings, even though it has the same effect on your net worth as saving.

Personally we are filling up our TFSA each year, but beyond that it all goes on the mortgage as we want to get that paid off quite early, at which point we'll take the mortgage payments we had been making and dump them all into RRSP's/savings. So if you calculate it only on savings, we're only at 12.5%, but if you count principal reductions as well we're around 43.75% of gross income.


----------



## steve41 (Apr 18, 2009)

I have to add.... the financial services industry has an incentive not to promote this analysis. It takes too much time for them to crunch these numbers. They would much prefer to simplify things... "how much can you afford to plop in your RRSP this year?", or "statistics show you should be dedicating X% to your savings".

Some planners/advisers will do the above number-crunch, especially if you are in the HNW category, but most don't have the time to spare (nor the tools).


----------



## CanadianCapitalist (Mar 31, 2009)

I calculate savings based on net income mainly because that's how I initially set Microsoft Money up and have no interest in tracking gross income now. Our household savings rate averages 45% to 55% -- basically, we live on one salary and bank the other. To provide some context, we have three kids; two were in day care. Unsurprisingly, child care is our single biggest expense by far.

Looks like so many of us here are excellent saves who put away huge chunks of income. If the average savings rate is only 5%, it begs the question: how many Canadians are living beyond their means? It must be a significant chunk of the population.


----------



## DAvid (Apr 3, 2009)

steve41 said:


> I feel it is time to get on my _"Every household has more computer power available to it than NASA had when we first went to the moon, so why do we persist in these primitive 'how much' simplistic questions?"_ soapbox.
> 
> Look... why not plunk in the pertinent numbers:
> 
> ...


I fully agree with the sentiment of this post, but maybe not with all of the categories.

That said, it is much easier for folks with high income levels to have higher savings rates than the majority of Canadians. And to a certain extent SO WHAT! What are you saving for, how do you plan to use your income to better your life, or is this simply a 'whoever has the biggest bank account wins' mentality. I understand that many of the posters on this board have family incomes higher (some considerably higher) than the national family average, so of course savings rates of 40% are readily attainable.

We own our home, in a small community, have a financial plan leading to a comfortable retirement, etc. However, a former colleague, a year younger in age than I, died of a massive heart attack New Year's morning. Suddenly, saving for an unknown future has a bit less charm, and we have decided to live a little more for the moment, and have realigned some of our priorities.

Savings, in and of itself, have become far less important to us.


----------



## CanadianCapitalist (Mar 31, 2009)

DAvid said:


> We own our home, in a small community, have a financial plan leading to a comfortable retirement, etc. However, a former colleague, a year younger in age than I, died of a massive heart attack New Year's morning. Suddenly, saving for an unknown future has a bit less charm, and we have decided to live a little more for the moment, and have realigned some of our priorities.


I agree. Saving just for gathering a pot of money at the expense of living today is simply a mirror image of going into deep debt to live up today -- not very smart. 

That said, too-much-saving-itis might be an endemic problem for posters here but I would imagine only a small percentage suffer from the disease in the wider population.

Personally, I don't think we are sacrificing too much with banking one salary and living off the other. Naturally, if only one of us were working, the savings rate would be lower. It is all about finding a balance and being comfortable with our choices.


----------



## Ben (Apr 3, 2009)

steve41 said:


> I feel it is time to get on my _"Every household has more computer power available to it than NASA had when we first went to the moon, so why do we persist in these primitive 'how much' simplistic questions?"_ soapbox.
> 
> Look... why not plunk in the pertinent numbers:
> 
> ...


I had two original motivations for posting this thread, and have now dreamt up a third.

1: to elicit information from the learned folk of this forum on what exactly is a "personal savings rate" (PSR), ie. what components form the numerator, and what components form the denominator. So far, no answers to that question.

2: hearing from others what their PSR is, on what basis they've calculated it, and perhaps even a little context to qualify how they achieve it. This, admittedly, is not a terribly valuable exercise.

3: what PSR is too much? A proper discussion of this question does admittedly require knowledge of some other financial details. My goal is to lead a balanced lifestyle from today to the final chapel service. If we front-end load the savings too much, we risk getting less enjoyment out of the younger years than we could. If we save not enough, there will be a few less flowers in the chapel.

This thread is not meant to portray my complete financial details, nor extract same from those who reply. As has been discussed on another thread, most people have reservations sharing "sensitive" financial details, even in a forum, where anonymity is certainly far from guaranteed.

Certainly, higher salaries would directly correlate with greater potential to save.

Finally, completely in agreement with DAvid and CC as above, which relate to point 3. I like the mirror-image concept and the concept of debt today - interesting way of looking at it.


----------



## steve41 (Apr 18, 2009)

Here's a simple example.... 30 year-old (no savings to date), grosses 65K (salary indexed at 3%, inflation 2%) He plans to retire at 60 and die broke at 95.

Based on a 5% market rate, 2% inflation and a post retirement lifestyle reduction 80% of pre-retirement, his savings rate at age 31 should be 6%, 16% at age 41, 22% at age 51, 26% at age 61.

The reason for the increase as one gets older is that most persons' salaries increase at a rate greater than the cpi. (i.e. merit increases and career progression) This makes a big difference to the amount one can afford to contribute when maintaining the same lifestyle.

This example gets even more skewed when you factor real estate into the equation. In this case, I assumed that the subject was single, no kids, and a life time renter.


----------



## CanadianCapitalist (Mar 31, 2009)

Ben said:


> 1: to elicit information from the learned folk of this forum on what exactly is a "personal savings rate" (PSR), ie. what components form the numerator, and what components form the denominator. So far, no answers to that question.


I thought I answered it. I calculate PSR = savings / net income (i.e. take home after taxes, EI, CPP, DB plan contributions etc.) 

The reason is that I track it using Microsoft Money and though it allows tracking gross or net wages, I chose to track net wages.



> 2: hearing from others what their PSR is, on what basis they've calculated it, and perhaps even a little context to qualify how they achieve it.


Simple. We spend one salary and bank the other.



> 3: what PSR is too much? A proper discussion of this question does admittedly require knowledge of some other financial details. My goal is to lead a balanced lifestyle from today to the final chapel service. If we front-end load the savings too much, we risk getting less enjoyment out of the younger years than we could. If we save not enough, there will be a few less flowers in the chapel.


This is an extremely tricky question and needs understanding of not only finances but lifestyle details. Some one who likes to run in the trails in the summer and cross-country ski in the winter likely has much less expenses than another who buys ski passes and golf memberships. Similarly, some like to travel the worlds; others curl up with a good book in their backyard. These preferences have a huge impact on the ability to save.



> How much I have saved has no bearing on understanding my PSR - rather, my PSR has complete relevance to how much I have saved.
> I am very interested in how debt reductions are included in the definition of PSR, relating back to 1 above.
> Windfalls, estate goals, and rates estimates have very little to do with PSR, other than tying back to 3 above.


Debt reduction helps a lot with PSR. We have a smallish mortgage and trivial interest payments. Our savings rate would be 5 to 10% lower if we still had a high mortgage balance.


----------



## steve41 (Apr 18, 2009)

As above, with a VERY average guy with a regular job, no mortgage... his PSR is all over the map:



> his savings rate at age 31 should be 6%, 16% at age 41, 22% at age 51, 26% at age 61.


... and this guy is a simple case!!!

Summary: PSR as a number has absolutely no useful meaning unless it is qualified with an individual's basic financial and age data.


----------



## Ben (Apr 3, 2009)

steve41 said:


> As above, with a VERY average guy with a regular job, no mortgage... his PSR is all over the map:
> 
> 
> 
> ...


I agree that PSR is not a particularly interesting, especially when shared with others. My original focus in writing the thread was on point 1, but in the process of writing I got curious in calculating how much we save, and that kind of spilled into the post, where it would have been better to exclude. Also, we aren't likely to solve the tricky question of how much is appropriate to save depending on different lifestyles - I would prefer not to have brought that up, in hindsight.

To re-focus:

How does Statistics Canada define "personal savings rate"? Is there a web page where the metric as calculated and reported by Statcan is defined?


----------



## steve41 (Apr 18, 2009)

I don't know what the PSR should be as a general rule, the only thing that is certain is that homeless 60-something guy living under a viaduct, and the Edmonton guy who just won the lotto, will have a PSR.... oh, I dunno.... close to zero, maybe!


----------



## Ben (Apr 3, 2009)

steve41 said:


> I don't know what the PSR should be as a general rule, the only thing that is certain is that homeless 60-something guy living under a viaduct, and the Edmonton guy who just won the lotto, will have a PSR.... oh, I dunno.... close to zero, maybe!


Interesting example to drive home your point. Speaks to my underlying interest in figuring out exactly what Stats Canada is measuring when they report PSR. Once we understand the metric, then we can find the holes in the reporting when main stream media reports such a statistic.


----------



## AshleyT (May 1, 2009)

Apart from CC, most seem to be using gross income as the denominator. I have to say that 45-50% PSR using gross income as the denominator is a whopper of a savings rate. Consider that many provinces have top MTR's of 45%+. That leaves only 55% to you. If you save 50%, that means you are living on 5% of your salary. So in other words, your salary is probably in the top 0.1%. 9% to RRSP's, maxed out? That would imply a family income of 400k+. If all Canadians enjoyed that salary, I'm sure the average PSR would be a lot higher than 5 or 6%. When you are only making 32k a year, and the gov't takes 10% or so, you need all of those dollars just to get by. Saving 5% gross takes incredible discipline at that salary. Far more heroic than someone saving 45-50% with a family income of 400k+. Steve's suggestion of context is quite appropriate in this regard.

One other quibble in the discussion. If your main goal in life is to max out your PSR, it is likely you will miss all the living. Not saying that this the case for anyone, but just to give the discussion some balance. For example, some sentiment above seems to be along the lines of "we're not having children because they will affect our PSR", although not exactly stated as such. If that is the reason you make that decision, you will certainly miss out in life's greatest pleasure in exchange for an attractive statistic. On the other hand, the legacy you leave to your charity/relatives/dog will be impressive.


----------



## steve41 (Apr 18, 2009)

Sorry to sound like a broken record here, but we all just spent a few hours more or less filling in numbers in our respective Cantax or Quiktax, and what purpose did that serve? It told us how much to make out our annual check to the CRA for.

And yet, entering a much less rigorous set of data into a similar program which will tell us how the rest of our life will unfold, how much we should be saving and what we should be budgetting for spending, so that we can have a handle on our current as well as post-retirement situation, including salary, loans, pension, cpp/oas, tax, lifestyle, etc.... (with a few what-ifs thrown in) is not worth the effort?

What's up with that?


----------



## Ben (Apr 3, 2009)

AshleyT said:


> Apart from CC, most seem to be using gross income as the denominator. I have to say that 45-50% PSR using gross income as the denominator is a whopper of a savings rate. Consider that many provinces have top MTR's of 45%+. That leaves only 55% to you.


Top MTR's apply only to the amount of taxable income in that bracket. It is incorrect to say that living in a province with 45% MTR leaves only 55% takehome pay. My take home is a much higher percentage, as I am nowhere near top MTR in Ontario.



AshleyT said:


> If you save 50%, that means you are living on 5% of your salary. So in other words, your salary is probably in the top 0.1%. 9% to RRSP's, maxed out? That would imply a family income of 400k+. If all Canadians enjoyed that salary, I'm sure the average PSR would be a lot higher than 5 or 6%.


You have made some leaps of faith. We are living on far more than 5% of our gross. Our family income is nowhere near 400k. According to Wiki, it is slightly above the average household income for a family with two earners in my town. Our PSR is as much a result of our controlled spending as it is our middle-class income.

The 9% of gross income to RRSP is a current rate of automatic deduction from source (paycheque). As I said, cash savings find their way to mortgage reduction, and RRSP contributions. Over our working careers, we have managed to meet the 18% limits through irregular lump sum contributions.



AshleyT said:


> When you are only making 32k a year, and the gov't takes 10% or so, you need all of those dollars just to get by. Saving 5% gross takes incredible discipline at that salary. Far more heroic than someone saving 45-50% with a family income of 400k+. Steve's suggestion of context is quite appropriate in this regard.


Agree. I was raised by a single mother with several kids. This is probably one reason I am so conservative with financial matters today.



AshleyT said:


> One other quibble in the discussion. If your main goal in life is to max out your PSR, it is likely you will miss all the living. Not saying that this the case for anyone, but just to give the discussion some balance. For example, some sentiment above seems to be along the lines of "we're not having children because they will affect our PSR", although not exactly stated as such. If that is the reason you make that decision, you will certainly miss out in life's greatest pleasure in exchange for an attractive statistic. On the other hand, the legacy you leave to your charity/relatives/dog will be impressive.


Agreed, living simply to drive PSR higher is hardly living at all. Certainly, that is not my goal. I'm not sure that I've got the balance right either, but it is something we should think about from time to time. I like to think of it as not pinching pennies necessarily, but spending according to our values. We don't value stuff - we value experiences.

Our values include family and travel. On family - I've got nearly as many siblings as there are fingers on my hands, and an exploding set of nieces and nephews, and they are a major source of joy for me. Having a brood of kids is forefront in our minds these days - I mentioned our DINK status only to give context to our savings rate, and point out that it will change drastically when we do have kids. On travel - in the last 3 years, we've been to Greece, Belize, Florida 3 times, and planning a road trip through UK in August - this is expensive, but in line with our values.


----------



## Ben (Apr 3, 2009)

steve41 said:


> Sorry to sound like a broken record here, but we all just spent a few hours more or less filling in numbers in our respective Cantax or Quiktax, and what purpose did that serve? It told us how much to make out our annual check to the CRA for.
> 
> And yet, entering a much less rigorous set of data into a similar program which will tell us how the rest of our life will unfold, how much we should be saving and what we should be budgetting for spending, so that we can have a handle on our current as well as post-retirement situation, including salary, loans, pension, cpp/oas, tax, lifestyle, etc.... (with a few what-ifs thrown in) is not worth the effort?
> 
> What's up with that?


I agree. Do you have this software? I would like to try it.


----------



## CJB (Apr 4, 2009)

Not sure, but I think it's called excel?


----------



## Ben (Apr 3, 2009)

CJB said:


> Not sure, but I think it's called excel?


Nice. Prickly. Touche.

Is there a spreadsheet or program out there that can model how our lives will unfold?


----------



## CanadianCapitalist (Mar 31, 2009)

AshleyT said:


> Apart from CC, most seem to be using gross income as the denominator. I have to say that 45-50% PSR using gross income as the denominator is a whopper of a savings rate. Consider that many provinces have top MTR's of 45%+. That leaves only 55% to you.


Ben has already quibbled with this but let me add some more colour. Someone living in Ontario and earning $100K will have a marginal rate of 43% but the average is only 29%.

Maxing out the RRSP by contributing $18K will drop the average tax rate even further to 20%.

http://www.walterharder.ca/T1.html


----------



## steve41 (Apr 18, 2009)

Spreadsheets don't do this stuff very well, especially when you are including the effect of the T1 (clawbacks, indexed brackets, age credits... etc) My not-so-well-kept secret is that I author a program called RRIFmetic. There is a free download demo on the website (www.fimetrics.com)

I sell mostly to planners, but there is a version available for DIY use as well.


----------



## AshleyT (May 1, 2009)

Ben said:


> Top MTR's apply only to the amount of taxable income in that bracket. It is incorrect to say that living in a province with 45% MTR leaves only 55% takehome pay. My take home is a much higher percentage, as I am nowhere near top MTR in Ontario.





CanadianCapitalist said:


> Ben has already quibbled with this but let me add some more colour. Someone living in Ontario and earning $100K will have a marginal rate of 43% but the average is only 29%.
> 
> Maxing out the RRSP by contributing $18K will drop the average tax rate even further to 20%.
> 
> http://www.walterharder.ca/T1.html


A good point, one I considered, but excluded since I thought it would muddy my argument in light of my assumption of a 400k+ family income (since most income at 400k is taxed at the top, the average tax rate approaches the top MTR for high income earners).



Ben said:


> You have made some leaps of faith.....The 9% of gross income to RRSP is a current rate of automatic deduction from source (paycheque). As I said, cash savings find their way to mortgage reduction, and RRSP contributions. Over our working careers, we have managed to meet the 18% limits through irregular lump sum contributions.


I have reread your original post, and I see where I misread the information. Thanks for the clarification.



Ben said:


> I was raised by a single mother with several kids. This is probably one reason I am so conservative with financial matters today.


You and I both.



Ben said:


> Agreed, living simply to drive PSR higher is hardly living at all. Certainly, that is not my goal. I'm not sure that I've got the balance right either, but it is something we should think about from time to time.


Same boat here. I struggle with this a lot, and hope I didn't sound like I was preaching, since I am far from an expert. We are fortunate to have a high income between the two of us, but I have a hard time finding the right balance. We can spend a perfectly reasonable amount of our income on a vacation, but it always seems to make me sweat a little even though it will never really affect our daily lives or our ability to retire if we desire. 

Being overly frugal can be just as much of a disease as being a free-wheeling spendthrift. I don't know if I'll ever get the balance right.


----------



## steve41 (Apr 18, 2009)

> since most income at 400k is taxed at the top, the average tax rate approaches the top MTR for high income earners


Well... not quite. $400K income will result in an effective tax rate of 39%. Close, but certainly not at the top MTR (43.7 in BC). If the $400K were split between 2 spouses, that effective rate would be 35%.


----------



## Mockingbird (Apr 29, 2009)

Ben said:


> Interesting example to drive home your point. Speaks to my underlying interest in figuring out exactly what Stats Canada is measuring when they report PSR. Once we understand the metric, then we can find the holes in the reporting when main stream media reports such a statistic.


The term "Personal Savings Rate" is rather narrowly defined both in Canada and US. The PSR number that media throws around is quite different from what you and I think. Since 1980's, it is basically calculated from National Income and Expenditure Accounts (NIEA) and does not take in account the changes in asset values such as capital gains or losses. In US, the measurement is from National Income and Product Accounts (NIPA), which has similar criteria of not including capital gains and losses on existing assets. 

"... personal savings is derived by first estimating personal income, then subtracting current transfers to government to obtain personal disposable income, and then subtracting consumption and current transfers to corporations and to non-residents. The savings rate is what is left over, expressed as a percentage of personal disposable income. Capital gains or losses are not included in the NIEA definition of savings on the basis that they do not represent added value, generated by the production process." (_Bank of Canada article_)

Some agencies now report "Wealth Adjusted Personal Savings Rate" which does account for the household balance sheet (eg. net worth)

Here's the method..

*Statement of household income and expenditures* (*1)

*Income*

Wages & Salaries
Interest, dividends, and other investment income (*2)
Transfers from government, corporations, and non-residents (*3)
Business income (*4)
*Expenditures*

Durable goods (*5)
Semi-durable goods (*6)
Non-durable goods (*7)
Services (*8)
_Transfers to government_
_Transfers to corporations and non-residents _(*9)
*Personal savings (=Income-Expenditures)*
*(* See attachment)*


----------



## steve41 (Apr 18, 2009)

These stats are no doubt useful to economists, govt planners and business planners when trying to determine what the overall consumer of goods and financial services is going to do as a group (in aggregate). It is not particularly useful to the individual since the PSR can vary over such a wide range depending his age, and individual stats (salary, assets, loans... etc) Especially his age.


----------



## Ben (Apr 3, 2009)

Mockingbird said:


> "... personal savings is derived by first estimating personal income, then subtracting current transfers to government to obtain personal disposable income, and then subtracting consumption and current transfers to corporations and to non-residents. The savings rate is what is left over, expressed as a percentage of personal disposable income. Capital gains or losses are not included in the NIEA definition of savings on the basis that they do not represent added value, generated by the production process." (_Bank of Canada article_)
> 
> 
> > Thanks - great response to the question!
> ...


----------



## Ben (Apr 3, 2009)

steve41 said:


> These stats are no doubt useful to economists, govt planners and business planners when trying to determine what the overall consumer of goods and financial services is going to do as a group (in aggregate). It is not particularly useful to the individual since the PSR can vary over such a wide range depending his age, and individual stats (salary, assets, loans... etc) Especially his age.


Agree that the PSR is of limited use in publicizing on a forum, because there's very little the readers can derive from that information without all of the qualifying subtext. 

However, I think the PSR can be an interesting and useful metric to the individual themself, as one yardstick in determining whether they are on track financially. Not everyone has access to the same sophisticated tools.


----------



## steve41 (Apr 18, 2009)

It is equivalent to telling me that the average individual weighs 120 pounds. This is great for an airline, say, determining load factors when planning fuel costs and fares, but for myself, I would want to know what gender and age range corresponded to various weight averages in order to make it meaningful to me as an individual.


----------



## mfd (Apr 3, 2009)

steve41 said:


> It is equivalent to telling me that the average individual weighs 120 pounds. This is great for an airline, say, determining load factors when planning fuel costs and fares, but for myself, I would want to know what gender and age range corresponded to various weight averages in order to make it meaningful to me as an individual.



I think a better analogy is someone saying they run 5k every day. What you don't know is the pace they ran or whether they are adding up small portions that they ran through out the day. However I think running 5k/day no matter how you did it is still an accomplishment. 

Steve everyone gets what you are saying but in the end PSR is a simple gauging mechanism. Who cares if the person who is saving 10% is making $30k or $100k the point is they are saving something.


----------



## Mockingbird (Apr 29, 2009)

mfd said:


> I think a better analogy is someone saying they run 5k every day. What you don't know is the pace they ran or whether they are adding up small portions that they ran through out the day. However I think running 5k/day no matter how you did it is still an accomplishment.
> 
> Steve everyone gets what you are saying but in the end PSR is a simple gauging mechanism. Who cares if the person who is saving 10% is making $30k or $100k the point is they are saving something.


Pretty much said what I wanted to say.


----------



## steve41 (Apr 18, 2009)

I am sorry that I am re-posting from upthread.... this is a projection for one individual. Please read the second paragraph... his PSR varies drastically over time. 6% at 31 up to a high of 26% at age 61. The same guy, one salary, no loans skewing the PSR trajectory... as simple a projection as you can get. So, what is this guy's PSR, 6% or 26%?



steve41 said:


> Here's a simple example.... 30 year-old (no savings to date), grosses 65K (salary indexed at 3%, inflation 2%) He plans to retire at 60 and die broke at 95.
> 
> Based on a 5% market rate, 2% inflation and a post retirement lifestyle reduction 80% of pre-retirement, his savings rate at age 31 should be 6%, 16% at age 41, 22% at age 51, 26% at age 61.
> 
> ...


----------



## Ben (Apr 3, 2009)

steve41 said:


> I am sorry that I am re-posting from upthread.... this is a projection for one individual. Please read the second paragraph... his PSR varies drastically over time. 6% at 31 up to a high of 26% at age 61. The same guy, one salary, no loans skewing the PSR trajectory... as simple a projection as you can get. So, what is this guy's PSR, 6% or 26%?


One can have only one PSR at any one time. That PSR is a simple metric that has some use to that individual. Knowing that one's PSR is greater than 0% is a good feeling. Knowing one's PSR may not be as useful as having a sophisticated software yielding other metrics.


----------



## mfd (Apr 3, 2009)

steve41 said:


> I am sorry that I am re-posting from upthread.... this is a projection for one individual. Please read the second paragraph... his PSR varies drastically over time. 6% at 31 up to a high of 26% at age 61. The same guy, one salary, no loans skewing the PSR trajectory... as simple a projection as you can get. So, what is this guy's PSR, 6% or 26%?


Steve, maybe this person has only ever read "The richest man in Babylon" and has decided that his goal is to save 10%. When he makes $30k he saves $3k. When he makes $100k he saves $10K. In both cases he saves 10%. Sure you could say well he should be saving more and maybe it won't provide for all of his future needs but at least it's something. 

Maybe thats the reason savings is such a problem in the world. In the early part of the century people had simple approaches to saving. Now we make it this long involved process that turns people off. PSR is a simple metric and a simple goal.


----------



## moneygardener (Apr 3, 2009)

Back in September of 2007 we were saving 34% of net income. This becomes 51% of net income when you include full mortgage payments. Are people including full mortgage payments?...are people including mortgage principle?

I just figured out our HSR (household savings rate) today and it came in once again at 34% of net income.


----------



## CanadianCapitalist (Mar 31, 2009)

moneygardener said:


> Back in September of 2007 we were saving 34% of net income. This becomes 51% of net income when you include full mortgage payments. Are people including full mortgage payments?...are people including mortgage principle?
> 
> I just figured out our HSR (household savings rate) today and it came in once again at 34% of net income.


I include mortgage principal payments as savings -- actually, Microsoft Money splits mortgage payments into principal + interest and counts interest as an expense. Makes sense to me.


----------



## mfd (Apr 3, 2009)

moneygardener said:


> Back in September of 2007 we were saving 34% of net income. This becomes 51% of net income when you include full mortgage payments. Are people including full mortgage payments?...are people including mortgage principle?
> 
> I just figured out our HSR (household savings rate) today and it came in once again at 34% of net income.


I never thought about that but I am going to be doing that going forward. I recently raised my mortgage payment. Thats money that could have gone into savings by is instead going towards principal.


----------



## steve41 (Apr 18, 2009)

This is a little dated, but here is description of a MUCH more significant measurement than the PSR. I call it the "BQ", your Burger Quotient.

What is the BQ?


----------



## Ben (Apr 3, 2009)

moneygardener said:


> Back in September of 2007 we were saving 34% of net income. This becomes 51% of net income when you include full mortgage payments. Are people including full mortgage payments?...are people including mortgage principle?
> 
> I just figured out our HSR (household savings rate) today and it came in once again at 34% of net income.


Savings might be defined as anything you do with your cashflow that directly increases net worth. 

As a mortgage payment goes in part to reduce principle, and increase net worth, then that part of the payment can probably be called saving.

CC - in the "principle reduction as savings" approach, how does Money sum the monthly expenses? Does it use this approach to calculate your savings, but use the full mortgage payment to calculate your expenses? It must, otherwise it would be under-reporting the monthly cashflow requirements of the household.

I'm thinking about getting into a copy of Money I got recently, and see if I like it better than my spreadsheet.


----------



## CanadianCapitalist (Mar 31, 2009)

Ben said:


> Savings might be defined as anything you do with your cashflow that directly increases net worth.
> 
> As a mortgage payment goes in part to reduce principle, and increase net worth, then that part of the payment can probably be called saving.
> 
> ...


Expenses only count the mortgage interest. Money treats cash flow as separate; income/expenses are accounted using the accrual method. For instance, if I spend $1,000 on my credit card in May and the bill is due in June, Money counts the $1,000 expense against May but the cash flow is affected only in June. Hope this makes sense.


----------



## moneygardener (Apr 3, 2009)

It seems a little counterintuitive to consider mortgage payments as savings. This is money that one has theoretically spent already and is now paying back. Is that really savings?

On the other hand, mfd raises a good point. Under the above argument, if we all dedicated 100% of our resources to paying back our mortgage, our savings rate would be zero.


----------



## CanadianCapitalist (Mar 31, 2009)

moneygardener said:


> It seems a little counterintuitive to consider mortgage payments as savings. This is money that one has theoretically spent already and is not paying back. Is that really savings?


Not the entire mortgage payment is savings. The interest portion is an expense. The principal payment is savings. Just like any mortgage pre-payment is savings. You haven't spent the portion that goes towards principal payment -- just repaid a portion of the loan. Now, I track this way only because that's how Microsoft Money works. But it sounds logical to me.


----------



## moneygardener (Apr 3, 2009)

CanadianCapitalist said:


> Not the entire mortgage payment is savings. The interest portion is an expense. The principal payment is savings. Just like any mortgage pre-payment is savings. You haven't spent the portion that goes towards principal payment -- just repaid a portion of the loan. Now, I track this way only because that's how Microsoft Money works. But it sounds logical to me.


Understood. It just seems a little awkward to consider loan repayment 'saved' money, but it must be so.


----------



## steve41 (Apr 18, 2009)

Your Burger Quotient (BQ) means exactly what it implies... the money you get to spend after all other finances are taken into account... tax, loan payments, contributions to savings, EI/CPP contributions, only that money which goes to feed, clothe, gas your car.... What other metric can there be to truly define your financial health, and to show you where you sit on the save/spend continuum?

If your actual lifestyle (budget) exceeds your BQ, then you need to save more, if it is less than your BQ, then you can loosen up and enjoy life more.

My theory is that these meaningless stats such as the PSR or _"how much do I need to retire on?" _serve the investment industry by thoroughly confusing the average Joe. The confusion scares the working stiff into (perhaps) saving more than he needs to, and the retiree by not pulling down his savings aggressively enough. This serves the investment guys by inflating the amount of capital they get to manage, and penalizes the client, who ends up scrimping from day to day and dies, leaving his rotten kids multi million dollar inheritances.

We need more real planning in our lives folks!


----------



## moneygardener (Apr 3, 2009)

Steve "Contributions to Savings"? doesn't this confuse things a bit. I could easily have a lower Burger Quotient by contributing more to savings. Alternatively I could have all the money in the world to spend with my BQ if I contributed $0 to savings.

Disposible Income is more worthwile:

Income less fixed costs


----------



## steve41 (Apr 18, 2009)

> I could have all the money in the world to spend with my BQ if I contributed $0 to savings.


 Yes. It's called 'retirement'. In fact your PSR goes negative at that point in time. I don't look at retirement in the context of 'working/retired' My model looks at the entire pre and post retirement phases as a single process. There are periods of time when you have more money coming in the door than you can spend and periods when there is not enough coming in. The latter phase could be full-on retirement, partial retirement, or a sabbatical (temporary cessation of paychecks). The BQ applies to all of these circumstances... working, partially retired, sabbatical, full retirement.


----------



## The_Number (Apr 3, 2009)

Thanks, Ben, for starting an interesting thread. I did (rather quickly) go through all the posts, but I don't think this question has been addressed: What exactly counts as "saving"?

Obviously, anything you put aside for retirement is saving, but what about saving that is earmarked for future spending, such as:
- Saving that is earmarked as downpayment for a house.
- Saving that is earmarked for purchasing a major item (e.g., car) in two years or a year? Does it make a difference if the major item is something more frivolous like a big screen TV?
- Saving that is earmarked for vacation in two years? a year? or what about next month?

My monthly overhead is less than 50% of my take home, but I save for various short-, mid-, and long-term goals, so I don't think/feel my saving rate is 50%.


----------



## steve41 (Apr 18, 2009)

Think about it this way.... everyone has assets... money currently saved, your home, cottage, the fact you can quantify (in time and amount) some level of inheritance, and most importantly, for the working individual... your career. Your career is an asset, whether you achieved it through higher education, learned a trade, married the bosses daughter, or picked an industry with a healthy future.

This career 'asset' can be quantified in exactly the same way as your savings... you represent it as a stream of future paychecks as they will come to you (generally growing) over time (including pension checks). Once you determine these assets and adjust for any loans you might have, you can then determine your BQ.... namely that constant lifestyle (after tax/after inflation) which those assets and liabilities will deliver such that your capital _just_ runs out on your 95th birthday.

Anyone can determine this number... and, surprise, surprise, it won't be the same for you as it is for Donald Trump. Knowing this number, and the savings/spending regime you should follow in order to sustain it, is infinitely more important and informative than a PSR.


----------



## brad (May 22, 2009)

To me the definition of saving is putting money aside for later use. 

Like others above, I disagree that mortgage payments count as "saving," because you're paying back a loan, and that's really spending. If your house happens to appreciate and you eventually sell it at a profit then I suppose in a twisted way you could view mortgage payments as "saving" but that's counting your chickens before they're hatched. In the sense that paying off your mortgage builds equity in a house, I would think of mortgage payments more as an investment than saving.

Also like others above, I feel that the personal savings rate is pretty much meaningless as a universal measure. The higher your income and/or the lower your expenses, the more you can save. It's a function of very individual variables. Even two people with the same income may have vastly different savings rates based on whatever commitments they have (size of a mortgage, other debts, medical expenses, etc.).


----------



## steve41 (Apr 18, 2009)

This is why the PSR is so screwed. If you examine a plan... during the period when you are making those mortgage pmts, you might not be making any savings. Once the mortgage is paid off, those savings will accelerate drastically. This is called financial planning. Look at your 'house strategy' as money saved that would otherwise have to go to rent. 

Real estate is part of your financial universe, and your plan can range from selling the house outright, downsizing and taking the excess cash back out into investments or leaving it to your estate.

And in case we forget, many Canadians will borrow from their RRSP in order to fund their down payment, paying it back later over time.


----------



## Antonia (May 2, 2009)

I have managed to save 35% of my income this past year. However, it is in my one-person corporate account and not in personal savings, _per se_. I don't include mortgage payments as savings since it is repaying $ borrowed. My DH views money spent on the reno as "savings" since it should add close to $100,000 to the value of our house. (When he does the "net worth" statement every month, he applies a fraction of the total improvement to the assets.) I have been selling my artwork on eBay to fund a TFSA this year.

Rosina at Middle Ageless


----------



## canadianbanks (Jun 5, 2009)

I don't think that repaying any kind of loan (mortgage, car loan, etc) qualifies as saving. If I say that I save 50% of my gross income this means that I have 50% of my income in cash left, after I have *paid all my expenses*, *serviced all my debt* and *paid my tax liabilities*. Everything else is wishful thinking.


----------



## Ben (Apr 3, 2009)

canadianbanks said:


> I don't think that repaying any kind of loan (mortgage, car loan, etc) qualifies as saving. If I say that I save 50% of my gross income this means that I have 50% of my income in cash left, after I have *paid all my expenses*, *serviced all my debt* and *paid my tax liabilities*. Everything else is wishful thinking.


It seems to me there are two useful definitions of savings, each equally valid, and differentiated by their effect on net worth. I won't attempt to define all the nitty-gritties of these definitions, as that would be painstakingly boring and neither am I an expert, but for some broad strokes:

#1. The first definition of saving is based on cashflow over a time period, income less expenses. Income defined as after-deduction paycheques into your bank account, and other transfers from government, corporations, or persons, etc. Expenses defined as the total amount you spend in the time period, including purchases, bills, and debt service like mortgage and car payments. The difference between the income and the expense can be defined as savings, ie. you are spending less than you earn. This is a good thing, as the alternative is not sustainable. 

#2. The second definition of saving takes the same approach from #1, and adds a wrinkle. It wants to look at savings from the perspective, "What effect does the 'expense' have on my net worth?" Effectively, it looks to make the savings equal the growth in net worth. The portion of a debt-reduction payment that goes toward the principle is therefore considered as savings, in this approach, as it directly increased the 'equity' in the asset. Putting aside liquidity differences between owning property or a car, and appreciation/depreciation wrinkles, fundamentally you are just as far ahead financially by having reduced that principle owing as you are from the cash savings resulting from the calculation in definition #1.

Definition #1 is useful in determining the 'affordability' of your lifestyle, and whether you are living within your means. You need to have enough money coming in to cover your living expenses and debt service, and doing the calculation will tell you this. This first definition of savings accounts for increases in cash reserves (which are subsequently directed "off-record" to asset accumulation vehicles like mortgage reduction or financial investments), but does not completely address the effect on net worth.

Definition #2 has less real use from a practical point of view. You may as well just take a snapshot of your net worth every once in a while. It really serves only curiousity to know the percentage of your income that is going directly to building net worth.

Savings from Definition #1 greater than zero, combined with increasing net worth, is a good sign that you are living within your means.


----------



## steve41 (Apr 18, 2009)

The metric that makes sense to me is 'ATI'... after tax income. This is the amount of money you get to spend on the necessities... beer, groceries, gas, entertainment, clothes, rent, proprerty tax, etc.... disposable income.

Everything else... loan pmts, deposits to or withdrawals from your savings, income tax, cpp&ei deductions, insurance premiums are external to that. That's the way I look at it.


----------

