[Ben]

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]

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]

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]

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

 

[Alexandra]

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]

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]

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)

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]

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]

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]

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]

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?

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]

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]

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?

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]

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]

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]

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]

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



... 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.

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]

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]

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]

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.