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What is your personal savings rate?

21K views 58 replies 18 participants last post by  steve41 
#1 · (Edited)
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?
 
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#2 ·
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 :D. 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
 
#3 ·
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.:p

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.
 
#5 ·
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.
 
#6 ·
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?
 
#7 ·
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)?
 
#13 · (Edited)
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.
 
#8 ·
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.
 
#9 ·
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).
 
#10 ·
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.
 
#14 ·
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.
 
#37 ·
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%?
 
#16 ·
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.
 
#17 · (Edited)
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?
 
#19 ·
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.
 
#20 ·
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.;)
 
#22 · (Edited)
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.

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.

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.

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.
 
#21 ·
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?
 
#27 ·
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.
 
#28 ·
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.
 
#31 ·
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.
 
#33 ·
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.
 
#34 ·
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.
 
#35 ·
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.
 
#46 · (Edited)
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.
 
#47 ·
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.
 
#49 ·
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!
 
#51 ·
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.
 
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