How Rich are You? Find your Net Worth, Spending, and Savings Rate

wheel of consumptionMr. Money Mustache can tend to get a little high-level at times, talking about all these feelings and philosophies that underlie the proper path to wealth.

But you can’t just smile your way to the top – there are real numbers at work in the background, whether you understand them or not.  These can gang up and torture you (as in the case of a person with a crushing 60-hour workweek who maintains a paltry 10% savings rate), or they can boost you right out of a mandatory work sentence in unprecedented time.

This is especially relevant in the wake of the annual spending article, which always brings up a lot of questions about how Mustachians accumulate wealth so quickly. So let’s start with the big picture, which is how to become wealthy:

Financial Independence in 3 Easy Steps:

  1. Figure out how much money you are taking home and subtract the amount you are spending.
  2. Be sure to keep all that surplus money at work, by paying down high interest debt first and then investing the rest.
  3. Once the total value of all your investments reaches 25-30 times your annual spending, paid work is now entirely at your discretion. For life.

So with this post, let’s explain these three fundamentals of rapid wealth accumulation the MMM way, so the schooling will be there for all future students.

Net Worth

We’ll begin with the end in mind. Net Worth is a bit of a degrading term, as it incorrectly implies a person is only worth the amount of money he or she has accumulated. But you can use this for motivation, since as a Mustachian your figure will tend to be unusually high.

The overall formula is easy:

The Value of everything you own (-subtract-) The total of all your loans

The details are equally easy, although sometimes debated. So I’ll tell you the way I happen to think about it:

  • You do include the value of any properties you own, including your primary house
  • All 401(k)s, IRAs, savings plans, and other hidden assets are included
  • All mortgages, loans, credit card balances and other nonsense get subtracted
  • Don’t bother with depreciating consumer stuff like your cars,  furniture, or Apple products, unless you are willing to sell them right now.

Let’s start with a deliberately twisted example:

Joe Consumer (age 33) is a Washington DC Lawyer pulling down $250,000 per year.

He has a condo he paid $517,000 for with a current market value of $580,000 and a mortgage of $460,000. He also has a BMW 535i sedan that cost him $61,300 including tax a few years ago, payment is $539 per month and remaining balance is $43,000.

401(k) balance is $50,000, IRA is $27,300 and he has $90,000 left on his Harvard student loans, which he plans to get serious about soon and pay off over the next 10 years. Credit card balance is just a bit high at $8,000 right now, what with the holiday season hangover. What is his net worth?

Whoo! Look at that collection of financial spaghetti.  Oddly enough, when people write to me with financial problems this is usually how they are described: a big list of confusing and unsorted details. They just heap them on a plate and hope it will straighten itself out some day. When you’re confused about your own money, it is likely that you are wasting a lot of it.

Joe’s Net Worth

Ownership of the Condo: $580,000 – $460,000 = $120,000
Retirement accounts (401(k) + IRA): $50,000+27,300 = $77,300
Student loans, car loan, and credit cards: $-90,000 + $-43,000 + $-8,000 = $-141,000

Total Net Worth: $120k + $77.3k – $141k = $56,300

If you ask the average Josephine, Joe is a successful rich guy, doing very well for a 33-year-old. Expensive house, flashy car, massive income and even some money in the bank. If he just keeps on the current path and saves a bit more during those “peak earning years” in a couple decades once he makes partner, he’ll have a nice fat retirement fund by age 65.

My diagnosis would be quite different: “Holy Shit, Joe! What the hell have you been blowing all your money on?! You should have had a higher net worth than that many years ago, given your career!!”

Very Rough Guideline: Take the total money you’ve earned after taxes in your lifetime (suppose that for Joe it happens to be $1,243,100). If you don’t have at least 40% of it still around to show for it today, you are spending way too much.

Bonus: Suppose his nearly-new BMW can still be sold on Craigslist for $33,000. Although he has already lost $28,300 in depreciation on this horrible money pit, he could end the bleeding immediately by selling the car and taking the $33k plus $10k of his own money to pay off the $43,000 note. This would increase his net worth by $33k and set him on a much more prosperous path for the future.


This was Joe’s problem above. The key is to understand where your money is going, and for most of us that means tracking your spending. I calculate it like this:

Everything that flows out of your wallet, bank account, credit cards,  or automatic payroll deductions for things like insurance.

Finer Points:
I include property taxes and sales tax, but do not count income tax or other payroll taxes.
I include all loan interest and fees, but do not count the principal portion of loan payments.

Why? Because I’m very interested in financial independence: that point when your passive non-work income is enough to pay for a hypothetical retired life of your choosing. Right now, Joe might be earning $250k and paying over $60,000 in income taxes. In retirement, he will probably be in a lower tax bracket. Plus income might come from dividends, long-term capital gains, or rent checks from investment properties he owns. He might even live in an area with a different tax rate.

You need to deeply understanding your spending needs and wants in order to know if you can afford to retire. Instead of taking random guesses at the factors above, I prefer to think of everything in terms of after-tax dollars. Take-home income instead of gross income.

So if we sort out what is surely a twisted ball of credit card,  EFT and ATM transactions, Joe’s monthly spending might look something like this:

Joe’s Spending

Interest portion of his $2500 mortgage payment: ($2000)
Interest on credit card and student loans: $480
Car Payment: $539
Employee contribution for health insurance: $150
Full collision+comprehensive car insurance: $200
Car Registration/licensing fees: $200
Gasoline: $200
Unnecessary checkups at BMW Dealer: $150
Condo fees: $450
Property Taxes: $500
Utilities: $200
Travel: $800 
Country Club Membership: $200
Groceries: $400
Dining out: $1000
Wine and Scotch collection: $400
Clothes, Suits, and Gentlemanly Accessories: $600
Haircuts and Massages: $200
House cleaner: $400
Dry Cleaning: $150
Cell Phone: $150
Cable TV/Internet: $150
Miscellaneous Shopping, Gifts, Etc: $500

Total spending: $8919 per month

So how can a busy person track all of these transactions and categorize them well? You have two choices:

  • Manually save all receipts and enter them into a spreadsheet or piece of budgeting software every night, or
  • Do all your spending on a credit card and let some financial software like Mint, YNAB, or Personal Capital grab all your transactions and sort them out (this is what I prefer).

In either case, you’ll probably spend at least some cash which you pull out of ATMs. You will see this in your automated spending report as well – I suggest assigning your cash spending to a category called “the decadent throwing around of unnecessary $20 bills.”

Take-home pay

This boils down to the amount of your paycheck that you eventually get to spend yourself. So let’s look over Joe’s shoulder as he opens a biweekly paycheck:

Gross Pay: $8620

401(k) plan deduction: $692
Employer 401(k) Match: $300
Automatic deduction he has set up to pay towards student loans: $1000
Professional Fees/Insurance: $200
Federal Tax: $1724
State Tax: $689

Net pay to his bank account: (8620-692-1000-200-1724-689) = $4315
Since there are 2.16 pay periods in the average month (52 / 24) you would scale this up to see that he gets an average of $9349 per month showing up in the bank.

But this is where many people get confused, because this paycheck he takes home is not really his take-home pay. You need to add back in the money that he is actually using – including to pay off loans –  or will get to use – including all retirement and savings account deposits.

The MMM Take Home Pay calculation would thus be:

Gross Pay + Employer 401(k) match – taxes and fees
= $8620 gross pay + $300 employer 401(k) match – $1724 federal tax – $689 state tax -$200 professional fees
= $6407 biweekly or $13,839 per month

If this sounds like a shitload of money, that’s because it is. Anyone making $250k gross pay should be rolling in it and saving the vast majority, therefore able to retire within just a few years. If you get your savings rate right.

 Savings Rate

Now that we’ve done all the hard work, we get to hit the gas pedal and show off a little, since we can make some bold forecasts.

The savings rate is simply the percentage of your take home pay that you’re not spending.

(Take home pay – spending) / (take home pay) , then multiply by 100 to get a percentage

For Joe, it would look like this:

($13,839 – $8919) / ($13,839)    x    100

= 35.5%

Hey, Joe is still saving a third of his income, even with the most outrageous spending list that I could invent for a single guy. It’s not completely suicidal, but he is still squandering an opportunity that only a tiny percentage of humans have ever been offered: the opportunity to become financially free while he’s still young.

To steal a few data points from the most popular article in this blog’s history: The Shockingly Simple Math Behind Early Retirement:  Joe’s 35% savings rate means he is on track to retire in about 25 years. He is already 33, so this means he is sentencing himself to be locked into that office until age 58.

This may seem “early” by current American standards, but if the reports I get about high-octane Washington DC law careers are accurate, that shit can get old in a hurry. It is far wiser to earn your freedom while you are still fired up about working.

From this point, it can get far worse or far better. Joe could get married, have multiple children, and expand the level of spending (larger house, more vehicles,  private schools, etc.) to consume even more of his income.

  • If he adds just $3000 to this monthly budget, he drops to a tragic 15% savings rate and is set for a 43 year working career
  • On the other hand, if he trims down the excess and goes to a still-insane $5000 monthly spending level, he’ll be saving about 65% of his income, which means he will be set for life less than 10 years from now.
  • If he can streamline life to just a slightly less ridiculous level than that, let’s say to my own level of spending, he will be retired well before 40.

So there you have it: The easy way to calculate spending and savings rates, and your net worth.

Although I illustrated it here with an outrageous but very common example of high income and high spending, the principles work just as well, and are even more important if you are living on an average income. In the US, it is quite possible to live well on under $7000 per person per year, and even gradually become wealthy on a below-average income.

But the first step is to understand how all these dollars fit together. How are YOU doing?


Bonus: For those who love to calculate, my friend and fellow early retiree Darrow Kirkpatrick maintains a really thorough roundup of the best retirement calculators on his blog here: http://www.caniretireyet.com/the-best-retirement-calculators/

  • Kayla January 30, 2015, 9:31 am

    You are right, money is partially about numbers, but also about feelings and mental toughness. These are great places to start for those who don’t know how to do these calculations to find out about the number part of their money equation. :)

  • Jan De Mont January 31, 2015, 7:20 am

    Hi there,

    FI seems a feasible goal in America, with low taxes and low price of goods. Conversely, in Europe it is pretty much an impossible mission, with super high taxes and less dynamic stock market. In my case I make an average salary (55k) and I pay the average tax rate 48% (social security included), yet I manage to save about 35% of the take home pay.

    The way it’s supposed to work is the following: the government takes your money away when you are young and single, then it gives it back to you in tax benefits when you are older and with kids. For the average European this is a safe and comfortable environment, for a mustachian working towards FI it a roadblock.

    So voilà, if you have any ideas to overcome this, they are more than welcome.


  • Jay January 31, 2015, 1:08 pm

    Does one include what they put away in retirement plans into their savings rate?

  • dc February 1, 2015, 12:24 pm

    I have a question and I think it’s one that would apply to many long term planners.

    When I was in my 20s I refinanced our tiny home to a 15 year loan for the decrease in interest and promise of nearer-term freedom.

    Of course, a 15 year mortgage is a significant up-tick in monthly dough (about 10 years left on it now). Not to mention the 25 year school loan that I am working to pay off in 10 years, and my husband’s much larger 20 year school loan that I should have taken care of in 5 years. Add to that our pre-school and private kindergarten bills (our school only has kindergarten for 3 hours and that doesn’t mesh well with a family with 2 full-time jobs – plus we like the montessori education).

    All of that adds up to pretty high expenditures over the next 5 years. These will taper off of course, but how does this factor in? Do I use my current expenses and assume that even though these very significant expenses will not continue, something else will somehow take their place, and if they don’t then I’m way more set than I thought I was?

    Or do I subtract some of the big expenses out?

    Here’s how this looks:
    Mortgage – 3500/month, 10 years left. Taxes and insurance and hoa are roughly 280/month (those will continue)
    Montessori – a whopping 40k this year. In Fall of 2016 our eldest will be in 1st grade (public school) and this will be cut in half for another 2 years until our youngest reaches 1st grade.
    Student Loan 1: 25k total. Paying 800/month. Interest is 3.5%. Didn’t calculate it exactly but will be done in less than 5 years.
    Student Loan 2: 20k total. Paying minimum of 200/month. Interest is 1.25% so I will be paying the minimum for the length of the loan.

    So what do you guys think? This is 90k of expenses that will be done in 10 years (half will be done in 3 years). How would you recommend accounting for this situation?

  • DCratracer February 2, 2015, 11:27 pm

    I wrote a long post and I don’t know where it went. So here comes an abbreviated re-do:

    What if your expenses have a clock on them? Like student loans or Pre-School or mortgage?

    My kids are in pre-school currently and when they hit 1st grade they will go to public school (Kindergarten is 3 hours where I live and that’s not really an option for me). I have student loans that are 1k/month that go for another 5 years and Preschool that is 40k this year and next year, and then 20k (down to 1 kid) for another 2 years, and then done. Plus our mortgage has about 10 years left on it (3300/month). Living expenses include all the other stuff, food, medical, hoa, phone, internet, utilities, etc. We are 35.

    2015: 12k student loans, 40k preschool, 40k mortgage, 27k living expenses
    2016: 12k student loans, 40k preschool, 40k mortgage, 27k living expenses
    2017: 12k student loans, 20k preschool, 40k mortgage, 27k living expenses
    2018: 12k student loans, 20k preschool, 40k mortgage, 27k living expenses
    2019: 12k student loans, 40k mortgage, 27k living expenses
    2020: 40k mortgage, 27k living expenses
    2021: 40k mortgage, 27k living expenses
    2022: 40k mortgage, 27k living expenses
    2023: 40k mortgage, 27k living expenses
    2024: 40k mortgage, 27k living expenses
    2025: 40k mortgage, 27k living expenses
    2026 and beyond: 27k living expenses

    My question is this. At my current expenses my savings rate is not much at all. But much of the expenses have relatively short clocks. Do you guys have any good tips for how to factor in this sort of stuff? As far as I can tell we should be FI in about 10 years, but since our savings rates don’t fit well into the spreadsheet because there are some giant jumps as big expenditures stop, I am not sure.

    Appreciate feedback and ideas!

    • Vik February 3, 2015, 5:24 pm

      If you need $27K/yr to live off of then you need to save 25 x $27K = $675K in investments to be FI.

      Since you spending/saving changes a lot year to year I’d make spreadsheet and just keep adding years until you reach $675K [adjust for inflation of course].

    • Ann February 3, 2015, 8:19 pm

      It is hard to budget when you have “clocked” expenses…but keep in mind, while the preschool bill goes down, other related kid expenses go up (my oldest two just graduated into adult size shoes, which are almost double the price of kid shoes, and you can’t find them in good condition used). I would plan to turn around and plow any paid off expenses into investments (i.e. our preschool payments became “college savings payments”, minus other ed expenses). And your childcare probably isn’t going down to zero; unless your public school goes 8-5, you will have after school care to pay for at least five years (until the oldest kiddo is 10) and/or summer camps to cover when school isn’t in session.

      Also, the straight math the other person presented isn’t correct because it allows for no growth of the principal; you need to factor in compounding interest.

  • BigRob February 3, 2015, 10:11 am

    Thought people might find this interesting. USA today recently posted an article on typical net worth by age groups. Mustachians should easily be in the 99th percentile =)


    • Le Barbu February 4, 2015, 11:38 am

      I did the calculation the way they explained and rounded up, our household NW is 800k$

      So being 43, where do we sit? 70 centile NW is 128,430$ WTF!!!

      I still consider I suck compared to what where we could be

      BTW, we always earned average salary over the last 20 years…

  • straycat February 4, 2015, 3:19 pm

    Our House current value: $800,000 (conservative – next door just listed at $810K and sold over asking with multiple bids – Oakville, ON, house has gone up in price by over $150K in just over 2 years – crazy!)
    My RRSP: $101,000 (I was proud of this, at age 37, until starting to read MMM)
    DH’s pension plan/RRSP through work: ?? approx same as mine $100,000
    Mortgage: 401,000
    Credit Cards – as if! Use for monthly expenses and pay off each month
    LofC – $0 (keep for emergencies)

    Net Worth as a couple = approx. $600,000

    This made me feel a whole lot better about my financial life, as a very beginner Mustachian- thanks, MMM… lolol.

  • Vik February 5, 2015, 4:35 pm

    “Author: Jan De Mont
    Hi there,

    FI seems a feasible goal in America, with low taxes and low price of goods. Conversely, in Europe it is pretty much an impossible mission, with super high taxes and less dynamic stock market. In my case I make an average salary (55k) and I pay the average tax rate 48% (social security included), yet I manage to save about 35% of the take home pay.

    The way it’s supposed to work is the following: the government takes your money away when you are young and single, then it gives it back to you in tax benefits when you are older and with kids. For the average European this is a safe and comfortable environment, for a mustachian working towards FI it a roadblock.

    So voilà, if you have any ideas to overcome this, they are more than welcome.


    Hey Jan,

    I can’t find your comment despite getting an email notification that it was posted so I am replying here.

    I live in a higher social service country [Canada] so I appreciate some of your concerns.

    What I am have done is generated a spreadsheet that list my assets & investments as well as my only debt [mortgage]. One a yearly basis I project my savings, withdrawals [none at the moment] and adjust each year for inflation as well as expected return on investments. I calculate these values in both 2015 $$ and in future values that are relative to the appropriate year [so they don’t adjust for inflation].

    Since you live some place with higher taxes and higher social services you benefit in two ways:

    1. current expenses should be lower in categories a typical US Mustachian would have a higher value…for example health care. So you can save more in this area – although that’s offset by higher taxes.

    2. If you have a high level of traditional retirement benefits [age 55+] coming from the gov’t than you don’t need to save as much to achieve FI as a person in a country that has less generous retirement benefits. For example at 55 I’ll get $8K/yr in 2015 $$ from the Gov’t and at 67 I’ll get $15K/yr. If my income needs for FI are $40K/yr I need only $32K/yr between 55 and 66 and then only $25K/yr after that until I die.

    So when I calculate my FI needs I don’t need 25 x $30K which is what a traditional Mustachian would work towards. The calculation of the amount you do need will be more complex.

    What I am doing is as follows:

    – I’d like to have $40K/yr
    – I’m shooting for saving $30K x 25 = $750K before I am FI
    – that will give me $30K/yr in income
    – I figure I’ll easily earn $10K/yr doing fun work to make up the difference to $40K/yr
    – when I get to 55 I only have to earn $2K/yr to make $40K/yr total
    – when I am 67 I’ll get ~$45K/yr without additional work and I can just relax

    If I went with the tradition 25 x $40K = $1m I’d have to save $250K more to reach FI.

    I’m saving $30K – $40K/yr now so 6.3-8.3 extra years of full-time work because our social programs are great.

    I trust our social programs so I actually feel like I am further ahead here for FI since the gov’t benefits are indexed to cost of living and don’t depend on the stock markets. As I get older a bigger portion of my income will be protected this way which is great since as I get older making some extra $$ to top up my income will be less easy/fun.

    You also mentioned your stock market wasn’t dynamic. I’m in Canada, but I can invest in the US, European and Asian markets if I want to. Is there anything stopping you from doing that?

    — Vik

    • adam February 5, 2015, 6:41 pm

      FYI: Vik has his $#*t together!

      36 married
      house: 300k
      mortgage: 0
      investments: 575k
      net worth: 875k

      saving rate last 2013 / 2104: 60% roughly
      forcasted saving rate 2015: 83%

      we have been very fortunate on the income side the last few years and have managed to keep expenses on a modest decline. thanks MMM!

      • Doug January 16, 2016, 9:37 am

        Dont’ forget in your calculations that your savings (principal) will earn income. Ideally, you should be digging into that principal as little as possible, since you don’t know how long you’ll live for!

  • supernova72 February 9, 2015, 5:13 pm

    I do track my net worth and realize I have a blank spot of sorts regarding my DB pension plan on the worksheet. How would you account for that in your NW. I’m 54 and at 55 I’m eligible for ~$36K a year (no COLA). Maybe reverse engineer it and figure out what a lifetime annuity at the income stream would cost? (~$625K).

    FYI–My 401K balance is not large enough at the 4% rule to generate all the retirement income I need. Meaning when I retire I plan to start my pension benefits. Cheers.

    • Doug January 16, 2016, 9:32 am

      Hey there,

      I’m not american, so not sure of all the assumptions, but in general terms, you could use a net present value (NPV) to calculate your DB benefits. So simplistically, for example, if you’re going to retire at 55 and receive for perhaps 30 years, and you use a discount rate of 8%, your DB is worth:

      36,000 * 1.08 ^ -(55-54) * 36000 / 0.08 * (1 – 1.08^(-30))=375 259

      A few extra details: Your DB may include inflation, which I haven’t factored in here. If it is, subtract that from the discount rate (approximation).
      The discount rate is the time value of money, which is very similar to the interest rate: E.g. I would be ambivalent between receiving a sum of USD 1m now, or 1.08m next year.
      In valuing a DB, actuaries will also probability-weight each year’s payment by the probability that you are alive to receive it (and possibly other factors). I have used an assumption that you’ll live to 85 as a proxy for these weightings – don’t have my handy actuarial mortality tables nearby, you know!

  • Gen Y Finance Guy February 12, 2015, 5:15 pm

    When this post first came out I bookmarked it because I intended to get around to not only calculating my savings rate based on the definition in the article for January of 2015. But it is something that I want to include in my monthly financial report that I put together.

    My savings rate for January was 66%, which was much higher than I thought it was. It is great to have a benchmark, but I won’t set a goal until I have 3 months of data. But now that I am aware of my savings rate, I will for sure be thinking twice before making purchases.


  • belegger April 23, 2015, 11:33 am

    Quick question for the people out here. I struggle on what to do with the mortgage payment. Reading the above article, I see the following: “Interest portion of his $2500 mortgage payment: ($2000)”.

    I deduct from this that principle payments count in the savings rate, but interest payments does not. Is this a correct conclusion? How do you deal with this?

    For now, I calculate the full mortgage payments into saving. Should I change this?

    • Saladman8283 April 23, 2015, 1:08 pm

      Not sure if it’s appropriate to count the $500 toward savings. That might be the case if the property only appreciates, but housing values do fluctuate.

    • Amanda M. April 23, 2015, 2:35 pm

      The interest is really the fee that you are paying for the home, and a sunk cost, while the principle is increasing your equity in the home, which is technically part of your net worth. There are MANY different schools of thought (from count every penny of net worth to “since you can’t sell it today don’t count it today” mentality).
      For me, when I owned a home, I assumed that it was worth close to what I paid for it, outside of a bubble/burst market, and considered each principle payment a payment into my net worth.
      The numbers are pretty personal, but I think most people would agree that the interest payments should never be counted as savings.

  • Tree May 2, 2015, 5:31 pm

    “Very Rough Guideline: Take the total money you’ve earned after taxes in your lifetime (suppose that for Joe it happens to be $1,243,100). If you don’t have at least 40% of it still around to show for it today, you are spending way too much.”

    I never know if statements like this also apply to students who are working to pay for school… I have made $5000, $8000, $9000, $16000, $20000, $25000, $34000 each year of my life. I’ve been a student for all of those years and will continue to be for the next 3-5 (I work nearly full-time and so it is taking me a very long time to get through school). I pay for school and living expenses on my own because my parents screwed up really bad financially and will never be able to help me, or even let me live at home.

    I save 30-40% of my monthly income… but almost all of that gets spent on school, and has for years now.. At 25 it feels like according to MM I should have more by now… but how? Am I doing this right MM? Education is very important to me – owning my own business is simply not something I’m interested in doing …. but should I be saving more?

    • Amanda M. May 3, 2015, 9:28 am

      This kind of calculation is very wonky for people just starting out. Take it with a grain of salt, and keep it in the back of your mind when you’re making money for your savings instead of the “investment” of school. Remember that the degree needs to be worth it.

      The statement “…around to show for it today…” to me says that for a student, at least while in school and a year or two after, you should exclude the tuition and fees from your income. It won’t help for these years when you’re saving zero, but our will help after graduation.

  • Dave Rudge July 15, 2015, 7:16 pm

    Forgive a newbie question, but why isn’t the savings rate calculated as :
    Total amount put in investments/Total gross income?
    While I understand the importance of tracking all spending (particularly if your focus is on reducing it as much as possible), the assumption if you are not spending it you are saving it seems odd.

    • Eldred July 17, 2015, 11:06 am

      I’m guessing because you can’s save what you don’t RECEIVE. Most of us have deductions from our gross pay for taxes, insurance, etc. If the government takes it, I sure as hell can’t *save* it…
      Or spend it either, but that’s besides the point.

    • Brian July 17, 2015, 11:24 am

      Because everyone’s income taxes differ, the only way to make savings rate comparable is to use after-tax income. Also, as I understand from MMM’s “The Shockingly Simple Math Behind Early Retirement” article, you calculate savings rate in order to see where you fit on the ERE graph of savings rate charted against time to retire. That chart uses savings rate calculated from after-tax income, rather than from pre-tax income. If it used pre-tax income, it would implicitly assume that your tax rate after retirement will be the same as it was before retirement. As it is, it assumes that your after-retirement tax rate will be zero and ignores pre-retirement tax rate, which is the better assumption for ERE (and Mustachian) type early retirees. If you are planning to live off of $100k/year in retirement, then you will want to factor in taxes into your retirement planning, including calculating time-to-retire.

      • Dave Rudge July 18, 2015, 12:10 pm

        Thanks Eldred and Brian for your helpful replies. They both make sense. Still I see value in determining directly how much you don’t spend each year (rather than subtracting spending from income), if only to check your math. I certainly recognize how a focus on reducing spending will give you money to save, but if you independently focus also on what you are doing with your savings, you can make sure your savings are working for you. I calculated both for my own finances and noticed a discrepancy. Whether it consists in my poor math, the accumulation of money I thought I would spend in a checking account that I didn’t actually spend, or something else, I do not know.

  • Doug January 16, 2016, 9:19 am

    I started my own company 4 years ago and looking to the future to figure out when it wouldn’t matter if I managed to earn any revenues next month soon became top of mind. I ended up with a similar line of thought to the article here: check your monthly expenses, figure out how much you need to get by, etc.

    However, a big difference between the article and my thinking relates to assets. I’m not particularly interested in assets, except to the extent that they generate passive income. I ended up with a goal of high-probability inflation-matching passive income (property rentals in my case) of $x per month in the income of the country I live in. The goal amount increases with inflation every year. After living expenses, my present active and passive income gets pushed towards (slowly!) acquiring new passive income.

    Once I reach the goal amount, the passive income will support me and my family indefinitely (disasters aside) on a day-to-day basis. Any further active income can then be split in a new way, with a proportion towards self reward (holidays, new car, charitable donations, etc), a smaller-than-in-the-past portion towards building more passive income to improve future quality of life, and a portion towards investments that might suit different purposes. These other purposes will include diversification by country (so I can travel even if my home currency tanks), diversification by asset class (to manage risk) and speculative investments (in case I get lucky and get in on the ground floor of that one-in-a-million investment which changes everything).

    Anyway – ’nuff said. Jut a slightly different way of looking at the same issue.

  • Fabien March 22, 2016, 11:08 am

    Question for MMM or anyone else:

    Here the spending value is used to calculate the saving rate.

    Is that okay to monitor my net worth in a monthly basis and consider the net worth increase to get my saving rate ?
    Or do I really need to check my spending ?

    Thanks !

  • Chris April 4, 2016, 7:38 pm

    What are professional fees in the calculation? Insurance, medical, and FSA?

  • jez July 31, 2016, 8:16 pm

    What a cool article. It’s been a voyage of discovery for me actually because I’ve realised that over my (approximate) working life I’ve managed to stash about 60% of my income! I never would have guessed this so what a breath of fresh air. Still don’t feel rich though.. 😁

  • Bavar-EN February 24, 2017, 6:29 am

    Long time listener, first time caller.

    Why is the annual investments growth not counted as part of net pay?

    If it’s all re-invested then isn’t that just contributing to savings rate as well?

    • Mr. Money Mustache February 24, 2017, 3:56 pm

      Nope, only your outside income counts as net pay, in this formula.

      The compounding is built into the equation that tells you how long you’ll have to work, but if you count it as more net pay, you’ll end up counting it twice.

  • Dennis June 25, 2017, 3:14 pm

    Question about savings %. I’m over 50 in CA and I’m in the approx. 37% (State and Fed) tax bracket. I save 24K in pre tax $ and approx. 25% of my take home pay. When figuring savings rate should I decrease the amount of pre tax $ by 37% since I haven’t paid taxes on it yet or should I add 37% to my post tax savings since post tax $ will are worth more than pre tax $. I would just like to figure out how many more years I need to work based on savings %.

  • Iain July 20, 2017, 2:03 am

    I love the simplicity of the saving rate rule, it has really helped me simplify calculating how long I will take to reach FI.

    I’ve got a slight variation on calculating my saving rate. I like saving rate to indicate “How badly do I need this job”. So if it is = 100% DONE I quit!

    Saving Rate = ΔNet Worth / Income

    Δ Net Worth = the change in net worth over the period
    Income = after tax income + Super (Australia) / IRA contributions over the period

    This way I can account for my existing investment gains and losses, and get an idea of how close I am to not needing a job.

    My saving rate over the last 12 months using the usual formula is 65%, and using networth formula 75%.

  • Danielle March 7, 2018, 10:22 am

    Can someone please help me understand where in these calculations the principal portion of my student loan payments would go, if they aren’t coming out of my take home pay OR my spending? It it part of savings? That’s the only thing I’m confused about.


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