How did you determine your target savings rate?

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Topic Author
ship_at_sea
Posts: 17
Joined: Thu Sep 26, 2019 2:01 pm

How did you determine your target savings rate?

Post by ship_at_sea »

Hello all,

I'm re-evaluating some thoughts about how much of my income I've been saving. I'm not going to claim I've been pinching pennies, but I definitely spend below the average of my peers, and I feel like my aversion to spending money may be affecting my quality of life. I never hire someone to do something that I'm capable of doing myself, for example. And I feel like maybe if I had a better handle on how much I actually need to be saving, I would be more comfortable saving less than the most I possibly can.

Vital Stats:
Age 36, single, 2 kids ages 6 and 3 (50/50 split time with Mom)
Income ~150K

Monthly expenses: ~$6500
Rent $1900
Alimony $1800 (for 2 more years)
Child Support + Child Care $1050
Groceries/Household Supplies $500
Utilities $300
Auto Maintenance/Gas $150
Entertainment/Vacation Budget $500
Misc $300
Total $6500

Current Assets
~$425K 85% S&P 500, 15% Russell 2500
~$20K Cash

Current Debts: None

Current Annual Savings:
401K 5% - $7500
401K Company Match - $7500
HSA- $7000
Backdoor Roth IRA - $6000
Total $28,000
Savings Rate 18.7%

So part of the basis for this question is the fact that there's a pretty big gap between my monthly post-tax income (~$9300), and my Savings plus Spending (~$8200). Right now this is all just piling up in Cash (building an emergency fund), but once that is sufficient I'm not sure what to do with it.

I like to think that I'll be able to keep my job for 20 years, or at least stay in the company at my current level. A simple retirement calculator shows that $425k starting with $28k annual contributions will grow to $2.4M after 20 years (6% growth), or $3.3M (8% growth). Even $2.4M at 3% withdrawal rate is $72,000/year. That sounds like plenty of money to me. And if it's not, I don't have to retire at 56. I could work a few more years while compound interest works its magic.

So I guess my question is, how do I know if I'm saving enough? Or to flip it, how do I know if I'm saving too much, and it's impacting my quality of life?
mega317
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Re: How did you determine your target savings rate?

Post by mega317 »

Do you have insurance premiums?

When your emergency fund is where you'd like it, the obvious next step is shift the extra savings into the 401k.
ship_at_sea wrote: Mon May 18, 2020 4:58 pm So I guess my question is, how do I know if I'm saving enough? Or to flip it, how do I know if I'm saving too much, and it's impacting my quality of life?
Well I think you've gone about trying to answer the first question in the appropriate way, although the numbers could use refining. (6% seems a little ambitious. You don't seem to have really considered retirement expenses in detail. You're probably too young to be able to do that well anyway.)

To the second question, is your quality of life bad? I'd start from there. If the answer is yes, figure out why and report back. The only clue you give us is that you don't hire someone to do something you can do yourself. If that is giving you a bad qualify of life and it costs less than $1100/month, then go for it.
https://www.bogleheads.org/forum/viewtopic.php?t=6212
runner3081
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Re: How did you determine your target savings rate?

Post by runner3081 »

Are you happy? Life is not about spending money.
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willthrill81
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Re: How did you determine your target savings rate?

Post by willthrill81 »

Those earning $100k or more should, IMHO, aim for a gross saving rate of at least 20% (i.e. at least 20% of one's gross pay saved). Assuming 5% real returns and a 4% withdrawal rate, it will take about 37 years to become financially independent with a 20% saving rate. If you began this at age 22, that would mean you would be age 59 when you became financially independent. For those of means, that sounds like a reasonable minimum. You don't want to plan on barely reaching financial independence at age 66.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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avenger
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Re: How did you determine your target savings rate?

Post by avenger »

I save what I don’t spend.
Not the other way around.
Your mileage may vary.
cheers ... -Mark | "Our life is frittered away with detail. Simplify. Simplify." -Henry David Thoreau | [VTI, VXUS, VWITX, SV fund]
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willthrill81
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Re: How did you determine your target savings rate?

Post by willthrill81 »

avenger wrote: Mon May 18, 2020 5:22 pm I save what I don’t spend.
Not the other way around.
Your mileage may vary.
So you spend first and only save what's left?

I hope that works out well for you. It doesn't work out well at all for most who use that approach.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
livesoft
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Re: How did you determine your target savings rate?

Post by livesoft »

I made it a goal to have 10 times my salary invested by the time I was age 40. I chose a savings rate that would get me there.
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avenger
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Re: How did you determine your target savings rate?

Post by avenger »

willthrill81 wrote: Mon May 18, 2020 5:24 pm
avenger wrote: Mon May 18, 2020 5:22 pm I save what I don’t spend.
Not the other way around.
Your mileage may vary.
So you spend first and only save what's left?

I hope that works out well for you. It doesn't work out well at all for most who use that approach.
Correct. I don’t have a budget.
I do have a high income, however, and had saved 7 figures before I turned 40.
cheers ... -Mark | "Our life is frittered away with detail. Simplify. Simplify." -Henry David Thoreau | [VTI, VXUS, VWITX, SV fund]
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willthrill81
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Re: How did you determine your target savings rate?

Post by willthrill81 »

avenger wrote: Mon May 18, 2020 5:26 pm
willthrill81 wrote: Mon May 18, 2020 5:24 pm
avenger wrote: Mon May 18, 2020 5:22 pm I save what I don’t spend.
Not the other way around.
Your mileage may vary.
So you spend first and only save what's left?

I hope that works out well for you. It doesn't work out well at all for most who use that approach.
Correct. I don’t have a budget.
I do have a high income, however, and had saved 7 figures before I turned 40.
Good for you.

It's terrible advice for most people though, who spend everything and have nothing left to save.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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avenger
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Re: How did you determine your target savings rate?

Post by avenger »

willthrill81 wrote: Mon May 18, 2020 5:27 pm
avenger wrote: Mon May 18, 2020 5:26 pm
willthrill81 wrote: Mon May 18, 2020 5:24 pm
avenger wrote: Mon May 18, 2020 5:22 pm I save what I don’t spend.
Not the other way around.
Your mileage may vary.
So you spend first and only save what's left?

I hope that works out well for you. It doesn't work out well at all for most who use that approach.
Correct. I don’t have a budget.
I do have a high income, however, and had saved 7 figures before I turned 40.
Good for you.

It's terrible advice for most people though, who spend everything and have nothing left to save.
Didn’t realize I was giving advice. Was just answering the question. Most on this forum are skewed conservative. Most won’t read that as advice.
cheers ... -Mark | "Our life is frittered away with detail. Simplify. Simplify." -Henry David Thoreau | [VTI, VXUS, VWITX, SV fund]
reln
Posts: 446
Joined: Fri Apr 19, 2019 4:01 pm

Re: How did you determine your target savings rate?

Post by reln »

ship_at_sea wrote: Mon May 18, 2020 4:58 pm Hello all,

I'm re-evaluating some thoughts about how much of my income I've been saving. I'm not going to claim I've been pinching pennies, but I definitely spend below the average of my peers, and I feel like my aversion to spending money may be affecting my quality of life. I never hire someone to do something that I'm capable of doing myself, for example. And I feel like maybe if I had a better handle on how much I actually need to be saving, I would be more comfortable saving less than the most I possibly can.

Vital Stats:
Age 36, single, 2 kids ages 6 and 3 (50/50 split time with Mom)
Income ~150K

Monthly expenses: ~$6500
Rent $1900
Alimony $1800 (for 2 more years)
Child Support + Child Care $1050
Groceries/Household Supplies $500
Utilities $300
Auto Maintenance/Gas $150
Entertainment/Vacation Budget $500
Misc $300
Total $6500

Current Assets
~$425K 85% S&P 500, 15% Russell 2500
~$20K Cash

Current Debts: None

Current Annual Savings:
401K 5% - $7500
401K Company Match - $7500
HSA- $7000
Backdoor Roth IRA - $6000
Total $28,000
Savings Rate 18.7%

So part of the basis for this question is the fact that there's a pretty big gap between my monthly post-tax income (~$9300), and my Savings plus Spending (~$8200). Right now this is all just piling up in Cash (building an emergency fund), but once that is sufficient I'm not sure what to do with it.

I like to think that I'll be able to keep my job for 20 years, or at least stay in the company at my current level. A simple retirement calculator shows that $425k starting with $28k annual contributions will grow to $2.4M after 20 years (6% growth), or $3.3M (8% growth). Even $2.4M at 3% withdrawal rate is $72,000/year. That sounds like plenty of money to me. And if it's not, I don't have to retire at 56. I could work a few more years while compound interest works its magic.

So I guess my question is, how do I know if I'm saving enough? Or to flip it, how do I know if I'm saving too much, and it's impacting my quality of life?
Unfortunately we don't know if we saved too little, enough, or too much until it is over.

I just enjoy life and save the rest. Turns out our un-targetted savings rate fluctuates between 50 and 60 percent.
tashnewbie
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Re: How did you determine your target savings rate?

Post by tashnewbie »

mega317 wrote: Mon May 18, 2020 5:11 pm
ship_at_sea wrote: Mon May 18, 2020 4:58 pm So I guess my question is, how do I know if I'm saving enough? Or to flip it, how do I know if I'm saving too much, and it's impacting my quality of life?
To the second question, is your quality of life bad? I'd start from there. If the answer is yes, figure out why and report back. The only clue you give us is that you don't hire someone to do something you can do yourself. If that is giving you a bad qualify of life and it costs less than $1100/month, then go for it.
+1
Topic Author
ship_at_sea
Posts: 17
Joined: Thu Sep 26, 2019 2:01 pm

Re: How did you determine your target savings rate?

Post by ship_at_sea »

mega317 wrote: Mon May 18, 2020 5:11 pm Do you have insurance premiums?

When your emergency fund is where you'd like it, the obvious next step is shift the extra savings into the 401k.

To the second question, is your quality of life bad? I'd start from there. If the answer is yes, figure out why and report back. The only clue you give us is that you don't hire someone to do something you can do yourself. If that is giving you a bad qualify of life and it costs less than $1100/month, then go for it.
My insurance is pretty cheap, ~$100/mo, lumped into Misc here.

Agreed that the next place for savings is the 401k. I'm wondering if the Roth IRA contributions should be going to the 401k instead.

My quality of life isn't bad. Over the last year I got divorced (including associated lawyer fees), moved a couple of times, and furnished a 3 bedroom apartment from scratch. In addition to the emotional trauma of the situation, it's been expensive. It's been making me think about money and security perhaps more than is healthy. I feel like if I knew that I'm doing well, I could relax a bit. But maybe it's more of an issue of mindset than of finances.
Triple digit golfer
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Re: How did you determine your target savings rate?

Post by Triple digit golfer »

Your savings isn't $28k a year, it's $41,200, with $11,200 going to cash. That's a 27.46% savings rate.

Whether it's too much, not enough, or just right is a personal preference. It's certainly much, much more than the average person saves. We are around 30% of gross on a similar income.

Make sure in your spending that you're counting irregular expenses. I don't see any insurance or home repairs and maintenance. I even count an allowance for a new car at $300 per month. Realistically our savings rate is 40% or more in some months and was negative when we bought a new roof and HVAC system. But I fully load the budget and it comes out around 30%.
Ron Ronnerson
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Re: How did you determine your target savings rate?

Post by Ron Ronnerson »

I determined my savings rate by trying to optimize and to try to catch up as we didn’t really start saving anything until our early 30s. My income is about $120k. We save about half of it (I do count mortgage principal as savings). By saving this amount, we greatly reduce our taxes and qualify for some nice tax credits. Our family lives frugally but quite comfortably on the remaining money.
JD2775
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Re: How did you determine your target savings rate?

Post by JD2775 »

Not really related I guess, but how are you contributing 7k a year to your HSA account as a single person?
BanquetBeer
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Re: How did you determine your target savings rate?

Post by BanquetBeer »

Just use excel and assume some Real interest rate (Maybe 6%)

Play with your income. Maybe check out +/-10%

How does that impact your retirement time? More importantly how does that impact your spend?

If I look at spending, an extra $500/mo is not significant to my enjoyment. It is somewhat significant to my long term plan.

This may skew you towards spend now closer to retirement as the delta saved is small over shorter periods.

$500/mo vs $150/mo in 5 years? SWR doesn’t look at principle.
sport
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Re: How did you determine your target savings rate?

Post by sport »

I did not have a high income. I could not afford to max out the 401k. Between my contribution and the company match, I aimed for 15% of my gross pay. We also saved 100% of DW's part time earnings. It worked out just fine.
Topic Author
ship_at_sea
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Re: How did you determine your target savings rate?

Post by ship_at_sea »

JD2775 wrote: Mon May 18, 2020 5:48 pm Not really related I guess, but how are you contributing 7k a year to your HSA account as a single person?
Our kids are covered by my HDHP, so even though I'm single, it's still a family plan and the family limit applies.
JD2775
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Re: How did you determine your target savings rate?

Post by JD2775 »

ship_at_sea wrote: Mon May 18, 2020 5:53 pm
JD2775 wrote: Mon May 18, 2020 5:48 pm Not really related I guess, but how are you contributing 7k a year to your HSA account as a single person?
Our kids are covered by my HDHP, so even though I'm single, it's still a family plan and the family limit applies.
ah, gotcha :sharebeer
Halicar
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Re: How did you determine your target savings rate?

Post by Halicar »

I went with 50% because it's a nice round number. That's probably too high for most people but I'm playing catch-up. I may even bump it up a bit next year.
Topic Author
ship_at_sea
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Re: How did you determine your target savings rate?

Post by ship_at_sea »

Triple digit golfer wrote: Mon May 18, 2020 5:46 pm Your savings isn't $28k a year, it's $41,200, with $11,200 going to cash. That's a 27.46% savings rate.

Whether it's too much, not enough, or just right is a personal preference. It's certainly much, much more than the average person saves. We are around 30% of gross on a similar income.

Make sure in your spending that you're counting irregular expenses. I don't see any insurance or home repairs and maintenance. I even count an allowance for a new car at $300 per month. Realistically our savings rate is 40% or more in some months and was negative when we bought a new roof and HVAC system. But I fully load the budget and it comes out around 30%.
I'm renting now, so my insurance is only Auto + Renter's + Umbrella, total ~$90/month. With renting, there's no home maintenance.

Given that I have had a lot of unexpected expenses over the past year, it's hard to determine how to calculate non-recurring expenses. E.g. if I bought ~$6K worth of furniture last year, is it reasonable to say my monthly furniture budget was $500? I'm certainly not planning on spending $500/mo on furniture over the next year. Similarly not expecting to spend ~$1k/mo on attorneys. How to account for that in future budget?

I do track expenses in detail, and I try to honestly allocate recurring expenses, but the $6500/mo figure is admittedly an approximation of future spending, not a reflection of past spending.
Triple digit golfer
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Re: How did you determine your target savings rate?

Post by Triple digit golfer »

ship_at_sea wrote: Mon May 18, 2020 6:03 pm
Triple digit golfer wrote: Mon May 18, 2020 5:46 pm Your savings isn't $28k a year, it's $41,200, with $11,200 going to cash. That's a 27.46% savings rate.

Whether it's too much, not enough, or just right is a personal preference. It's certainly much, much more than the average person saves. We are around 30% of gross on a similar income.

Make sure in your spending that you're counting irregular expenses. I don't see any insurance or home repairs and maintenance. I even count an allowance for a new car at $300 per month. Realistically our savings rate is 40% or more in some months and was negative when we bought a new roof and HVAC system. But I fully load the budget and it comes out around 30%.
I'm renting now, so my insurance is only Auto + Renter's + Umbrella, total ~$90/month. With renting, there's no home maintenance.

Given that I have had a lot of unexpected expenses over the past year, it's hard to determine how to calculate non-recurring expenses. E.g. if I bought ~$6K worth of furniture last year, is it reasonable to say my monthly furniture budget was $500? I'm certainly not planning on spending $500/mo on furniture over the next year. Similarly not expecting to spend ~$1k/mo on attorneys. How to account for that in future budget?

I do track expenses in detail, and I try to honestly allocate recurring expenses, but the $6500/mo figure is admittedly an approximation of future spending, not a reflection of past spending.
You just have to conservatively estimate. You seem to have the idea down.
mlipps
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Re: How did you determine your target savings rate?

Post by mlipps »

I get where you're coming from & struggle with the same question. I'm 30, single, and earning just over $100k. I have about $150k saved. Depending on what I put into a retirement calculator I might have $3M by the time I retire or I might have $700k. (I'm exaggerating a little, but you get the gist.) I found a fairly simple heurestic at Fidelity (and a few other sources) that I generally use as my target for now:
https://www.fidelity.com/viewpoints/ret ... guidelines

I also see a lot of recommendations to save 20% so I try to hit that a minimum.

However, I am getting into tricky territory where I'm maxing out my 401k & Roth, piling up cash for...what? And don't have a clear goal beyond not eating rice & beans and quitting working somewhere between 50-60. I agree that it can be difficult to know when you've saved enough, especially once you factor in hedonic adaption and the understand that every extra $100 you spend annually today represents another $3000ish you need to save by the time you retire.

I have no clear answer, mostly just empathizing, but I do reference the Fidelity article when I'm feeling especially anxious if I'm doing ok or not.
Topic Author
ship_at_sea
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Re: How did you determine your target savings rate?

Post by ship_at_sea »

mlipps wrote: Mon May 18, 2020 6:12 pm I get where you're coming from & struggle with the same question. I'm 30, single, and earning just over $100k. I have about $150k saved. Depending on what I put into a retirement calculator I might have $3M by the time I retire or I might have $700k. (I'm exaggerating a little, but you get the gist.) I found a fairly simple heurestic at Fidelity (and a few other sources) that I generally use as my target for now:
https://www.fidelity.com/viewpoints/ret ... guidelines

I also see a lot of recommendations to save 20% so I try to hit that a minimum.

However, I am getting into tricky territory where I'm maxing out my 401k & Roth, piling up cash for...what? And don't have a clear goal beyond not eating rice & beans and quitting working somewhere between 50-60. I agree that it can be difficult to know when you've saved enough, especially once you factor in hedonic adaption and the understand that every extra $100 you spend annually today represents another $3000ish you need to save by the time you retire.

I have no clear answer, mostly just empathizing, but I do reference the Fidelity article when I'm feeling especially anxious if I'm doing ok or not.
I appreciate the Fidelity article here. It has reasonable guidelines for retirement from 62-70. I think one thing that I need to recognize is failure to meet my target here (retirement in 20 years) is not failure. I might retire with less money than I hope, or I might retire later than I hope, but I will almost certainly be in a better position than many, many people. I can be happy with that. And if I can't, the problem isn't the money.
tigers174
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Re: How did you determine your target savings rate?

Post by tigers174 »

ship_at_sea wrote: Mon May 18, 2020 4:58 pm Hello all,

I'm re-evaluating some thoughts about how much of my income I've been saving. I'm not going to claim I've been pinching pennies, but I definitely spend below the average of my peers, and I feel like my aversion to spending money may be affecting my quality of life. I never hire someone to do something that I'm capable of doing myself, for example. And I feel like maybe if I had a better handle on how much I actually need to be saving, I would be more comfortable saving less than the most I possibly can.

Vital Stats:
Age 36, single, 2 kids ages 6 and 3 (50/50 split time with Mom)
Income ~150K

Monthly expenses: ~$6500
Rent $1900
Alimony $1800 (for 2 more years)
Child Support + Child Care $1050
Groceries/Household Supplies $500
Utilities $300
Auto Maintenance/Gas $150
Entertainment/Vacation Budget $500
Misc $300
Total $6500

Current Assets
~$425K 85% S&P 500, 15% Russell 2500
~$20K Cash

Current Debts: None

Current Annual Savings:
401K 5% - $7500
401K Company Match - $7500
HSA- $7000
Backdoor Roth IRA - $6000
Total $28,000
Savings Rate 18.7%

So part of the basis for this question is the fact that there's a pretty big gap between my monthly post-tax income (~$9300), and my Savings plus Spending (~$8200). Right now this is all just piling up in Cash (building an emergency fund), but once that is sufficient I'm not sure what to do with it.

I like to think that I'll be able to keep my job for 20 years, or at least stay in the company at my current level. A simple retirement calculator shows that $425k starting with $28k annual contributions will grow to $2.4M after 20 years (6% growth), or $3.3M (8% growth). Even $2.4M at 3% withdrawal rate is $72,000/year. That sounds like plenty of money to me. And if it's not, I don't have to retire at 56. I could work a few more years while compound interest works its magic.

So I guess my question is, how do I know if I'm saving enough? Or to flip it, how do I know if I'm saving too much, and it's impacting my quality of life?
I picked what age I wanted to retire at and how much I wanted to have to spend each year. I then multiplied that by 33 for conservatism to get the total I want when I retire. Then I used the -fv function in excel with how much I had currently saved, how much I was saving a year, and a conservative return %. I looked at what that total was going to be and how it lined up with my goal. I then decided if I needed to save more.
H-Town
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Re: How did you determine your target savings rate?

Post by H-Town »

willthrill81 wrote: Mon May 18, 2020 5:24 pm
avenger wrote: Mon May 18, 2020 5:22 pm I save what I don’t spend.
Not the other way around.
Your mileage may vary.
So you spend first and only save what's left?

I hope that works out well for you. It doesn't work out well at all for most who use that approach.
It's more common than you think. I max out all tax advantaged account, spend what I need to spend, then save the rest. It works out to $2 saved for every dollar spent. It doesn't matter the order of when you save and when you spend, so long you LBYM.

Sure I keep track of my spending to the cents, but I don't keep track of how much of the budget do I have left to spend. I doubt that anyone would stop buying groceries if they already max out their groceries budget for the month. Keeping track of my spending give me information to plan for the future. But I don't kick myself if I go over budget for a given month. It is what it is.
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willthrill81
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Re: How did you determine your target savings rate?

Post by willthrill81 »

H-Town wrote: Mon May 18, 2020 6:51 pm
willthrill81 wrote: Mon May 18, 2020 5:24 pm
avenger wrote: Mon May 18, 2020 5:22 pm I save what I don’t spend.
Not the other way around.
Your mileage may vary.
So you spend first and only save what's left?

I hope that works out well for you. It doesn't work out well at all for most who use that approach.
It's more common than you think. I max out all tax advantaged account, spend what I need to spend, then save the rest. It works out to $2 saved for every dollar spent. It doesn't matter the order of when you save and when you spend, so long you LBYM.

Sure I keep track of my spending to the cents, but I don't keep track of how much of the budget do I have left to spend. I doubt that anyone would stop buying groceries if they already max out their groceries budget for the month. Keeping track of my spending give me information to plan for the future. But I don't kick myself if I go over budget for a given month. It is what it is.
Most people who spend first and save what's left don't have anything left. George Clason covered that in his famous book The Richest Man in Babylon, and research has shown that saving first and spending what's left generally leads to higher saving rates. But if something else works for you, that's fine. It's just the exception, not remotely the rule.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
H-Town
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Re: How did you determine your target savings rate?

Post by H-Town »

willthrill81 wrote: Mon May 18, 2020 7:01 pm
H-Town wrote: Mon May 18, 2020 6:51 pm
willthrill81 wrote: Mon May 18, 2020 5:24 pm
avenger wrote: Mon May 18, 2020 5:22 pm I save what I don’t spend.
Not the other way around.
Your mileage may vary.
So you spend first and only save what's left?

I hope that works out well for you. It doesn't work out well at all for most who use that approach.
It's more common than you think. I max out all tax advantaged account, spend what I need to spend, then save the rest. It works out to $2 saved for every dollar spent. It doesn't matter the order of when you save and when you spend, so long you LBYM.

Sure I keep track of my spending to the cents, but I don't keep track of how much of the budget do I have left to spend. I doubt that anyone would stop buying groceries if they already max out their groceries budget for the month. Keeping track of my spending give me information to plan for the future. But I don't kick myself if I go over budget for a given month. It is what it is.
Most people who spend first and save what's left don't have anything left. George Clason covered that in his famous book The Richest Man in Babylon, and research has shown that saving first and spending what's left generally leads to higher saving rates. But if something else works for you, that's fine. It's just the exception, not remotely the rule.
I don't disagree. I recognize that my method doesn't work for everyone. Just a question: how do you determine how much to save first?
- If you over-save, do you have to borrow money? It leads to unnecessary interest expense.
- If you under-save, do you try to spend the rest? It leads to inefficiency in saving.

My point is the practicality. You know what you need to spend based on real data, and then save the rest. If you find out that you need more cashflow, you adjust the 401k contribution. If you find out you have extra cash flow, you increase the 401k contribution. It's more realistic than a person maxing out 401k and trying to live on whatever is left.
Triple digit golfer
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Re: How did you determine your target savings rate?

Post by Triple digit golfer »

H-Town wrote: Mon May 18, 2020 6:51 pm
willthrill81 wrote: Mon May 18, 2020 5:24 pm
avenger wrote: Mon May 18, 2020 5:22 pm I save what I don’t spend.
Not the other way around.
Your mileage may vary.
So you spend first and only save what's left?

I hope that works out well for you. It doesn't work out well at all for most who use that approach.
It's more common than you think. I max out all tax advantaged account, spend what I need to spend, then save the rest. It works out to $2 saved for every dollar spent. It doesn't matter the order of when you save and when you spend, so long you LBYM.

Sure I keep track of my spending to the cents, but I don't keep track of how much of the budget do I have left to spend. I doubt that anyone would stop buying groceries if they already max out their groceries budget for the month. Keeping track of my spending give me information to plan for the future. But I don't kick myself if I go over budget for a given month. It is what it is.
But in fairness, you're saving first, then spending, then saving what's left. That's very different than spending first and saving what's left.
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Nestegg_User
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Re: How did you determine your target savings rate?

Post by Nestegg_User »

Triple digit golfer wrote: Mon May 18, 2020 5:46 pm Your savings isn't $28k a year, it's $41,200, with $11,200 going to cash. That's a 27.46% savings rate.

Whether it's too much, not enough, or just right is a personal preference. It's certainly much, much more than the average person saves. We are around 30% of gross on a similar income.

Make sure in your spending that you're counting irregular expenses. I don't see any insurance or home repairs and maintenance. I even count an allowance for a new car at $300 per month. Realistically our savings rate is 40% or more in some months and was negative when we bought a new roof and HVAC system. But I fully load the budget and it comes out around 30%.
and where do you get the other $13 k ? The OP might save it, but since it's not earmarked for savings it could just as easily be spent (or used on the kids... but not recognized as an ongoing cost)

{I'm assuming that you, first, got the $13 k from the slight differences in income and recognized costs; hence the comment that not all expenses might be recognized by the OP and that might be a hole in the budget that would allow either increased savings or be used towards others providing services that would increase the OP's life experience}

As to the OP's question, I'd agree with Livesoft that you would want a fairly aggressive savings rate to better align with the future possibility that you might not get to stay employed all the time that you expect!

Queue Klangfool ! 8-)
viewtopic.php?t=247631
Triple digit golfer
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Re: How did you determine your target savings rate?

Post by Triple digit golfer »

Nestegg_User wrote: Mon May 18, 2020 7:42 pm
Triple digit golfer wrote: Mon May 18, 2020 5:46 pm Your savings isn't $28k a year, it's $41,200, with $11,200 going to cash. That's a 27.46% savings rate.

Whether it's too much, not enough, or just right is a personal preference. It's certainly much, much more than the average person saves. We are around 30% of gross on a similar income.

Make sure in your spending that you're counting irregular expenses. I don't see any insurance or home repairs and maintenance. I even count an allowance for a new car at $300 per month. Realistically our savings rate is 40% or more in some months and was negative when we bought a new roof and HVAC system. But I fully load the budget and it comes out around 30%.
and where do you get the other $13 k ? The OP might save it, but since it's not earmarked for savings it could just as easily be spent (or used on the kids... but not recognized as an ongoing cost)

{I'm assuming that you, first, got the $13 k from the slight differences in income and recognized costs; hence the comment that not all expenses might be recognized by the OP and that might be a hole in the budget that would allow either increased savings or be used towards others providing services that would increase the OP's life experience}

As to the OP's question, I'd agree with Livesoft that you would want a fairly aggressive savings rate to better align with the future possibility that you might not get to stay employed all the time that you expect!

Queue Klangfool ! 8-)
viewtopic.php?t=247631
He said $1,100 per month is going to cash savings. If he spends it, it is spending. He said he is saving it.
JD2775
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Re: How did you determine your target savings rate?

Post by JD2775 »

Triple digit golfer wrote: Mon May 18, 2020 7:21 pm
H-Town wrote: Mon May 18, 2020 6:51 pm
willthrill81 wrote: Mon May 18, 2020 5:24 pm
avenger wrote: Mon May 18, 2020 5:22 pm I save what I don’t spend.
Not the other way around.
Your mileage may vary.
So you spend first and only save what's left?

I hope that works out well for you. It doesn't work out well at all for most who use that approach.
It's more common than you think. I max out all tax advantaged account, spend what I need to spend, then save the rest. It works out to $2 saved for every dollar spent. It doesn't matter the order of when you save and when you spend, so long you LBYM.

Sure I keep track of my spending to the cents, but I don't keep track of how much of the budget do I have left to spend. I doubt that anyone would stop buying groceries if they already max out their groceries budget for the month. Keeping track of my spending give me information to plan for the future. But I don't kick myself if I go over budget for a given month. It is what it is.
But in fairness, you're saving first, then spending, then saving what's left. That's very different than spending first and saving what's left.
Yep, that's not even remotely the same thing as what the "average person" does.
horste
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Re: How did you determine your target savings rate?

Post by horste »

ship_at_sea wrote: Mon May 18, 2020 4:58 pm Hello all,

I'm re-evaluating some thoughts about how much of my income I've been saving. I'm not going to claim I've been pinching pennies, but I definitely spend below the average of my peers, and I feel like my aversion to spending money may be affecting my quality of life. I never hire someone to do something that I'm capable of doing myself, for example. And I feel like maybe if I had a better handle on how much I actually need to be saving, I would be more comfortable saving less than the most I possibly can.

...

So I guess my question is, how do I know if I'm saving enough? Or to flip it, how do I know if I'm saving too much, and it's impacting my quality of life?
ship_at_sea wrote: Mon May 18, 2020 6:03 pm
Triple digit golfer wrote: Mon May 18, 2020 5:46 pm Your savings isn't $28k a year, it's $41,200, with $11,200 going to cash. That's a 27.46% savings rate.

Whether it's too much, not enough, or just right is a personal preference. It's certainly much, much more than the average person saves. We are around 30% of gross on a similar income.

Make sure in your spending that you're counting irregular expenses. I don't see any insurance or home repairs and maintenance. I even count an allowance for a new car at $300 per month. Realistically our savings rate is 40% or more in some months and was negative when we bought a new roof and HVAC system. But I fully load the budget and it comes out around 30%.
I'm renting now, so my insurance is only Auto + Renter's + Umbrella, total ~$90/month. With renting, there's no home maintenance.

Given that I have had a lot of unexpected expenses over the past year, it's hard to determine how to calculate non-recurring expenses. E.g. if I bought ~$6K worth of furniture last year, is it reasonable to say my monthly furniture budget was $500? I'm certainly not planning on spending $500/mo on furniture over the next year. Similarly not expecting to spend ~$1k/mo on attorneys. How to account for that in future budget?

I do track expenses in detail, and I try to honestly allocate recurring expenses, but the $6500/mo figure is admittedly an approximation of future spending, not a reflection of past spending.
I can understand the struggle of wrapping your mind around what your new normal financial life looks post divorce / majority life transition. I experienced a divorce at the end of 2016 and spent the majority of 2017 trying to figure out what were "normal" and "post-divorce" expenses. We did not have kids so there were fewer new expenses. Nonetheless, I kept finding new things that I didn't expect to purchase - unexpected car maintenance as I got the older lesser used car, new work clothes for a new position, and college tuition for the courses required to receive the promotion (at the end of 2017).

All in, the new unexpected expenses were about 7-percent of my total income and it took me the full year to feel comfortable to loosen my spending. In hindsight I knew those were unexpected expenses. In between knowing, I aggressively saved and tracked my spending.

My savings rate was higher in 2017, first year post-divorce, than I ever previously reached; it was about the same as your rate between cash and investments (~30 percent). Finding my new priorities in single-dom and to reestablish what my new life looked like took time. I think of those initial post divorce months in terms of resilience building and identifying how I wanted to spend money that aligns with my values and life goals both personal and financial.

Since then, I have slowly loosened up my spending while even raising my saving rate to about 40-45 percent (more income helped). Initially found ways to 'treat" myself to higher quality items I already wanted and then began changing my "I should wait" (which was often months or years) to actionable terms, like, "I will buy fancier coffee because I drink it every day and the good stuff is enjoyable."

Just my two-cents.

Edit: Shorten quote
Normchad
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Re: How did you determine your target savings rate?

Post by Normchad »

I set out my financial plan 28 years ago, when I first entered the work force. At that time, I was not a saver by nature, and I didn't know very much at all about investing or financial planning. But I had time on my hands, made my plan, and basically stuck with it ever since.

Back then, I set my goal to save 15% of my gross income every year. And I thought I would end up retiring at age 65, with about $4M invested. So that is what I've been doing; although over the last 10 years or so, I've been able to save even more.

Although 15% was my original goal, I'm also one of those people that don't have a budget, etc. What I save is just what I happen to not spend. And it's worked out fine for me as well. If I had the "I'm saving exactly 15% method"; then that would just lead to increased spending for me as my salary rose. So in a way, I like this better.

But we should all be aware, there is no "one size fits all" answer for everybody. And I do have a high income now; and honestly, when you have a high income, you can take almost any approach to most things, and it will work. And you can also be suboptimal in your decision making, and it turns out just fine. The point being, I am fortunate in that I can do this relatively badly, and still be fine, because I have financial flexibility that most folks just don't have.

Anyhow, despite my poorly-informed plan that I came up with 28 years ago, and 3 major market pull backs during that time, I am on track to retire 10 years earlier than I had planned back then.
reln
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Re: How did you determine your target savings rate?

Post by reln »

avenger wrote: Mon May 18, 2020 5:22 pm I save what I don’t spend.
Not the other way around.
Your mileage may vary.
Like it
dru808
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Re: How did you determine your target savings rate?

Post by dru808 »

I don’t target a savings rate, other than the 12% pretax automatically to retirement, it’s the pay yourself first plan, then I’ll pay bills, buy non necessities and anything left over gets saved. We do not run a budget.
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KlangFool
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Re: How did you determine your target savings rate?

Post by KlangFool »

OP,

1) I determined my saving rate based on my annual expense. Not on income.

2) I save 1 year of my current annual expense every year.

KlangFool
User avatar
Ged
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Re: How did you determine your target savings rate?

Post by Ged »

I determined the this by asking my father how much to save. He said 15%.

It worked out extremely well for me.
fasteddie911
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Re: How did you determine your target savings rate?

Post by fasteddie911 »

I think it's a balancing act and an iterative process. Balancing desired lifestyle and spending vs retirement goals (age, amount, lifestyle, etc.). From the numbers you gave, you seem to be in a good place and maybe could open the purse strings a little. But the concern would be lifestyle inflation, necessitating larger nest egg, or comes at the cost of less savings, less financial security, early retirement, etc. Beware of inflation and working in nominal vs real numbers, $72k in 20yrs is not quite so much.
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djpeteski
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Re: How did you determine your target savings rate?

Post by djpeteski »

Finding a targeted spending rate is a the tail wagging the dog, IMHO.

You are in a detrimental financial situation. You have alimony, child support, and young children. Saving any amount is an accomplishment.

I would encourage you to outsource some mundane tasks. For me it was lawn care and house cleaning. When I was in your situation, I would have the house cleaner come in once per month where they deep cleaned and I was able to keep it decent with maintenance. With lawn care, I was spending more time and money maintaining the equipment than anything else. Both were good buys in terms of ROI. At the same time I did a lot of my own auto maintenance, and still do, because taking it to the shop is not a good ROI. For you it may be different, but I would start looking at outsourcing some tasks.

Also there is nothing wrong with purchasing a little fun like going for a beer with friends.

The truth of the matter is, at your income, if you had the same savings rate at age 45 you could retire pretty comfortably, if you did nothing between now and then. So you are winning now.

You are on here for a reason. There is no such thing as get rich quick schemes, trading <insert latest thing> to turn a small investment into millions with only 4 hours per week. In your case it is okay to take the "foot off the gas" a bit, and purchase a little bit of convenience.
PhoebeCoco
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Re: How did you determine your target savings rate?

Post by PhoebeCoco »

reln wrote: Mon May 18, 2020 11:07 pm
avenger wrote: Mon May 18, 2020 5:22 pm I save what I don’t spend.
Not the other way around.
Your mileage may vary.
Like it
Me too.

I do an ROI analysis of every potential expenditure, aside from the necessities (basic food, clothing, housing). Few things are actually worth the money in terms of the pleasure received. My favorite activities have to do with achieving personal goals in terms of fitness and other accomplishments. These activities usually take time, not money. I can't see the point of spending money on either entertainment or status items.

Et voila! Lots of money saved.

Yes, I am a minimalist.
If you're not working on yourself, you're not working.
mak1277
Posts: 1572
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Re: How did you determine your target savings rate?

Post by mak1277 »

H-Town wrote: Mon May 18, 2020 7:12 pm
willthrill81 wrote: Mon May 18, 2020 7:01 pm
H-Town wrote: Mon May 18, 2020 6:51 pm
willthrill81 wrote: Mon May 18, 2020 5:24 pm
avenger wrote: Mon May 18, 2020 5:22 pm I save what I don’t spend.
Not the other way around.
Your mileage may vary.
So you spend first and only save what's left?

I hope that works out well for you. It doesn't work out well at all for most who use that approach.
It's more common than you think. I max out all tax advantaged account, spend what I need to spend, then save the rest. It works out to $2 saved for every dollar spent. It doesn't matter the order of when you save and when you spend, so long you LBYM.

Sure I keep track of my spending to the cents, but I don't keep track of how much of the budget do I have left to spend. I doubt that anyone would stop buying groceries if they already max out their groceries budget for the month. Keeping track of my spending give me information to plan for the future. But I don't kick myself if I go over budget for a given month. It is what it is.
Most people who spend first and save what's left don't have anything left. George Clason covered that in his famous book The Richest Man in Babylon, and research has shown that saving first and spending what's left generally leads to higher saving rates. But if something else works for you, that's fine. It's just the exception, not remotely the rule.
I don't disagree. I recognize that my method doesn't work for everyone. Just a question: how do you determine how much to save first?
- If you over-save, do you have to borrow money? It leads to unnecessary interest expense.
- If you under-save, do you try to spend the rest? It leads to inefficiency in saving.

My point is the practicality. You know what you need to spend based on real data, and then save the rest. If you find out that you need more cashflow, you adjust the 401k contribution. If you find out you have extra cash flow, you increase the 401k contribution. It's more realistic than a person maxing out 401k and trying to live on whatever is left.
Early in my career I saw a number of co-workers who saved tremendously in their 401k. But they lived paycheck to paycheck and didn't ever do anything fun. I vowed NOT to live like that. I view being "401k poor" is no different than being "house poor".

I have always lived the life I wanted to live, and then if there was anything left over I saved it. THat meant that until I was 30, I didn't put a cent into my 401k. But I was able to avoid lifestyle inflation because I never felt like I deprived myself of what I wanted. So as my income grew, my spending stayed the same. I was able to save gobs of money in my 30s and still never compromised the life I wanted to live.

In short, the thought of setting a percentage savings goal has never entered my mind. "Pay yourself first" means, to me, that you live the life you want to live. If there's money left over then you can save it. Life is not about saving money anymore than it's about spending money.
as9
Posts: 200
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Re: How did you determine your target savings rate?

Post by as9 »

I feel like my aversion to spending money may be affecting my quality of life
How? Is it because your only saving goal is for a far-out retirement? Is there something else you want to save for - a house? kids' college?

Or do you feel like you're spending time doing things you could pay for? Cleaning service? Eating out more?

Or do stop yourself from doing things because of the cost? Concerts? Sporting events? Museums? (whatever you enjoy in non-Covid times)
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Nestegg_User
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Re: How did you determine your target savings rate?

Post by Nestegg_User »

KlangFool wrote: Mon May 18, 2020 11:17 pm OP,

1) I determined my saving rate based on my annual expense. Not on income.

2) I save 1 year of my current annual expense every year.

KlangFool
KF

I figured that you would show up sometime; I had posted your earlier thread farther up. As KF has often noted, you really can't count on being employed until you are, say, 60... and even now..doctors, thought of as being about as recession proof as any career, are either being furloughed, laid off, or unable to do procedures to earn their normal income.

As has been noted repeatedly in countless threads, moderation is important. We were able to travel, hit all 50 and 25 countries, when still employed and was able to do some traveling in retirement (obviously, until this year). But we didn't go overboard, kept a reasonable budget, took advantage of work trips (including those internationally) and only did one real splurge (two week cruise). again.... moderation
rbaldini
Posts: 1436
Joined: Mon Mar 23, 2015 3:20 pm

Re: How did you determine your target savings rate?

Post by rbaldini »

The first time I thought about personal finance in any meaningful way was when I heard William Bernstein give a short interview on NPR, recommending his short online book If You Can. That's where it all started for me. In the interview he said a young person will be fine if they save 20% and invest in index funds. So I treated that as a lower bound: save at least that much. I've found that my wife and I can very comfortably save >30%, so that's my annual goal.
Last edited by rbaldini on Tue May 19, 2020 10:17 am, edited 2 times in total.
smitcat
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Re: How did you determine your target savings rate?

Post by smitcat »

KlangFool wrote: Mon May 18, 2020 11:17 pm OP,

1) I determined my saving rate based on my annual expense. Not on income.

2) I save 1 year of my current annual expense every year.

KlangFool
"1) I determined my saving rate based on my annual expense. Not on income."
I have always found this to be the best answer especially if you are figuring getting SS and/or pensions.
Much more targeted and valuable than any other metric mentioned.
reln
Posts: 446
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Re: How did you determine your target savings rate?

Post by reln »

PhoebeCoco wrote: Tue May 19, 2020 10:01 am
reln wrote: Mon May 18, 2020 11:07 pm
avenger wrote: Mon May 18, 2020 5:22 pm I save what I don’t spend.
Not the other way around.
Your mileage may vary.
Like it
Me too.

I do an ROI analysis of every potential expenditure, aside from the necessities (basic food, clothing, housing). Few things are actually worth the money in terms of the pleasure received. My favorite activities have to do with achieving personal goals in terms of fitness and other accomplishments. These activities usually take time, not money. I can't see the point of spending money on either entertainment or status items.

Et voila! Lots of money saved.

Yes, I am a minimalist.
:sharebeer I'm also a minimalist but DW is not. That's ok. It makes me happy when she's happy so I don't fuss about her spending habits.
rbaldini
Posts: 1436
Joined: Mon Mar 23, 2015 3:20 pm

Re: How did you determine your target savings rate?

Post by rbaldini »

KlangFool wrote: Mon May 18, 2020 11:17 pm OP,

1) I determined my saving rate based on my annual expense. Not on income.

2) I save 1 year of my current annual expense every year.

KlangFool
Doesn't that imply that you save 50% of your income?
dcabler
Posts: 1531
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Re: How did you determine your target savings rate?

Post by dcabler »

avenger wrote: Mon May 18, 2020 5:22 pm I save what I don’t spend.
Not the other way around.
Your mileage may vary.
This. At least today. In the early days of my career, for about the first 6 months I had a negative cash flow. Stupid new college grad with a nice car, living in a HCOL with high apartment rent and high car insurance.

Over time, my spending was under control, raises happened, stock options, RSU's, ESPP, bonuses, profit-sharing etc., got married, bought a house, had a kid, etc. First thing is that I got to the point where I maxed out my 401K. Then had a pretty good idea what I was spending every month and just sent the rest to savings in my taxable account. Beyond my 401K, at this point I have a relatively stable amount I save every month. It's a targeted dollar amount. Never stopped and looked at the percentage of my salary it represents. Unless there's an urgent need (new car, major house repair etc.) 100% of proceeds from RSU's, ESPP, bonuses, profit-sharing go directly into the taxable account. This works for me and puts us in a position to retire in about 3 years or so when our daughter finishes college.

Would have done things quite a bit differently if I had to do it over again, but the 23 year old version of me wasn't interested in such things at the time.
Last edited by dcabler on Tue May 19, 2020 10:30 am, edited 2 times in total.
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