AAR32 - Listener Q&A: How to Calculate Your Real Savings Rate

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3:19Evan Raidt:Go to shopify.com slash beginners. That's shopify.com slash beginners. When you look at that value, again, if you put$100 into your 401k straight from your paycheck, that is not$100 that's equal to everything else. So what we want to do here, what my personal recommendation or the way that I go about things is, is to try and approximate those 401k contributions as if they were after tax. And that means we can just alter this one value and compare it to absolutely everything else. To be clear, whatever number you get from this calculation, you don't want to be using to track its total amount over time because it's going to be inaccurate.

3:57If you put$100 in your 401k, there is$100 in your 401k.

4:13Welcome back, ladies and gentlemen, to another episode of At Any Rate. My name is Evan Rate, and we are here to help you make sustainable financial changes without breaking a sweat. And today is going to be actually my first episode recording after the 2025 holiday break. So I would like to officially wish everyone a happy holidays and a happy new year. I hope you had a fantastic break. And although I was taking some time off, and I hope you did too, I know it sounds so cliché to transition to this, but I know that my money never did take time off and that just feels really, really good. And that feels like I'm starting a sales pitch of some kind when I put it that way.

4:47But my point is that all of the habits, it's really exciting to see all of the habits that we build on these kinds of episodes, the mindsets that we build, the automations that we build, the investing, the saving, everything like that. It continues working. It doesn't matter if you take a day off. It doesn't matter if you take the whole holidays off. It does not make a difference because your money is continuing to grow and work for you and build towards a better future for yourself. With that in mind, today's episode is, I love these kinds of episodes because today is going to be based around a listener question that I received in that was a little bit more in-depth than some of them that warranted, I felt, a whole episode to cover some of the stuff that it goes into.

5:23So this is from a listener named Keaton, and I'm going to go ahead and read out what they sent over real quick. The first email was, I'm listening to your podcast on how much I should save. When you say you can approximate your after-tax value of your 401k, You mentioned finding it with your overall tax rate. How do you find that? Just what tax bracket you're currently in. And then they also sent a follow-up saying, also, how do you save for unexpected things such as car and home maintenance too? Those can be spendy. And I could not agree more. Those things can absolutely stack up like crazy. But yeah, so this is diving into a little bit more.

5:52So I wanted to cover it in a little bit more depth and give it the proper coverage that it deserves. So as far as I can figure out, this is coming from episode 27, AAR 27, on how I decide how much to save. This was an episode where I was going through very personally in a lot of detail of how much I save, how I decide where to save it, how I lay that all out, how I landed to the decisions that I landed at, all that sort of stuff. And this is covering and going through detail by detail, a budgeting spreadsheet that is available online at einvestingforbeginners.com slash budget, completely free starter tool, a perfect way for people who are just getting into their finances, diving into things, or people who have been doing it for a long time, but not in a very specifically organized manner, a perfect starter kit for you to start laying everything out, seeing where everything is, where everything goes.

6:40And this was an episode where I went through in a ton of detail how I landed to all the decisions that I landed at. So covering the first question here on determining after-tax 401k value, like I mentioned in that episode that Keaton's referencing here, when we're calling out how much you save in your 401k, we can't just take whatever value was landing in your 401k and add that to your savings rate and say, bang, you're saving that much money. The reason for this is because 401ks, unlike a lot of other things out there, they're actually pre-tax. So this makes it so you can't just compare apples to apples.

7:14You can't say $100 that's coming out of your paycheck and going to a 401k is equal to$100 that I would have spent on closed or something. We can't compare those two things. And if you do, it's going to give you a very inaccurate idea, a significantly inaccurate idea, depending on how much you're being taxed. of how much you're actually saving or how much you're actually spending and what all those rates are. The reason for this, like I quickly mentioned, is that 401k is pre-tax. So when you go buy groceries, when you put money in the savings account, you put it in a Roth IRA, you put it in a standard taxable brokerage account or something like that, that is all post-tax funds.

7:48That is money that you earned, that went through, was taxed, and then that after-tax value, that net value landed in your account. And then you went and spent it or moved it somewhere else, whatever you did with it. A 401k is different. It's one of the, I shouldn't say few, but one of the not very common accounts out there where your money will leave and go somewhere else before it ever got taxed. Now, to be clear, it will get taxed eventually. It gets taxed when you withdraw from it in retirement or if you pulled from it early or something like that. So it will get taxed eventually. But when you look at that value, again, if you put$100 into your 401k straight from your paycheck, that is not$100 that's equal to everything else.

8:28So what we want to do here, what my personal recommendation or the way that I go about things is, is to try and approximate those 401k contributions as if they were after tax. And that means we can just alter this one value and compare it to absolutely everything else. To be clear, whatever number you get from this calculation, you don't want to be using to track its total amount over time because it's going to be inaccurate. If you put$100 in your 401k, there is$100 in your 401k. And so if you want to track, you put another$100 in there, well, now you have$200 in that account. You shouldn't be decreasing it by whatever tax rate it is.

9:04However, when you want to compare that$100 you just put into your 401k, and you want to compare that to how much you spent on clothes that month or something like that, then you do need to be comparing apples to apples. And they both need to be either post-tax or pre-tax. And for me, the easiest thing to do is to make that 401k post-tax just like everything else. So to get the nuts and bolts of things, how to determine how much of your 401k would be as a post-tax equivalent. The first step is to find your taxable income from your last federal tax return. So wherever you keep your tax returns or if you use an online service like QuickBooks or if you use a specific agent that deals with this kind of stuff, then go talk to them.

9:42Get your last federal tax return and search for just taxable income. Just control F, command F through that document and look for the taxable income field. And that is the total amount of money that the government saw to pull taxes from. Then we're going to make approximate adjustments based on your income if it has changed drastically. I would say if it hasn't changed by any crazy amount, I wouldn't worry about it. But if you got a really large raise, if you got a promotion, if you got a massive raise, if you're getting a much larger bonus this year or a bonus when you didn't get one last year, some large change in income, then I would say try and just approximate that change, whatever it might be.

10:22If your income didn't change drastically from last year, I wouldn't worry about touching whatsoever. Just take that taxable income value. Then the third step, and arguably the most complicated step, is to do one of two things. One, you could Google just your effective tax rate for X dollar income in X state. So again, you're going to take that taxable income and then put in whatever state you're in because some states have state taxes, different amounts of state taxes, all that sort of stuff. So that'll drastically vary how much you're actually getting taxed overall in the end, your effective tax rate.

10:54So literally just Google a word for word effective tax rate for whatever total income in whatever state, then reduce your 401k by that percentage. So if your tax rate is 20%, just to make the numbers easier, tax rates, 20%, you earned a hundred thousand dollars of taxable income in the end, then you can say, okay, 20 % is my tax rate from this. Or you can Google the latest tax brackets and calculate your tax bracket bracket by bracket. And what I mean by this is, again, just trying to simplify the figures here, there are different tax rates for different income levels. So for example, everybody who earns$20 ,000, the first$10 ,000 is taxed at one rate, maybe 10 % or something.

11:35And the next$10 ,000 worth of income is taxed at maybe 12%, a slightly higher rate. So the tax rate actually ramps up more and more the more income you earn, and it sort of stacks on itself. When we get that effective tax rate that I suggested Googling for previously, which is what I personally do just because it's faster and easier, that's taking all that into account. That's averaging, not averaging, but that's taking everything into account, weighting everything properly, and giving you just a final value that you can easily plug in. But again, if you want, you could go bracket by bracket, tier by tier and calculate out what your total tax rate would be.

12:09So you would deduct everything until again, maybe you earn a hundred thousand dollars taxable income and you say, okay, well, it got reduced down to 80. So now I have my total tax rate. Then the very last step is we're just going to reduce your 401k contributions by whatever your tax rate is. So again, if you Google it and you get a 20 % effective tax rate based on your income in your state, just reduce your 401k contributions by that amount. So a hundred dollars a month becomes$80 a month. And the great thing about that is we can now take that$80 a month and compare it apples to apples to any other spending, any other saving that you do anything else this post tax.

12:43And I would take that value and plug that into that line item in your savings rate. Again, if we're using the budgeting outline that I suggest using that's available online, then you just have the line item for 401k and put that 80 bucks in there for that monthly value. And now you can compare that to everything else. And that is contributing to your savings rate as accurately as you can. Again, to be clear, this is not going to be dollar for dollar perfect because technically 401k contributions reduce your taxable income, so it would be stacked on top, but the math becomes much more complicated for relatively marginal changes.

13:17We're just trying to get as close as we can here without diving for hours into everything. And also just to be clear, this doesn't apply to any other post-tax savings. So you don't want to go through your entire savings column and do this to everything. Accounts like Roth IRAs, Roth 401ks, that's another version of a 401k that is after tax, high yield savings accounts, other savings accounts, cash that you're keeping, a taxable brokerage account, all of these other accounts are post-tax and therefore don't need to be reduced. But anything, your 401k or any other pre-tax account, like a health savings account, if you want to include that in your savings rate, those will be pre-tax as well, pre-tax contributions.

13:53Anything else that's pre-tax that doesn't get taxed when it goes over into that account, and you want to count that in your savings rate, needs to go through the same process. So hopefully that answers Keaton's first question. And quickly, before we move on to the second question, we've actually got a pretty exciting opportunity for you guys here. We actually have an opportunity for ourselves as well to hear from you. We want to get input from the listeners, and I'll go a little bit more in detail to it. But as I mentioned before, feedback from you guys, it's more than just the heck of it. This isn't just something to do because we want to do it or, you know, for engagement or any of that BS.

14:27This is genuinely wanting to find out more and more ways to connect better with you and to better understand what does and doesn't help you. That is the end goal of all of this. So I want to, I just wanted to preface it. So every entry to the survey gets entered into a raffle for a$500 Amazon gift card. And the first hundred entries actually get a free IFB mug and coaster. and if you're a long-time listener, trust me, you know how obsessed with my coffee I am. So that's a very big deal right there. But head over to einvestingforbeginners.com slash podsurvey, one word, einvestingforbeginners.com slash podsurvey to complete the survey.

15:04There's also a link down below in the show notes. And again, that's einvestingforbeginners.com slash podsurvey, terms and conditions apply. And we would love, genuinely, heartfelt love to hear from you, and we hope to see you over there. To move on to the second question from Keaton, how do you save for unexpected things such as car and home maintenance too? These can be spendy. These can vary greatly by situation. This isn't going to be quite as cut and dry of an answer, sadly, as the previous question. However, I do hope that the answer is just as customizable to everybody and can still help lay things out.

15:37So generally, I would recommend keeping any savings, any funds for something like this in what's called an emergency fund. We actually have an entire episode covering this. There's also a ton of fantastic, valuable content available online covering emergency funds, but to listen to our episode, that's actually episode six. So if you just search your podcast platform, so for AAR06, then you'll go ahead and find it. The first step here is where do we want to keep the money? This money has to be kept somewhere and where it's kept, trust me, it makes a massive difference. And the first place I would recommend and the place I personally keep my emergency fund is in a high yield savings account.

16:14High-old savings accounts, they grow over time. They're just as accessible as any old savings account out there. They're very easy to set up. They can be entirely digital. It could be some brick-and-mortar stores, though it tends to be more digital companies nowadays. But you've got a ton of flexible options, and your money will grow at a noticeable, substantial rate. Some of the other options that I wouldn't necessarily recommend but are still options for you is a standard savings account. These are going to essentially, you can assume, grow at 0%, but at least it is safe and secure and accessible.

16:44And then the third option is just cash. If you want to just keep the money there and you feel better being able to look at it under your mattress before you need to spend it, by all means, go that route. More power to you. The most important thing is it is liquid or accessible. Liquid just means how quickly can you turn whatever that current asset is, like a number in your bank account, into hard cash or a direct deposit over to somebody else, whatever it is to be able to pay for something. So it needs to be liquid. We don't want to be depending on something like investments, something like home equity.

17:13We don't want to have to depend on anything like that that isn't very liquid because it's going to take time to get. And if it takes time to get, then that could be valuable time that you're either putting off paying for something that you could otherwise afford, or you're having to take on debt to cover you or bridge you and bridge that gap. Also, along the line of debt, this should not be a credit card too often. I hear people describe an emergency fund, describe having some backup cash as, well, I've got a credit card. I've got a credit limit of$5 ,000. I can cover anything that comes up. That's fantastic.

17:44You can go spend$5 ,000 on something that you then can't afford maybe a month later, maybe two months later, maybe three months later. And trust me, if you just let something pile up in a credit card for two, three, four, five, even longer months, that$5 ,000 charge is going to turn into another$500, another$800, another$1 ,000. and suddenly that$5 ,000 charge is much more than$5 ,000 and we do not want to end up in that place. So I beg of you, do not depend on a credit card as your emergency fund. We'll discuss some ways that it could be a part of the situation of paying for something, but it should not be, I don't have any cash to be able to pay for this.

18:22However, I have a credit card that could pay for it up front, so I'm all set. That should not be the way you go about things. And then the last detail here of where to keep the money is ideally we do want it to grow. Like I mentioned before, having money put somewhere that's growing is incredibly valuable for you because it's just going to be free money. That's the only difference. You put money in a normal savings account, you're going to get nothing from it. You're even going to lose value due to inflation. If you put that exact same money in a high-yield savings account, it's going to earn and grow for you at a substantial rate.

18:50I mean, me personally, just a little anecdote for myself is when we were saving up for the house, when it was getting close to purchasing the house or planning on purchasing for the house within the next couple of years or something. I had all the savings that was going to be planned for it moved into a high-held savings account. This again made it liquid and accessible. So if we stumbled across something that we wanted to pay for, we had the money to pay for it. We don't have to care about market timing. We don't have to worry about, well, the market's down right now, so we really shouldn't buy it right now, or we put off a purchase, or we take a loss on the stocks, whatever it is, avoiding all that, I moved it into a high-held savings account.

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20:36Evan Raidt:Is your wardrobe well-stocked for the upcoming season change? I'm recording and it's the first warm day we've had in a while. And I'm realizing my wardrobe isn't as robust as it should be. So I went to Quince and got myself a three-pack of 100 % Pima cotton tees. I can't wait to report back to you about how those feel. Quince is all about premium fabrics, considered design, and everyday essentials that feel effortless to wear and dependable even as the seasons change. They are all about quality that lasts. For example, the cashmere is 100 % Mongolian, the same stuff luxury brands use. You know how much we love quality long-term investments on this show.

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21:50Evan Raidt:I just made a new stock the third largest position in my portfolio. And I actually just finished the deep dive report on it called the Newtonian Compounder, How 60 % Returns Power an Unstoppable Machine. It's available for our Value Spotlight members. If you want to see the thesis, we're doing a 60 % discount for now, but I'm pulling the deal once the stock hits$45. dollars. Check it out at einvestingforbeginners.com slash 60. That is obviously a substantial amount of money. I'm not suggesting to have tens of tens and tens of thousands of dollars ready for your emergency fund. However, earning hundreds of dollars for essentially free, just money you already have, is an absolute given.

22:29That is something you need to be, should be taking advantage of. The second step here about emergency funds is what to use it on. Now, Keaton gave a couple of fantastic examples here, and I do think they are the two main examples that most people are going to have to worry about. There's one other one, but I'll cover a better way to handle that. So any unplanned expenses. That's really the sum of it. However, for most people, what unplanned expenses means is going to be either car maintenance or home maintenance. I've personally had some car maintenance come up recently. I got a nail in a tire, and I took it to the shop, and they looked at the tread and said, well, the tread's pretty much dead anyways.