Savings ratio more useful than savings rate?
Posted: Mon Jan 14, 2019 10:32 am
Savings rate (savings/income) feels like a meaningless statistic to me- or at least, one with only indirect meaning. However, savings ratio (savings/expenses) has an inherent meaning- it’s how many years you could live off what you saved. Let’s say your SRate is 37% one year and 45% the next. Obviously, higher is better, but there’s no connection to the real world unless you plug it into a FIRE calculator. In the same scenario, your SRatio would go from 0.59 to 0.82, which means that those additional savings bought you 12 weeks more of life.
As well, as spending decreases, the growth of SRatio accelerates relative to SRate. 50% -> 60% = 1.0 -> 1.5, 60% -> 70% = 1.5 -> 2.33, and so on. You get to a point where you can make lifestyle changes that add just one percentage point to the SRate, but which translate to months of additional living expenses saved per year. It feels like a better motivational tool to me.
Finally, you avoid the eternal debate with savings rate over whether you're using post-tax income or pre-tax income. Savings/expenses is pretty unambiguous (unless you want to get super petty and differentiate post-tax from tax-deferred savings).
Thoughts?
As well, as spending decreases, the growth of SRatio accelerates relative to SRate. 50% -> 60% = 1.0 -> 1.5, 60% -> 70% = 1.5 -> 2.33, and so on. You get to a point where you can make lifestyle changes that add just one percentage point to the SRate, but which translate to months of additional living expenses saved per year. It feels like a better motivational tool to me.
Finally, you avoid the eternal debate with savings rate over whether you're using post-tax income or pre-tax income. Savings/expenses is pretty unambiguous (unless you want to get super petty and differentiate post-tax from tax-deferred savings).
Thoughts?