Savings ratio more useful than savings rate?

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fell-like-rain
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Joined: Fri Jun 15, 2018 12:19 pm

Savings ratio more useful than savings rate?

Post by fell-like-rain » 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?

2Birds1Stone
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Re: Savings ratio more useful than savings rate?

Post by 2Birds1Stone » Mon Jan 14, 2019 10:38 am

I look at this as two ways of arriving at the same conclusion.

With SR, I just think of it like 10% savings rate = work 9 years to not work 1, 25% savings rate = work 3 years to not work 1, 50% savings rate = work 1 to not work 1, 66% savings rate = work 1 to not work 2, 75% savings rate = work 1 to not work 3, and so forth.

fell-like-rain
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Joined: Fri Jun 15, 2018 12:19 pm

Re: Savings ratio more useful than savings rate?

Post by fell-like-rain » Mon Jan 14, 2019 11:46 am

2Birds1Stone wrote:
Mon Jan 14, 2019 10:38 am
I look at this as two ways of arriving at the same conclusion.

With SR, I just think of it like 10% savings rate = work 9 years to not work 1, 25% savings rate = work 3 years to not work 1, 50% savings rate = work 1 to not work 1, 66% savings rate = work 1 to not work 2, 75% savings rate = work 1 to not work 3, and so forth.
Sure, but then you're doing extra math every time to convert. You could say, "Well, my SR is 75%, so I save 3 years for every 1 I work," but if you're tracking the ratio, then it's already just 3. No calculation needed. Also, that's only easy for certain numbers- what if your SR was 57%?

Jean
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Location: Switzterland

Re: Savings ratio more useful than savings rate?

Post by Jean » Mon Jan 14, 2019 11:59 am

It's a great metric. It has Also the advantage to stay usefull post FI.

George the original one
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Re: Savings ratio more useful than savings rate?

Post by George the original one » Mon Jan 14, 2019 12:44 pm

Use whatever works for you, but don't expect to change the establishment. Also be prepared to explain why you use it everytime you post in a new thread.

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