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How to Calculate your SR (Savings Rate)

Photo by Micheile Henderson on Unsplash
** As usual, hello everybody! Blog update at the bottom for my regular readers! **

A Savings Rate (SR) is the act of putting a certain percentage of money into savings or investment account to be used for a purpose down the road in your life, such as retirement or emergencies. This can be a high-interest savings account, an RRSP or TFSA, etc. The higher your savings rate, the earlier you can achieve FIRE. That means everybody in the FIRE movement is obsessed with calculating their SR.

So how on earth do you calculate a SR? Nobody can agree on one formula for some reason:

"Can I include my mortgage payments?" 

"I save money for my kids RESPs so that must count, right?" 

"Do I calculate the gains on my stock options at work?" 

"I didn't get ice cream on the way home from work.. does that count?"

As you can see people have a hard time wrapping their head around a concept of putting money into a piggy bank. The question keeps coming up every other day in the online forums I frequent and even more alarmingly, people keep giving different answers! Ahh! Let's make this very clear for everybody and slim down all the confusion to one correct (and final) statement:

Your SR is when you take a portion of your money and put it into a separate savings or investment account for you to use later

To highlight what this statement means, here's a quick checklist of things we all pay for and we can decide whether or not it's money saved
  • Payroll taxes - No
  • Paying into Employment Insurance (EI) - No
  • Contributing to Canada Pension Plan - Disqualified
  • Contributing to my kids RESPs (great decision but....) - No
  • Helping your parents out financially - No
  • Principal payments on your mortgage - Yes
  • Interest payments on your mortgage - No
  • Purchasing shares of your workplace's stock option plan - Yes
  • Group RRSP offered by your workplace - Yes
  • Your employer matching your contributions for stocks or RRSP - Yes
  • Redeeming cash on your cashback credit card - No
  • Donating to charity - No
  • Using a coupon at A&W - No
  • Canada Child Benefit - Yes, debt reduction counts
  • Paying off your car - Yes, debt reduction counts
  • Paying off your student loans - Yes
  • Buying a Costco Membership - Perhaps
  • Buying an Amazon Prime Membership - No
  • RRSP tax refund - Yes
  • Receiving an inheritance - Yes
  • Contributing to your TFSA - Yes
  • Buying hair clippers to save on haircuts - Perhaps
  • Finding $20 on the ground and nobody in sight - Yes
You'll notice that quite a few of these are obvious but some are more subtle and require a bit of explaining. Let's go through a few and explore the nuance of saving money.

#1 - You only ever use "Net Income"
  • Look at the amount of money being deposited to your chequing account. That's your net income. If you use gross income (like when people say they make $100k/year but they actually won't see more than $70k deposited to their bank account) your SR will be unfairly low. You can't control things like income tax*, EI or CPP so don't get frustrated discounting your SR right off the bat. Bust out the calculator after the money has been deposited.
  • As you may have seen above, I had to Disqualify Canada Pension Plan due to my FIRE bias. It technically counts as money being saved since you'll get it back in the future but it doesn't serve our purposes here because it's way too far away. More on this at the bottom of the post.** 
#2 - RESPs are not savings (for you)
  • While I appreciate parents saving money for their children to attend university one day, it doesn't count whatsoever towards your SR. Somebody contributing 10% each pay to RESPs now only has 90% of net income to work with, reducing the SR accordingly. So understand that your intention is to give money to your kids, plain and simple. It's a good thing to do but it's not a part of your SR and you should be mindful not to overdo it since you have a future as well.
  • Speaking of RESPs they come with a little exception because while you intend for your kids to use the money for tuition, some may choose not too (as I did - I was fortunate enough to have a fully funded RESP and enlisted in the Canadian Armed Forces instead.. sorry Dad ¯\_(ツ)_/¯ ). Whoever set up the RESP can actually turn the thing into an RRSP for themselves if the kids forego university but of course that is unplanned so do not include this whatsoever in your SR.
#3 - Saving money at the retail store doesn't count
  • Unless the store you're at is depositing money into your bank account, it doesn't count towards your SR. While I'm glad your coupon or rewards points are saving you money on groceries or take out food and it technically does saves you money, it's still money being spent. In my example above I used an A&W coupon. Congrats, you've changed the total to $8 instead of $14. Instead, you could have contributed $14 towards the very ingredients that made your burger and fries and used the difference to invest in VGRO.
  • If you follow this line of reasoning down to the logical extreme, technically you will improve your SR by buying cheaper and cheaper but that's not the point I'm making. Consumers today think they're being savvy by using Optimum Points or the Tim Horton's reward app but really you're just being advertised to - and then to spend. As a result you probably aren't saving money but getting "more bang for your buck". You'd be better off never setting foot inside a Shopper's Drug Mart or Tim Horton's ever again if you want to take it as extreme as that. I vote you just accept the fact that you're spending money at these locations, not saving anything regardless of the propaganda you're seeing on your app telling you you're points millionaire due to your most recent "deals".
#4 - Membership fees are simply a product you're buying
  • Similar to #3, your Amazon membership doesn't save you jack. Neither does Costco people!
  • The reason is you can live without either and still be ahead. Amazon is an easy example so I won't spend too much time on it but it's basically a 2-day shipping Wal-Mart with no real discount brands and low quality video streaming service with horrendously bad audio service for the price of a Prime Membership. You might not be able to find cheaper but you can certainly do better with Netflix / Spotify family account sharing as I have. The Amazon Music that comes with Prime really sucks so you'll end up paying more per month just to access all the music out there.
  • Okay, Costco will be a harder sell but here goes: the membership price is quite reasonable ($60) but there's two main problems with Costco. 1. It's a very busy place that people generally have to drive far to rather than the much more optimised choice of driving a block or riding your bike to your local discount grocery store. It can definitely reduce grocery costs in the long term but you better be buying Kirkland whenever possible and have a large family to feed. A family of 6 that throws away virtually no food will probably save A LOT at Costco (and it's the only reason I gave it a Perhaps), but let's be real: the average family size is 3 or 4 and throws away 40% of the food in their home. Not optimal and definitely enabled by the large product sizes at Costco.
  • My second point is you're also now susceptible to the "Costco Effect", an intriguing phenomenon where you walk into the warehouse for groceries and leave with a new laptop and snazzy pants for your husband. How did this happen?? They were such great deals though right? And you can return them no questions asked so there's no risk... right? Wrong. Costco is a perfect example where spending money to save money on repeat will leave you with no money. You and I are not immune to advertising and a place like Costco with it's golden reputation and amazing bargains is a money trap. I'd argue you'd be better off paying a little more for groceries in a slower-paced store near your home.
#5 - Always include employer sponsored programs!
  • As part of the FIRE movement, it is imperative that you never turn down free money from your workplace because this will SKY ROCKET your SR. So many big Canadian corporations lure you to apply by posting in the job description things like "Group RRSP and company matching stock options included". Hot damn, hop in on that action, pronto!
  • These are so valuable because it will take a $67k take home pay and bump it up several thousand dollars in essentially free money your employer gives to you in return for a job well done (which you already intend to do!). As a bonus, your employer contributions to a Group RRSP will let you reap the tax refund as well, giving that SR another boost. It's a no brainer.
  • In #1 I told you to only include your net income, so be sure to add the amounts automatically taken off your paycheque to your SR as well, plus any employer contributions too. It's all your money!
#6 - It totally counts if you're paying off debt 
  • While my advice might seem like I'm pandering to those in debt (and I suppose I'm being generous) I don't see the value in shitting on people climbing out of debt. Imagine reading a FIRE blog discounting all your efforts to become financially stable again, that'd be a pretty shitty feeling. 
  • Reading a FIRE blog such as mine should inspire and motivate you to save more. So yes, I count you paying off your debt as long as you make the solemn promise to never take out consumer debt again AND you convert your debt payments into investment contributions for your FIRE number. You'll be happy you did.
#7 - Mortgage principal payments count, mortgage interest does not
  • This is another confusing topic but I swear it's really easy. Interest paid can never be returned to you so that's nice and easy but the principal payments really mess with people here. The basis for my logic is that a house is an appreciating asset - you will get this money back when you sell the place. Typically, people get even more money back due to the appreciation but I don't want my readers starting to predict the future home prices and working that into their SR - for 1. its timing the real estate market and you don't have a crystal ball
  •  2. You have home-related bills to pay, you have home improvements to make and deadliest of all you have tonnes of fees to pay when you move. These costs vary wildly depending on the homeowner but I prefer a broad-brush policy here - keep things simple and just include the principal payments and leave it at that. All the appreciation will go towards the expenses of home ownership.
#8 - Gains in the stock market don't count
  • Much like homeowners in #7 don't get to include appreciation on their property, you don't get to assess last years gains as an overall improvement on your SR either. This is flat out cheating and you're guaranteed to reduce your savings by artificially improving your SR based on last years gains. This line of thinking will quickly erode your FIRE goals so only count the contributions and in the case of an RRSP, the tax refund that provides.
#9 - Investing in equipment isn't saving money until you prove otherwise
  • I own a bread machine and it has saved me hundreds if not a thousand bucks over the last 8 years I've owned it but there's no point for you to buy a bread machine if you really just prefer buying bread from the store. Likewise, buying hair clippers and then using them once was a really expensive haircut (and since it was your first time it probably sucked too). So many consumers fill their houses with crap thinking they'll provide value for years when in reality it was a novel purchase to be used once or twice and then discarded to the basement/garage/storage unit. Unless those hair clippers are being pulled out on a monthly basis, I fail to see how this saved you money.
  • As a side note, this is also where people get minimalism or FIRE enthusiasts dead wrong - they think we'll buy something low quality to save money and then try to use it forever. That's not the reality, cheap low quality crap never lasts long and you'll end up spending MORE money, not less. If you're reading this from outside the FIRE movement and looking in, please note that we (as a general rule) buy high-grade quality products. 
  • As a truck driver, I can tell you for certain if I invest $40-60 on a pair of steel toe boots my feet will not only hate me but my wallet will be forking out the proper amount of $200~ in a month from now. Investing in quality and maintaining the equipment is a great way to watch your SR grow over time.
Let's do a quick example using easy numbers:

Maria and her boyfriend Carlos make $110k/year. They have to pay 30% in income taxes, EI and CPP so their take home pay is actually $77k. Maria has a group RRSP with her employer and she's automatically contributed 4k off of her pay last year. Her employer matches all her contributions, an amazing perk! Carlos isn't contributing to his RRSP right now, he's decided to contribute to his TFSA instead.

Now their take home income is actually $77k + $4k + $4k = $85k. Maria and Carlos are serious about achieving FIRE and want to save at least 50% of their income before making discretionary purchases so they know that at least half of $85k needs to be saved so $42.5k. They're already at $8k thus far.

They are also homeowners, paying $1200/month towards a mortgage of which $900 is principal payments. This means $900 * 12 = $10,800 last year. Now their savings thus far is $18,800.

Don't forget, Maria contributing to her RRSP produces a tax refund at her current taxable rate which for us will be 25% (it's 30% above this because we included EI/CPP payments). 25% of $8k = $2k.

Here's where things get really simple! The total they are working with now is $20,800. Maria and Carlos need to save another $21,700 to achieve a 50% SR. They can contribute to Carlos's TFSA like we mentioned above or look into Maria's TFSA as an option too. The sky's the limit. Then the rest of the take home money (the other $42.5k) is free for them to spend on whatever they want! Of course mortgage interest and all the other fixed expenses would need to be reduced from that budget but that's the #1 priority of anybody looking to optimize their lifestyle by joining the FIRE movement and why my own fixed expenses are SO low - because who cares what logo I have on my shirt or which cell phones are new. Increase your income, reduce your spending, invest the difference! Always!

So there you have it! If you could all do me a favour and shoot down the crazy comments you see roaming the internet about things that "save people money" or "totally count towards my SR!" I would be forever grateful.

Did I miss anything? Was this useful? Let me know in the comments if that's your thing or email me. 

You can email me here: canadianfire1@gmail.com (I respond to everybody).

Ryan Myricks

* You CAN control your income tax quite effectively if you earn a high income (but not too high) and contribute to RRSPs while taking further advantage of income splitting techniques like spousal RRSPs and writing dividends to family members from your corporate account and whatnot. That's all stuff you can google, Financial Post is typically quite good for this kind of stuff. Lowering your income using these strategies is quite good for your SR since the less money you make, the more generous government programs are to you, such as CCB and GST rebates.

** You see, when you count on something as far away as CPP in your calculations you'll end up shooting yourself in the foot because you do not know what will happen in 15 or 30 years, depending on when you anticipate achieving FIRE. The rules may change, the age requirement pushed back or the taxes you'll pay on this income might make it all worthless to calculate anyways. Do yourself a huge favour and ignore CPP even though it's technically money that you will get back in the future. It's just too far away for our purposes here at Canadian FIRE. If you're in your late 50's and CPP is less than 10 years away, I would suggest you ignore my advice and begin planning for those payments using a fee-for-service financial planner.

** Quick Blog Update... **

From here on out I've decided to make a few changes around here.
  1. All content will be released on Wednesday's - but not every Wednesday. I'm a husband, father and full time employee and some weeks are busier than others because... you know, life? So check back on Wednesday's or wait for the email blast.
  2. Half of my content from now on will be practical stuff - So I've noticed an interesting trend in my stats for this blog. My super popular posts get a tonne of direct emails (but no comments lol!) and I can tell a lot of you are very thankful for the simplistic approach I have (and no ads either) for very actionable stuff. This is why I'm going to gear exactly 50% of my content towards reviewing products, explaining complex topics using checklists and just in general trying to save people frustration and time within the Vortex of FIRE Information. Things like "The Best Phone Plan in Canada" and "Translating VTSAX for Canadians" are prime examples of my practical posts.
  3. The other half of my content will remain philosophical - While I know a lot of my content can rub people the wrong way, the wonderful advantage of operating a blog is to be able to journal your thoughts about something you care deeply about. I really think a lot of people need to be told the truth about the FIRE movement and not buy into the happy-go-lucky universe of "anybody can do what I did" syndrome. Articles like "Criticisms of ChooseFI" and "The Requirements of FIRE" aren't going anywhere and will be the underlying narrative going forward. 
  4. However, my philosophy and my practical posts will remain distinct from one another - That way if you're an advanced FIREwalker and don't care for my practical stuff, chances are you'll still enjoy my more controversial opinions on FIRE... and if you're new to FIRE, you might not like what I have to say just yet and prefer to stick to the practical stuff. Eventually in the future I'll figure out a feature for this blog to filter these two categories for my readers but for now, I need to create a lot more before that becomes needed. I'll rotate between practical and philosophical stuff for now and see if there's a clear winner before changing anything in the future. I'll let you know any changes I make.
  5. While I plan to monetize Canadian FIRE - I don't see a huge benefit to crowding the blog with ads and pop ups inviting you to my email list, so those things will never happen. If you're interested in supporting the blog, I'm going to create a separate page with my referral codes for various products and services I review and use. Feel free to plug those in as a way to support my blog and my mission. I'll update that red text with a link once it's ready. In the meantime, thanks for everybody so far for using my codes. As an example, by using my Public Mobile referral codes you guys were able to reduce my two annual phone bills from $488.16 to $81.36. That further reduces my FIRE number by $10,170. Not bad for a blog that's cost me $16 (and my time) over the last year. Thank you all so much :)
Thanks again for reading :)

Ryan Myricks

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