Savings Rate Implementation FAQ
If you’re wondering how to actually implement a savings rate in everyday life, this FAQ covers the most common questions that come up.
I have my savings amount and spending target. How do I put this into practice?
Let’s make this concrete. Suppose your after-tax income is $15,000 per month and you choose a 30% savings rate. That means $4,500 goes to savings/investing and $10,500 is available for spending.
For the $4,500 of monthly savings, I’ll cover how to allocate this across a 401(k), IRA, brokerage account, student debt, and more in an upcoming investing series. But in short, you invest this money.
The $10,500 of spending gets allocated across the categories you uncovered by tracking your spending. You can set this up in Copilot (or any budgeting tool) by creating category targets that sum to $10,500 and letting your actual spending flow through them. Just remember to include all spending, including those non-recurring expenses such as travel, weddings, etc.
Do I need to track this perfectly for it to work?
No. This does not need to be perfect. The goal is to think about saving and investing first, and let that decision guide your spending. Whether you save 25%, or 23% or 27% is largely irrelevant. What matters far more is having a system in place and sticking to it over time. Spending excessive time tracking the exact number usually adds very little value too.
What if I’m spending more than my target spending amount?
That’s a signal that something needs to change. Either your spending or your target savings rate. If the overspend is coming from low-value discretionary categories, work on decreasing that spend. If it reflects high-priority items, it may be more realistic to revisit your savings rate and accept the tradeoffs intentionally.
Does my employer’s 401(k) matching contribution count toward my savings rate?
Yes. Count it if you reasonably expect to earn it. If the match vests immediately, definitely include it. If it vests after one year and you expect to stay, count it. If it vests over three years and you’re unsure you’ll be there that long, I wouldn’t include it.
Here’s a quick example:
Imagine your employer offers a 5% match that vests immediately, and you decide on a 30% savings rate. The simplest approach is to save 25% of your income and let the employer match make up the rest.1
If my employer matches my 401(k), does that mean I can spend more?
Yes. You’d adjust your spending calculation by subtracting the employer match from your personal savings target.
Spending = after-tax income × (1 - (savings rate % - employer match %))
Because the employer is contributing part of your savings for you, the amount you need to save from your own paycheck is lower. As a result, the amount you can spend increases.
How do student loans repayments fit into this framework?
Student loan repayments should be treated as spending. As a result, you may find that your spending is higher and your savings rate lower than you would ideally like. That is okay.
As we will cover in the investing section, high interest student loans, generally around 6-7% or higher, are usually worth paying off before investing beyond the 401(k) match. This means your savings rate target may be lower until those loans are paid off, but that is the smart choice.
How do bonuses fit into this framework?
It’s fine to use bonus money to splurge a bit, but it’s worth remembering that this is just mental accounting. Bonus income is still income and should be treated intentionally rather than as “free money.”
A good approach is to apply your normal savings rate target to bonuses.
I personally try to apply a higher savings rate to bonuses. For example, on a $20,000 bonus, I might spend $5,000 and invest $15,000, which is a 75% savings rate. That is meaningfully higher than the 40% I target on regular income.
How often should I track my savings rate?
I compute it quarterly. You shouldn’t have to regularly track it, since your savings/investments should happen automatically, but it’s probably a good idea to audit your system occasionally. You’re looking for significant variations, and not minor drift (i.e. don’t worry if you’re 1% off your goal).
Why use after-tax income instead of gross income when calculating a savings rate?
I use after-tax income because it reflects the money you actually control. Taxes aren’t optional, and spending and saving happen after taxes are paid.
Using after-tax income also keeps the savings rate consistent with financial independence math, which is based on what you can actually spend and invest rather than on gross income that never hits your bank account.
Can I use gross income instead of after-tax income?
Yes. If that makes implementation easier for you, that’s fine. The key is to apply the same methodology consistently at each review period so you can clearly see how your savings rate changes over time.
Just keep in mind that using the same savings rate with gross income will mechanically result in higher savings than using after-tax income, so you may want to adjust your savings rate target down.
For example, for a single person living in Atlanta earning $200,000 per year, a 20% savings rate based on gross income ($200k × 20%) equals $40,000. That same $40,000 equals roughly a 29% savings rate when measured against their after-tax income of about $139,000.
Additionally, most financial independence projections are made based off after-tax income, so a gross-income-based savings rate might be harder to translate into meaningful insights.
How do I actually track and compute my savings rate?
Because your savings rate is your savings / after-tax income, the easiest approach is to calculate those two numbers separately and then divide them. Remember, don’t overcomplicate tracking it. Just make a few decisions, apply it consistently, and then look for drastic variations over time.
What counts as savings during my review?
As a reminder, I view a savings rate as a tool for estimating time to financial independence (FI), so I only include contributions intended for retirement spending. I don’t count money I plan to spend before FI. If you define it differently, that’s totally fine. Just be consistent with your definition.
I would include the following:
I would not include the following:
Debt payments (including most mortgage payments and student loans)4
Investment gains
Cash earmarked for a specific short-term goal (e.g. wedding or down payment) or for known future costs (e.g. housing maintenance, car replacement, vacation)
Emergency fund contributions
Any equity compensation or bonuses, unless that money is used as a contribution to one of the accounts above
How do I calculate after-tax income?
To estimate your after-tax income, start with your pay stubs for the quarter. Use your gross income as the input, then annualize it and run it through the SmartAsset paycheck calculator.
I walk through this in more detail in a separate article if you want a deeper explanation.
How do I track my savings rate over time?
I’d track this in Excel. Start by adding all of your “savings” contributions for the period. Then divide that total by your after-tax income calculated above. Most of the inputs can be found on your pay stubs or account documents.
Disclosure: This content is for educational purposes only and reflects general principles. While I am a CPA, nothing here should be considered personalized investment or tax advice.
Employer matches are pre-tax and based on gross pay, while savings rates here use after-tax income. That means a 5% match isn’t a perfect one-for-one swap, but it still is a good rule to follow. I generally subtract the match from the target savings rate, which ends up slightly overshooting the target savings rate as a result.
I include HSA contributions only if they are invested and intended for retirement spending. HSA contributions intended to be used for medical expenses may need to be treated different.
I treat contributions to a taxable brokerage account count as savings if they are intended for long-term investing and financial independence. I generally do not include speculative or high-risk investments, such as options in my savings rate. These may increase net worth, but they do not reliably reduce time to financial independence.
I would not include housing payments or mortgage principal on a primary residence as savings. While paying down a home can reduce future expenses, it does not increase investable liquid assets that could be used to fund retirement in a strategic way. For investment properties, that generate cash flow, it may make sense to include some portion of the payment as savings. If you do not agree, then that is ok, calculate it how you please.