Tuesday, 1 November 2011

Household Savings Rate : How do we measure up?

It is the last day of the month, and our only sources of monthly income, i.e. our paychecks hit our salary accounts today.  I had talked earlier about shooting for a 85% savings rate, and the need to be able to track this religiously, if we want to have any chance of hitting this super aggressive goal.  We have always struggled to come up with a system to track our expenses.  Either we get too ambitious and try to record every single penny we spend, and end up failing miserably in the attempt, or we become too lazy and forget to track any spending at all.  So we figured the first step was to come up with a simple way to monitor our overall monthly expenses and then refine the method if we see the need for it.  So instead of messing with tracking spreadsheets, notebooks, etc, my wife and I came up with this pretty simple method, that was staring us in the face.  Today, I simply added up my wife's and my monthly October paycheck, and I withdrew 10% of the amount in cash from our nearby ATM. 

We now have the entire month of November to eke out, using just the cash we have in hand.  We purposely chose to limit the cash withdrawal to 10%, so that we have a 5% buffer in case we needed the extra expenditure to finish up the month.  We intend to cover all our monthly expenses by drawing down from this kitty and paying in cash for all our spending.  There are a few expenses that are paid in auto-pilot mode through online websites such as utilities and phone-bills.  We will simply draw out an equivalent amount of cash from our 10% stock and keep it aside to ensure that we stay true to our target spending allocation. 

To summarize, we will only spend the "real world" money that I withdrew from the ATM in hard cash (which is 10% of our joint monthly income) and will leave all of the remaining online wealth (in bank accounts, SIPs, home loan EMIs, insurance payments, etc) to remain as investments. 

I suggest this method to you as well, as it should be pretty simple, and reduces the burden of thinking about it.  The one thing that will not be covered by this method, is tracking where our expenses are actually going into (for example how much are we spending on food, utilities, entertainment, health care, school fees etc) However, for starters if we can stick to the 15% spending target, I don't think there will be much need to figure out where we spent it.  It is only if we are consistently over-spending beyond the 15% target, will we need to spending distribution, so we can figure out where to cut back.  But then, we will cross that bridge when we come to it.  For now, on towards a frugal November!


  1. this is a good approach to monthy expenses, but how do you deal with annual costs (vehicle taxes/maintenance, state taxes etc)?

    Analysing the class of things you spend on is a good way of seeing if your spending matches your values. Otherwise, depending on how long you will be in saving mode, you may find your spend start to creep upwards or you may start to feel resentful to your goal, as you run into the spend limits without understanding what has changed.

    However, if it works for you then it is good :)

  2. Agreed! Analyzing where the spending goes is key to be able to make decisions on how to tweak spending, why expenses changed, how to control them, etc. It is just that we have not found the right balance on how to track them religiously.

    While we figure out how to get our act together on the tracking front, we figured we need to put a stake in the ground with respect to our monthly spending. Hence the ploy to have only 10% of our monthly income in hand for expenses, with a 5% buffer. As long as we get even close to the 15% goal, I think we will be in the top 1% for the savings rate, which should be a good start.

    You bring up a good point about annual expenses, and how to roll them into our monthly savings targets. I will need to think about this a little more, so we dont miss out anything. At first thought, we just dont have a whole lot of annual expenses. We dont own a vehicle, India does not have state taxes, and practically all of our expenses are on a monthly payment schedule (example flat maintenance needs to be paid monthly) I am thinking if we do find any annual expenses, we will just further cut down the monthly withdrawal to say 12% to leave some money to payoff the annual expense within the 15% budget.

    Our final safety net is that 85% savings on our monthly take home income, is actually better than 85% since we have not accounted for any annual bonuses that accrue on top of our monthly takehome.

    Thanks for taking the time to read the post, and bring up an important thought on tracking annual expenses.

  3. Four our monthly expenses we follow the envelop system....i.e. put our money marked for different monthly items in different envelopes.... like Milk, Groceries, New Paper, Local Commuting, Entertainment Expenses (eating out at restaurants and for going to the movies, not very often though it upsets our budget) and for other sundry expenses like buying clothes, we just accumulate it in the envelop and once we have enough to buy what we need for a occasion we spend from that.

    We also use our credit card statement to track our expenses but making sure we clear the outstanding well before the due date for the credit card. We have just one card, as its easier to track and get more bonus points. The bonus points are just added bonus, but the "credit free days" are the real kicker. We only buy after we are sure and decided in advance for items we need and from a list prepared at home. It helps avoid the impulsive shopping.