Everybody needs a good savings guide to stay on track. Too many people don't follow a savings guide and wake up 20 years from now wondering where all their money went! Good thing for you, I've been saving aggressively since 1999 and have a solution for you.
When it comes to increasing your savings, you can motivate yourself by looking at your taxes. The joy of doing your own taxes is that you know where every single dollar of income goes. When our tax bill is not being optimized, we call this “leakage.”
I finished up my taxes and realized I paid more in taxes than the total amount I spent to enjoy life. Holy Friedman Batman! Something is seriously wrong when the government is allowed to spend more of your money than you can spend on yourself. Or maybe I'm just not spending enough at all?
A Savings Guide Based On The Taxes You Pay
I've never thought about this ridiculous fact until I started comparing notes with a fellow tax hating friend. Everything can be explained by simple math. Given I saved around 70% of my net income after taxes last year, I have 30% in net disposable income to spend.
If I pay more than a 30% effective tax rate (Federal+State+Medicaire+3.8% Medicare Investment Tax+Social Security etc), it ends up that I've paid more to the government than I've spent on myself!
This post will focus on your TITTS: Total Income Taxes paid (effective tax rate) divided by your Total Savings after paying taxes. If you can save as much as your effective tax rate, then you are on the right track because it means you are at least keeping as much of your money as the government is taking.
Your TITTS ratio will determine whether you are winning or getting bent over by the government. The more you save, the greater your chance of obtaining an above-average net worth!
But first, a little philosophy about taxes.
The Total Income Tax to Total Savings Ratio (TITTS)
Fortunately for the government, and unfortunately for most of us, the majority of our income is straight W2 income. It is so much better earning investment income because tax rates are lower. Further, investment income is 100% passive!
If all my income was in dividends or long term capital gains, my effective tax rate would only be around 15%. However, it takes a lot of time to be able to generate a portfolio where you will be able to live a comfortable, non-trailer park life in the boonies on just dividend income.
Based on various tax organization websites I've seen, interest income, dividend income, and pension income account for roughly 5%, 10%, and 12% of total income for those in the highest income brackets.
See: Long-Term versus. Short-Term Capital Gains Tax Rates
Clearly, these percentages change with each individual, but it's just good to understand the composition of incomes in various tax brackets. If you were to ask Warren Buffett his composition of income, 95%+ comes from lower taxed dividend income.
Being OK With Paying Taxes For Your Savings Guide
We should be fortunate to pay taxes. If we do, it means we have income. Furthermore, the more taxes we pay, the more income we have.
A lot of people whine and complain about the 47%+ of Americans who pay no Federal income taxes, but they are missing an important fact. Sure, there are tax evaders, but the large reason why they don't pay tax is because they have much lower incomes or are retired!
I've suggested each working American pay at least $1,000 in Federal Taxes a year to raise $120 billion in annual tax revenue for our budget. I think this is quite reasonable, as the total tax bill amounts to only $83/month.
Increasing The Breadth Of Tax Payments Is Important
If you think it's cruel to pay so much in taxes if you don't pay in the first place, how about just $42 a month to collectively raise $60 billion to save our country's finances? Either way, it's important to broaden tax collection so that every American can have skin in the game to make our country great. Maybe not.
Before I retired, there was no way for me to significantly lower my tax bill. I've played with numbers, asked tax consultants, and did a ton of reading. As a result, I decided to break free and earn no W2 income.
Paying more than a million dollars in income taxes by 35 should be more than my fair share. Now it's time to enjoy a little more of the public parks, libraries, and everything our nation has to offer while I live off passive income and write.
The Ideal Total Income-to-Total Savings Ratio
The TITTS ratio's purpose is to encapsulate how much of a slave we are to government. It is a savings guide to help us figure out whether we'll ever have a chance of breaking free. The ideal TITTS ratio is under 50%.
Example 1: Bob pays a 20% effective tax rate and saves 25% of his net income. The ratio is therefore 20% / 25% = 80%. Bob is at the higher end of the range. But he is still solidly saving for his future and living a decent life.
Example 2: Patty pays a 30% effective tax rate and saves 50% of her net income. The ratio is therefore 30% / 50% = 60%. Pretty good, and almost at my ideal level of 50% or lower. Patty just needs to continue saving 1% more a month to get there.
Example 3: Lebron pays a 15% effective tax rate and saves 10% of his net income. The ratio is therefore 15% / 10% = 150%. Even though Lebron is only paying an envious 15% effective tax rate, he's saving way too little to achieve financial security.
More Ideal Savings Ratios
Example 4: Stephanie pays a 33% effective tax rate and saves 70% of her income. The ratio is therefore 33% / 70% = 47%. Stephanie comes in right at the recommended TITTS ratio of 50%. Stephanie is perhaps not fully utilizing her income to maximize the joys of life. Alternatively, Stephanie could be paying too much taxes and should seek to lower her tax bill by moving.
Example 5: Sheila pays a 15% effective tax rate and saves 5% of her income. The ratio is therefore 15% / 5% = 300%. Sheila is up poops creek and will never be able to retire.
TITTS Ratio Example In Graphic Format
10% Net Savings Rate
| Tax And Savings Guide: Total Income Taxes To Total Savings (TITTS) | |||
| Effective Income Tax Rate | Net Savings Rate | TITTS Ratio | Analysis |
| 5% | 10% | 50% | Excellent |
| 10% | 10% | 100% | Good In A Bad Way |
| 15% | 10% | 150% | Average |
| 20% | 10% | 200% | Bad Donkey |
| 25% | 10% | 250% | Stinky Billy Goat |
| 30% | 10% | 300% | Horrendous |
| 35% | 10% | 350% | Stop Working |
| 40% | 10% | 400% | Dial 911 |
| 50% | 10% | 500% | Start A Revolution |
| Source: FinancialSamurai.com |
20% Net Savings Rate
| Tax And Savings Guide: Total Income Taxes To Total Savings (TITTS) | |||
| Effective Income Tax Rate | Net Savings Rate | TITTS Ratio | Analysis |
| 5% | 20% | 25% | Hero Status |
| 10% | 20% | 50% | Erecting A Shrine |
| 15% | 20% | 75% | Good In A Decent Way |
| 20% | 20% | 100% | Getting Sloppy |
| 25% | 20% | 125% | Commoner |
| 30% | 20% | 150% | Skinny Rat |
| 35% | 20% | 175% | Poor Muskrat |
| 40% | 20% | 200% | Getting Robbed Blind |
| 50% | 20% | 250% | Why Bother Working? |
| Source: FinancialSamurai.com |
30% Net Savings Rate
| Tax And Savings Guide: Total Income Taxes To Total Savings (TITTS) | |||
| Effective Income Tax Rate | Net Savings Rate | TITTS Ratio | Analysis |
| 5% | 30% | 17% | Watch Out For The IRS |
| 10% | 30% | 33% | Call Yourself The Boss |
| 15% | 30% | 50% | Early Retirement Awaits |
| 20% | 30% | 67% | Still Winning! |
| 25% | 30% | 83% | Strawberries And Cream |
| 30% | 30% | 100% | Lemon Merengue Pie |
| 35% | 30% | 117% | Average Like the Sun |
| 40% | 30% | 133% | Rich But Poor |
| 50% | 30% | 167% | Slipping Away To Oblivion |
| Source: FinancialSamurai.com |
50% Net Savings Rate
| Tax And Savings Guide: Total Income Taxes To Total Savings (TITTS) | |||
| Effective Income Tax Rate | Net Savings Rate | TITTS Ratio | Analysis |
| 5% | 50% | 10% | Watch Out For The IRS |
| 10% | 50% | 20% | Professional Minimalist |
| 15% | 50% | 30% | Early Retirement Awaits |
| 20% | 50% | 40% | Who Is Your Daddy? |
| 25% | 50% | 50% | Minimalist In Training |
| 30% | 50% | 60% | Winning |
| 35% | 50% | 70% | Pseudo Minimalist |
| 40% | 50% | 80% | What's The Point Of It All? |
| 50% | 50% | 100% | Can't Quit Fast Enough |
| Source: FinancialSamurai.com |
The more you can save, the more you will strive for financial independence. And I gotta tell you, being financially independence feels great!
Stay On Top Of Your Savings Guide And Control What You Can
It's much easier to control your savings rate than your effective income tax rate when your main source of income is from employment. Your TITTS percentage should continuously decline as you save more and figure out ways to legally shelter your income.
I'm convinced the majority of citizens will be able to achieve a comfortable retirement if they can get their TITTS ratio down to 50% or below. If you can't, just blame someone else.
Related: How Much Savings Should I Have By Age
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Real estate is my favorite way to achieving financial freedom because it is a tangible asset that is less volatile, provides utility, and generates income. Stocks are fine, but stock yields are low and stocks are much more volatile.
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Take a look at my two favorite real estate crowdfunding platforms that are free to sign up and explore:
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CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends.
I've personally invested $953,000 in real estate crowdfunding across 18 projects to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$300,000.Â
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“Alternatively, Stephanie could be paying too much taxes and should seek to lower her tax bill by moving to a lower income tax state… or moving out of the country.”
This was a joke, right? Even European tennis stars who genuinely like living in Monaco 186 days a year don’t do this anymore. Anyone with an income large enough to realize enough state income tax savings to make up for the costs associated with a move across state lines has enough money to live wherever they please, and would be fools not to take advantage of that benefit of wealth.
I mean, the TITTS thing sounds like a perfectly reasonable benchmark, but that degree of taxphobia isn’t generally associated with sound financial advice.
Check out Singapore and Hong Kong. Fantastic 15-20% flat tax rates. For many Americans living abroad, the first $97,000 is tax free.
There’s nothing wrong with moving to Florida, Washington, Texas, Nevada etc to save on state taxes.
You won’t have taxphobia if you don’t pay too much taxes, so feel thankful.
There’s nothing wrong with moving to any of those places, period. But there aren’t many people for whom “oh, just move” is sound tax advice. If you’re only saving a few hundred dollars a year, it’s self-defeating. If you’d be saving millions, it’s WORSE, because the only point of having that much money is to try to live where and how it pleases you to.
I just wanted to chime in here and thank you (belatedly) for this post, Sam. Along with your constant prodding for us to max out our 401(k) contributions, it has helped shape my current savings plan. As of this month, I’m finally maxing out my 401(k) and feel proud that I’m saving more of my income (~25%) than I’m paying in taxes (~18%)! While a 74% TITTS isn’t the best, I feel that I’m on the right track. Now I’m looking at real estate investment to start building passive income streams.
Well done Winston! 74% TITTS is better than 100% TITTS!
I just got a small raise, ratcheted up my savings, and am now at 50% TITTS (37% savings, 18% taxes)! Now I just need to keep myself disciplined with spending so that I don’t backslide.
What do you think about using savings for investment purposes (e.g. purchasing rental property)? Is it still savings if you’re spending it on an investment? As I mentioned in another post, I’ve maxed out my 401(k). My wife and I make too much to get anything out of a traditional IRA, so real estate looks like a good “home” for this money. Is sure doesn’t earn anything in the bank, and Texas doesn’t allow participation in P2P lending programs.
Nice job!
I’m always trying to mobilize at least 65% of my savings in investments and the remaining in risk free assets.
Sam,
I like the acronym. Gives yet another meaning to the phrase: “Gonna go TITTS up!”
So for my situation, effective tax rate is 25% (used to be 30%+ but mastering the local deductions have brought this down) and after tax savings rate is 80%. So just under 32% TITTS.
-Mike
Didn’t realize you were so frugal. Good job! I can only manage 70% here in expensive SF.
Interesting and well explained. Knowing how to properly manage your income should be a life lesson everyone should learn or seek financial help to actively invest in their future. After all we are living in a society that everything is now disposable.
Interesting concept. I had to go home and calculate how much I saved.
Last year was an overinflated income year for me, so my numbers are a bit skewed on the saving side. After calculating my tax bracket @ 28% and 70% savings, my score is close to 40%.
I consider this a one-off year though, because some of the money I got last year was unexpected and went straight into savings.
Everybody has a TITTS ratio mate. Just need to calculate and see where you stand in order to improve!
Sam,
What about your sales tax of 10% on consumption, (4.7% here for me), property tax rates on primary home, gasoline and vehicle tax, cell phone tax to pay for Obama phones, airfare, hotel and car tax when you travel. What rate do you assign that?
We got hit with the AMT tax this year so that threw off my tax calculations, it caused certain write offs being disallowed. The marriage penalty is much more painful with the AMT hit.
Sam next time I’m in SF for business we should grab some beers and discuss more about TITTS.
I focus on tax based on income because I’m focused on the working folks of the world. Not everybody owns a home, owns a vehicle, or travels.
Also for sales tax, that’s easy. I don’t buy much of anything that costs more than $100 in the state of California, b/c I don’t like paying sales tax. Oregon, I love you baby!
Here you go: https://www.financialsamurai.com/2010/10/15/how-higher-taxes-saved-me-a-alot-boatload-of-money/
It’s ironic most finance bloggers concentrate on being frugal, lowering expenses and getting rid of debt. If you earn enough taxes becomes your largest expense, yet many advocate paying off the house, and contributing only to the company match. A much more effective way to manage your finances is to maximize your deductions in order to reduce your taxes.
We earmark our interest deduction tax break as Roth IRA contributions. We contribute extra to the mortgage but only after maxing out both 401ks, and Roth IRAs. If we couldn’t max out the retirement accounts I would only pay the minimum on the mortgage.
Charles, a fundamental level trying to maximize deductions to reduce taxes is effectively lowering one’s tax expenses, with a side effect of being tax frugal (instead of food/utilities) and helping to get rid of debt (or in your case help to fund the Roths).
I hope you are doing well sir!
I like your approach quite a bit, though, I’ve never looked at doing taxes as a joyful event… that’s why I pay someone else to do them. :)
I found that focusing on finding ways to claim deductions and minimal living (maybe Leo Babuta is onto something?) might be an attractive option for some. Maybe even more so for those individuals that are stuck in lower wage positions at the moment due to a still weak economy.
As far as saving at least our effective tax rate, last year we were just $330 short of that, only because I didn’t start bumping my retirement contributions higher sooner in the year.
Now that I’ve increased my retirement contributions another 2%, we will definitely put more away than our effective tax rate for this coming year.
Thanks to people like you, KrantCents, Untemplater, JayCeezy, RB40, FirstMillion, and so many others on your site and others!
Who says you can’t teach an old dog new tricks? LOL
Wouldn’t this possibly a reason to have filled a Roth to the max as opposed to a Traditional IRA. Although I must say I know that you advocate for Traditional vice Roth, I just didn’t know if you did either type of IRA.
After all, you could be drawing on 10+ years worth of contributions currently since you’re under 59 1/2, or for that matter even using any extra cash to continue to fund a Roth even though you’re semi-retired.
Although that means you’d be getting taxed on it while pulling funds out of your retirement accounts either way. I just see it as you being able to save on taxes in your latter years personally.
Thoughts?
Couple more things.
In example 4, how does someone pay an effective tax rate of 33% but still save 70% of their income? I would venture to say this is impossible, since 70% + 33% = 103%.
After all, how can somebody save more than their paycheck has paid them after subtracting the taxes.
And while our effective tax rate was a mere 8.92%, and we only saved 8.54% of our income, that means we’re far away from the 50% suggestion you propose.
Now for this year, we’re right on target for saving an effective 19%-20% of our income in a combination of retirement, savings, and HSA accounts, so I guess I can be happy that if we maintain a below 10% effective tax rate than we will be erecting a shrine. :-)
Ah, I see the error of my ways Sam. It was 70% of after tax income, therefore she would be living off of 20.1% of her salary. Wow, that’s even crazier than you! That’s borderline Jacob Lund style.
After rerunning our figures, we did ok, since our after tax savings was 9.72%. So we hit 88% (well 87.86%) ratio, but that’s just into your good category for the this past year.
Good question, which can easily be explained by a simple example.
Salary: $100,000
Effective Tax Rate: 33%
Taxes Paid: $33,000
Income After Taxes: $67,000
70% after tax savings: $46,900
$33,000 / $46,900 = 70% TITTS
With only a 8.92% effective tax rate, you have a chance of being a hero by saving 20% or more. Do it, and forever be happy later on!
You’ve struck my curiosity with this one. I’m a big saver myself so I’m not sure I will like my numbers. It’s a good thing to calculate and keep an eye on though. I’m going to crunch my numbers as soon as I get home. Haha this is an easy acronym to remember.
Calculate and find out! Bigger is not always better.
Net savings? So are you counting 401k investments + interest in this equation? Between me, my employer, and my se401 from my freelance work thats approaching 30+ grand a year in pre tax contributions not including interest. (My company has a crazy match usually 40-90% of whatever I put in depending on how good a year we have).
Net savings includes all savings after you’ve paid your taxes. You can include 401k contribution if you want, even though it is pre-tax savings. Just knock the percentage down a bit since you have to pay taxes in the future.
30 grand a year is nice, but what percentage is that of total income and how does that compare to your effective tax rate? Everything is relative!
Our ratio is pretty good, but I don’t know the real value yet. I’m still not done with tax. :(
At least we don’t owe a lot this year. Our ratio is probably around 50% in the past, but not sure what it will look like from 2013 forward. Our income is much less now and we should be paying much less tax.
Once you’re done with your taxes let me know! It’ll be interesting to find out. I’ll have a new ratio next year for sure since 2013 will be the first full year of no W2 income and no severance pay. Will be exciting!
We’re at a tax rate of about 22%, after tax savings rate of 62%, which would make the ratio about 35%. I know we pay a relative boat load of federal taxes at the moment (state taxes are certainly not what’s bringing it that high!), but we expect that to go down as we live off of non-W2 money in the future, so feel like it’ll balance out over time.
Good ratio and keep it up! Early retirement awaits my lady.
Destined to become a classic article… And probably get a lot of accidental traffic from other searches and set off more than a few parental filters.
I was always a saver! Unfortunately, I am in extremely low tax bracket. I actually have a 35% savings rate! Early retirement, accomplished!
Not sure why it’s unfortunate to be in an extremely low tax bracket. Low income?
My goal is to be in the highest tax bracket! I had much more fun when I earned more to find ways to reduce my taxes. I think I am a closet tax geek. I probably should have been a tax attorney. I love messing with taxes.
Mess with Taxes, die like the rest?
Even if you are in a low tax bracket, what is your TITTS ratio? You can still do well.
Very interesting concept! I like it. My wife and I had a TITTS ratio of 46% for 2012 and are looking to improve that further in 2013. Our TITTS has definitely bounced around quite a bit over the years but we’ve gotten a grasp of our TITTS and are on the right path now.
How obscene!
Best of luck to you in 2013 all the same.
We’re just finishing up the Mortgage within a few months here. It’s the only thing keeping from firming up the TITTS ratio. Although we are already at 25%, just not a high enough savings %. We may make it to “watch out for the IRS” status though. We give lots of money. Hopefully, my super TITTS score won’t hurt our chances with them.
25% TITTS is sweet, although you do mention it’s b/c of a low effective tax rate as opposed to a higher savings rate.
The IRS folks are actually really nice. Every single one of them has been helpful and know the craziness of our tax code. Here’s a good follow up article for you to read: https://www.financialsamurai.com/2012/12/14/how-tax-collectors-like-the-irs-cleverly-rob-you-of-your-money/
My TITTS ratio came in at 31% this past year. I’m trying to significantly increase my savings percentage this year, so hopefully this time next year I’ll have augmented my TITTS even further.
Call yourself The BOSS with 31% TITTS! Well done.
Awesome. Really great explanation. For the past 20+ years, my wife and I combined have lived on 35%, saved 30%, and paid 30% in taxes (FS, our ratio includes Property Taxes which yours does not). A great book with an excellent worksheet to calculate one’s own rates is “The Tax Racket” by Martin L. Gross.
It always surprises me when somebody who should know better claims to pay “half my income!” in taxes, or otherwise insists on some ridiculous number but clearly doesn’t understand marginal and effective rates. Or, claims that “the rich have writeoffs!” as if paying $1 in charity to get back 35 cents is some kind of nefarious machination.
One thought for your online business, just in case…you can install an Amazon widget on your page, and visitors can make purchases through your website at no extra cost. You will realize between 1-3% of the purchase from Amazon; it adds up if people buy a big-screen, or even a book or two. Continued success to you, FS.
JayCeezy, so your TITTS ratio is 100% putting you at Lemon Meringue Pie status. Not bad, as I love lemon meringue pie, but could be better! Dial that savings rate up a couple percent, even with your property taxes included to get to double digit TITTS.
Actually FS to clarify, my numbers were on my Gross Savings Percentage of Total; this is a ratio I like to call “G-SPOT”.©-JayCeezy Most guys don’t care about it, and I really don’t blame them for focusing on the TITTS. My TITTS score is actually 65.2%, double-d in the hizzizouse, yo!