After years of talking about my goal of achieving financial independence in Switzerland by 40 on this blog, I realize that some basics are not clear to the readers who joined my adventure along the way.
Starting with one of the most important variables of the FIRE movement for any true Mustachian: the savings rate.
As with all elements of personal finance, Switzerland comes with its own set of specifics on how to calculate your savings rate.
So here's the magic formula:
Savings rate = ((Income - Expenses) / Income ) x 100
Or in other words:
Savings rate = Savings / Income x 100
What to include and exclude in the calculation of your savings rate as a Swiss?
Personal finance being what it is, i.e. personal, there are different opinions on what to include and what to exclude when calculating your savings rate.
After many iterations and discussions with the members of the Team MP, I think I have arrived at a formula that is the most used in our Swiss FIRE community.
- Our net salaries
- Any additional income such as my "Kickstarter" contributions from readers for my book project in progress, or Mrs. MP's passion project
- Any bonus at work
- Repayments from people to whom we lent money
- Reimbursements from various sources, like health insurance, taxes, my job expenses, etc.
- The monthly increases of our LOB (to calculate this, I take the value of my termination benefit in year X+1, subtract the value of my termination benefit in year X, and divide by 12 to get the amount my employer and I contribute monthly)
- Bank interests
- Dividends paid into our Interactive Brokers investment account
- The capital increase of a security only upon the effective sale of this latter
- The rents of our rental building in France
- Bonus cashback from Migros Cumulus (via my credit card) and other similar programs
- Sales of items on Anibis and other second-hand platforms
And I exclude:
- Transfers from my various accounts to my private account (because in the end it's not income, it's just money that moves around)
- The capital increase of my shares that I didn't sell. It's called unrealized performance, which means that until it's not sold, it's not really an income in my pocket
- Exchange rate gains on the different currencies I may have in stock on IB, because idem, as long as it's not converted into CHF, I don't really benefit from it
- All the expenses we pay with our private account or by credit card
- Which also includes expenses related to our ancillary activities
- And I mention the following charges fees they're often on accounts we look at less:
- Management fees for our pillar 3a
- Transaction fees on our investment accounts
- The management and notary fees of our building on our SCI bank account
- Our mortgage interest payments
And I exclude:
- The transfer to our children's investment account (because it's not an expense in itself)
- I do not take into account transfers between my own accounts (including the savings that we transfer to our IB account), nor the potential decrease in my securities in the event of a stock market crash, nor the negative variations of my currencies
- Purchases of securities (because in the end this is just another movement between my IB cash account and my IB securities account)
- The repayment of our French property loan because it is also a movement between our SCI account (i.e. the rents received) and the value of our property which increases accordingly
Why is the savings rate the keystone of the FIRE movement?
If you're new to the blog, you might wonder why we have fun calculating the savings rate. Are we just math nerds?
Nothing like that!
We love the savings rate in the FIRE community because it's a magic number. It's the one that predicts (in a scientifically proven way) how many years are left before you can retire early:
|Savings rate||Years until retirement|
I detail the math and economic reasoning behind this table in this article (MP note: link coming soon).
So that's why we're all getting crazy in the Team MP to increase this savings rate to the maximum!
And you, how do you calculate your savings rate as a Swiss?