What’s a reliable measure of frugality?
It’s certainly not savings alone. For example, let’s say Jane Dough socked away $100,000 last year. At first blush, this might seem thrifty. But on second thought you might want to know something about Jane’s income. If you discovered she earned $2.45 million last year, her $100,000 in savings wouldn’t look so impressive (but at least no one would doubt her earning ability).
For a better gauge of frugality than mere savings, you might calculate the “savings rate,” a measure in which total savings are divided by total income.
Here’s an example. Let’s say that Jane’s brother, John Dough, earned $150,000 last year. He paid household expenses of $87,500 and taxes of $25,000. This left him with $37,500 in savings for a savings rate of 25 percent ($37,500/$150,000 = 25%). Is John fantastically frugal? His 25 percent savings rate sounds impressive, but we need more data before we bestow upon him any superlatives.
That’s where nationwide surveys come in.
The Bureau of Labor Statistics conducts an annual Consumer Expenditure Survey (CES), which asks thousands of citizens about their finances and provides data regarding income, taxes, household expenses, and savings. The survey is a huge operation. In the most recent 2013 CES, about 7,000 households were interviewed.
Using CES data, you can compare John Dough’s taxes, household spending, and savings to others who earn similar incomes. If you want, you can plug his numbers into the interactive calculator below, which I’ve dubbed the “Frugalometer.” And if you like, you can even plug in your own numbers. Like every other calculator on this website, the Frugalometer is completely confidential and nothing you enter is recorded or stored.
The purpose of the Frugalometer is to provide a better measure of frugality than a household’s annual savings or savings rate. It’s a useful yardstick that hopefully will inspire a few more people to spend less and save more—you, perhaps?
HOW TO ENTER DATA
The Frugalometer is easy to operate. You input three numbers only. In return, you receive all kinds of feedback about how you stack up against other households.
Line 1: Annual Pre-Tax Income. Estimate your gross income before taxes or retrieve it from Form 1040EZ (line 4) or Form 1040 (total all gains reported above line 22 and ignore all losses). Enter the amount in the first red box. (Note: the Frugalometer doesn’t work for reported incomes below $25,000 or above $250,000.)
Line 2: Annual Expenses (Excluding Social Security and Pension Payments). Enter your expenditures in the second red box. Don’t include any amounts you’ve paid into social security or pension funds. If you’ve never calculated your annual expenses before, here’s a convenient method for reaching a reliable figure.
Line 3: Annual Federal and State Taxes. Your total federal tax appears on Form 1040EZ at line 10 or Form 1040 at line 63. Retrieve your state tax from whichever line of the state form reports your total tax burden. Add together your federal and state taxes. Input the resulting sum into the last red box.
Now you’re ready for the Frugalometer. Once you make the required entries, lines 4 through 14 will display a ton of helpful information about your finances. A detailed key to reading each line appears below.
FRUGAL FRINGE FRUGALOMETER
KEY TO FRUGALOMETER RESULTS
Line 4: Annual Pre-Tax Income Rounded. This simply rounds the amount on line 1 to the nearest $100 so that the result can be matched to figures in the Frugalometer’s CES Database, which reports pre-tax income in hundred dollar intervals.
Line 5: National Average Expenses for Your Income. Using 2013 CES data, this shows the average expenses for your income level. As to incomes below $238,200, the averages were derived through a process of linear interpolation. As to incomes above $238,200, the averages reflect a process of linear extrapolation. To see the database, click on the “CES Data” tab that appears below the Frugalometer.
Line 6: National Average Federal and State Taxes for Your Income. This follows the same approach that was used in line 5, except that it reports average taxes rather than average expenses.
Line 7: National Average Savings for Your Income. In this simple calculation, the figures for lines 5 (expenses) and 6 (taxes) are subtracted from line 4 (income) to report the national average savings for your income level.
Line 8: National Average Savings Rate for Your Income. This divides line 7 (average savings) by line 4 (average pre-tax income) to report the average rate of savings achieved by others at your income level.
Line 9: Your Personal Savings. This reports the difference between your pre-tax income as entered in line 1 and your expenses and taxes as entered in lines 2 and 3. To see how your personal savings compare to the national average, compare line 9 to line 7. If line 9 is higher, congratulations—you’re saving more than the average household at your income level.
Line 10: Your Personal Savings Rate. This restates your personal savings as a percentage of your reported income in line 4. If this percentage is higher than line 8, you’re outperforming the national average for your income level.
Line 11: Your Savings Compared to the National Average as Stated in Dollars. This states a dollar amount for the difference between your annual savings and the average savings for households that earn your income. If line 11 is a positive figure, then you’ve bested the national average.
Line 12: Your Savings Stated as a Percentage of the National Average Savings Amount. This restates the dollar amount on line 11 as a percentage. For example, if the reported figure reads 10.57% this means that you’ve saved 10.57% more than the average household earning at your income level. If the reported figure is a negative percentage, you’re saving less than the average household at your income level.
Line 13: Your Frugalometer Score. Regardless of whether line 12 states a positive or negative value, line 13 rounds it off and adds 100 points. The higher your score the more frugal you are as compared to other savers. The average score is 100.
One benefit of this scoring system is that it’s weighted to allow direct comparisons among those who earn different incomes—much like a handicap scoring system for golfers. For example, someone who earns $40,000 and saves $10,000 will receive a higher score than someone who saves $30,000 but earns $200,000. This approach recognizes a basic reality: those who save despite having lower incomes often practice more frugality than many high earners—even though the high earners might report bigger savings.
Line 14: Your Frugalometer Grade. This provides a letter grade to accompany the numerical score on line 13. Grades appear in increments of C, C+, B-, B, B+, A-, etc. Generally, you move up one grade increment every time you add five points to your line 13 score. To see a full schedule of the letter grade assigned each numerical score, click the “Grade” tab that appears beneath the Frugalometer.
* * *
If you’d like to explore other Frugal Fringe calculators, click any of the following:
- yFIRECalc 1.0: The Retirement Calculator that Shows Why You Should Retire Early
- Worthometer: Compare Your Net Worth to National Surveys
- How to Compare Your Income to Others (Without Being Rude)
- Compare Your Adjusted Gross Income to Others by Age and Filing Status [Using 2011 IRS Data]
- Compare Your Adjusted Gross Income to Others by Age and Filing Status [Using 2012 IRS Data]
- Compare Your Student Loan Debt to National Studies—What’s Your Percentile?
- Worthometer Canada: Compare Your Net Worth to Others (Without Being Rude)
If you’re wondering how the Frugalometer operates, its workings are similar to this site’s popular Worthometer. A description of Worthometer methodology appears here.
If you have any questions or remarks about the Frugalometer, please don’t keep them to yourself. Send me an email or leave a comment below.
Photo by taxcredits.net