Author Topic: The "everybody seems wealthy" illusion — is it really just all fueled by debt?  (Read 72634 times)

honeybbq

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So when you guys calculate your savings rate, you are including your mortgage payments, or even the part going to principle, as savings?

Personally, I do. I contribute about $1500/month extra to the mortgage. Plus the amount to principal if I am calculating my 'savings rate'. But I really don't calculate that very often because I really don't care what it is at this point in my life.

I'm more interested in my estimated net worth, which I calculate all the accounts, plus the zillow amount of my home less my outstanding mortgage.

I live in a HCOLA where the houses appreciate 10% a year, so I am confident that I can get within 3% of my zillow estimate of my house at any given second. If I lived in rural Missouri, I might have a different approach.


I'm a red panda

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I do not count my house in my savings nor in my net worth.  As long as I'm living in it, it doesn't have value as far as I'm concerned. I don't count anything else I've bought in my net worth.

DividendMoney

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I do not count my house in my savings nor in my net worth.  As long as I'm living in it, it doesn't have value as far as I'm concerned. I don't count anything else I've bought in my net worth.

At the bare minimum, your house has the value of the equivalent rent you would need to pay to live in a similar property.

I'm a red panda

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I do not count my house in my savings nor in my net worth.  As long as I'm living in it, it doesn't have value as far as I'm concerned. I don't count anything else I've bought in my net worth.

At the bare minimum, your house has the value of the equivalent rent you would need to pay to live in a similar property.

It would cost a lot more to rent a similar property than to pay my mortgage, so I don't think that's true.

aspiringnomad

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I do not count my house in my savings nor in my net worth.  As long as I'm living in it, it doesn't have value as far as I'm concerned. I don't count anything else I've bought in my net worth.

This comes up very often here, but IMO it's a bit silly not to count your house as an investment and principal payments as savings. The spending part is what you pay in interest (i.e., the cost of money borrowed), maintenance, taxes, HOA if applicable, etc. Principal is not spending because presumably you will get it back (and perhaps more) when you sell it. Now, depending on your local housing market, you may not get it back in full, but unless you have some kind of special insight into the future, you shouldn't be calculating your future net worth based on the idea that your house will be worth nothing when you sell it. A very clear example of why that approach is problematic: is someone with a 10-year or 15-year mortgage less frugal than someone with a 30-year mortgage of the same value? Of course not. What about someone who makes additional payments to the mortgage every month, as many on here do? Regular principal payments should not be counted as spending any more than those extra payments are counted as spending, because they are fungibly the exact same thing. I understand that counting all housing payments as spending makes some folks feel more conservative in their approach to wealth building or maybe they are using it as some kind of jedi mind trick to encourage a higher savings rate. That's fine, but it's no less arbitrary than not counting 401k contributions or than just knocking 100k off your networth, just because why not? Works for some people, but I think it runs counter to the analytical, fact-based approach to FIRE that people on this forum should aspire to.

Lastly, given the historical returns of the housing market (appreciation of about ~3% a year), buying a house is no more consumption than buying a bond is consumption. The interest you pay on your mortgage, if you have one, is consumption (i.e., you are "consuming" the time value of money). The often significant transaction costs are consumption (i.e, you are consuming the services of realtors, mortgage brokers, and local government services via the taxes you might pay). Maintenance costs, which also can be quite significant, are obviously consumption. But unless you live in a car, a boat, or a trailer, the house itself is no more consumed than any other appreciating asset is "consumed."

DividendMoney

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I do not count my house in my savings nor in my net worth.  As long as I'm living in it, it doesn't have value as far as I'm concerned. I don't count anything else I've bought in my net worth.

At the bare minimum, your house has the value of the equivalent rent you would need to pay to live in a similar property.

It would cost a lot more to rent a similar property than to pay my mortgage, so I don't think that's true.

You have to live somewhere.
Let's look at it another way.

If you sold your house, how much would 4% of the net proceeds cover in rent?
Per your previous comment, your answer should be $0.00 because you state your home has no value.  But, we know that's not true.

deeshen13

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I do not count my house in my savings nor in my net worth.  As long as I'm living in it, it doesn't have value as far as I'm concerned. I don't count anything else I've bought in my net worth.

This comes up very often here, but IMO it's a bit silly not to count your house as an investment and principal payments as savings. The spending part is what you pay in interest (i.e., the cost of money borrowed), maintenance, taxes, HOA if applicable, etc. Principal is not spending because presumably you will get it back (and perhaps more) when you sell it. Now, depending on your local housing market, you may not get it back in full, but unless you have some kind of special insight into the future, you shouldn't be calculating your future net worth based on the idea that your house will be worth nothing when you sell it. A very clear example of why that approach is problematic: is someone with a 10-year or 15-year mortgage less frugal than someone with a 30-year mortgage of the same value? Of course not. What about someone who makes additional payments to the mortgage every month, as many on here do? Regular principal payments should not be counted as spending any more than those extra payments are counted as spending, because they are fungibly the exact same thing. I understand that counting all housing payments as spending makes some folks feel more conservative in their approach to wealth building or maybe they are using it as some kind of jedi mind trick to encourage a higher savings rate. That's fine, but it's no less arbitrary than not counting 401k contributions or than just knocking 100k off your networth, just because why not? Works for some people, but I think it runs counter to the analytical, fact-based approach to FIRE that people on this forum should aspire to.

Lastly, given the historical returns of the housing market (appreciation of about ~3% a year), buying a house is no more consumption than buying a bond is consumption. The interest you pay on your mortgage, if you have one, is consumption (i.e., you are "consuming" the time value of money). The often significant transaction costs are consumption (i.e, you are consuming the services of realtors, mortgage brokers, and local government services via the taxes you might pay). Maintenance costs, which also can be quite significant, are obviously consumption. But unless you live in a car, a boat, or a trailer, the house itself is no more consumed than any other appreciating asset is "consumed."

Good summary.  I've  never struggled with accounting for a house; it doesn't need to be made unduly complicated:

Your Income Statement:
Principle - Savings
Interest, insurance, taxes, maintenance - Expenses

Your Balance Sheet:
Market value of house - Asset
Mortgage - Liability
M.V.- Mort.  = Equity

I'm a red panda

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If you sold your house, how much would 4% of the net proceeds cover in rent?

Do you do this for every possession you own?  I could sell my clothes, my wedding ring, my car, my dog.  These things are all assets, though not as much as my house.

Until I sell it, I don't count it.

The question was "So when you guys calculate your savings rate, you are including your mortgage payments, or even the part going to principle, as savings?"  My answer was "nope".

I see my house as an expense. I plan to live there until I die, or if I move, I'd be trading it for another house- so I'm not going to be cashing out on it. It isn't an investment, it isn't savings. It is a place to live that I purchased.

DividendMoney

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Quote
If you sold your house, how much would 4% of the net proceeds cover in rent?

Do you do this for every possession you own?  I could sell my clothes, my wedding ring, my car, my dog.  These things are all assets, though not as much as my house.

Until I sell it, I don't count it.

The question was "So when you guys calculate your savings rate, you are including your mortgage payments, or even the part going to principle, as savings?"  My answer was "nope".

I see my house as an expense. I plan to live there until I die, or if I move, I'd be trading it for another house- so I'm not going to be cashing out on it. It isn't an investment, it isn't savings. It is a place to live that I purchased.

So, I assume you have an interest only mortgage?

Chris22

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Quote
If you sold your house, how much would 4% of the net proceeds cover in rent?

Do you do this for every possession you own?  I could sell my clothes, my wedding ring, my car, my dog.  These things are all assets, though not as much as my house.

I don't for most things, because they aren't worth anything material.  I do have three cars, so I figure one of the three could be sold off if I needed the cash, so I mentally add a little bit for that (~$10k) but overall, everything I own (outside of cars and house and wedding/engagement rings) would struggle to bring $5k total, so it isn't worth considering them.  Dog in particular might be more of a liability ;) 

dragoncar

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The only reason to calculate "savings," besides bragging rights, is to determine your time to retirement. 

Let's say you earn $10k/mo net, have a $3k mortgage ($1k to principal) and spend $2k otherwise.  In this respect, you have two options:

Count principal as savings.  Savings rate is 60% meaning 16.6 years to retirement (again assuming cash for simplicity).  You still have a mortgage payment, but it goes away after 15 years, so you don't need to save enough to sustain that payment indefinitely.  The payment also does not increase with inflation

Count principal payment as an expense.  Savings rate is 50% meaning 25 years to retirement (in cash).  But wait, if you retire in 25 years, you will only have 5 years (or less) on the mortgage.  You will have saved TOO LONG because you overestimated your retirement expenses.

You can correct this (and some do) by doing a separate calculation for pre-retirement and post-retirement expenses.  For example, you know you need 25 time your expenses, minus the mortgage, after 30 years, thereby assuming a paid off house in retirement.

But this is needlessly complicating the savings rate->retirement estimation.  If you include your principal payment in savings, you IMPLICITLY account for the fact the your mortgage will eventually go away, thereby lowering your expenses in retirement.

I think either way you get the same result-- it's just that the math is more convoluted when you count principal as expense.

dragoncar

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If you sold your house, how much would 4% of the net proceeds cover in rent?

Do you do this for every possession you own?  I could sell my clothes, my wedding ring, my car, my dog.  These things are all assets, though not as much as my house.

I don't for most things, because they aren't worth anything material.  I do have three cars, so I figure one of the three could be sold off if I needed the cash, so I mentally add a little bit for that (~$10k) but overall, everything I own (outside of cars and house and wedding/engagement rings) would struggle to bring $5k total, so it isn't worth considering them.  Dog in particular might be more of a liability ;)

Sure, I'd do this for everything I own if it weren't so time consuming.  If I have a good pair of shoes, it's one pair of shoes I don't need to buy anytime soon.  As mentioned, the house is likely the highest percentage of NW and my shoes are so insignificant as not to be worth the time to add up.  However, if I owned a $1 million yacht or even a $30k car, I'd definitely be wondering if I could rent the yacht for cheaper by investing the proceeds.

Kaspian

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The "everybody seems wealthy" illusion — is it really just all fueled by debt?
« Reply #262 on: January 26, 2016, 12:14:27 PM »
A house is an asset, part of your net worth.  It may appreciate in value or depreciate.  Paying off debt (including a mortgage) isn't saving.  It's paying for something you already bought--no different than paying off a credit card balance for a new TV.  If someone needs to tell themselves paying off the mortgage is "saving" in order to self-motivate, I can fully understand that.  ...But to extoll it to others as such is delusional.

Rollin

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I think much of it is - or at least paid for by "leverage".

What I mean is, for many of these people, they use credit to leverage their future cash flow into current instant gratification. IF they can maintain the cash flow, they will be OK for the most part. It is when the cash flow ends OR they let their instant greed/need get too far out of control OR both. Thus is why so many are one paycheck away from crises, or one unexpected expense away from crises.

But, I know how you feel. I almost never spent money I didn't have yet (or even money I had), and have watched peers take more trips, buy grander houses or vacation homes, and wear nicer clothes.  But I retired last year (@ 55 yo - a bit late to the MMM or FIRE game, but I caught up quickly). Had I been more aware years ago, I could have retired earlier.

What is the difference between debt and leverage?

Ftao93

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2 examples:

1 person I work with, hard worker, tons and tons of hours, very high position/salary (actual #'s are not known to me, but are clearly in multiple 6 figures).   He works really, really hard.  He found out last year that he has a disease that will most likely kill him within 5-7 years.  His attitude has shifted vastly, and he will be headed for disability in 6 weeks.

one of his lieutenants is in a similar position.  2 high incomes, 2 kids.  Big house, big cars, constant worry over money.  She brings in a starbucks (venti of course) nearly every day, but tosses half of it.

Me:  50k a year.  I didn't start saving until a few years ago, like...NOTHING.  we have paid off scooters and a motorcycle, all of which could be traded in for a bus pass if we had to (actually we both get bus passes for work!).  I put just shy of 30% away before I get it into 401k.  I vowed to pay for everything in the future with cash, and we want to save 10-12k a year toward a house payment for a few years.  If we can't get a reasonable house with that at the time (Denver is HUGELY overpriced at the moment) then we will likely invest it and hide under a rock.

We still have a nice vacation every year, just try to keep it reasonable, pay almost all cash, and anything that goes over on a card, pay it off before interest accumulates.  "But how do you pay for all that?"  I save up!

We do go out to eat (and my drinks) more often than we should.  I shamed myself last month by spending like $200 on utter crap, which could have gone to much better places.  I don't mind enjoying life, and money spent on travel isn't wasted, but our expenses are very low.

Many of you are 100x more efficient than this, so I'm not sure how people think it's OK to have a monthly income of 10k and somehow worry over $$.

dragoncar

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A house is an asset, part of your net worth.  It may appreciate in value or depreciate.  Paying off debt (including a mortgage) isn't saving.  It's paying for something you already bought--no different than paying off a credit card balance for a new TV.  If someone needs to tell themselves paying off the mortgage is "saving" in order to self-motivate, I can fully understand that.  ...But to extoll it to others as such is delusional.

You can only count paying off tv debt as an expense if you ignored the expense when you bought the tv.  Personally, I count a tv purchase as an expense when I pay with my credit card.  It lowers my net worth by incurring the debt.  When I pay off the card (from income) it increases my net worth by reducing my liability.   If you count it as an expense both times, you are accounting wrong and may God have mercy on your soul


Edit: if you want to consider the debt payment an expense and ignore the purchase of the tv that's fine, it's just really counterintuitive.  I don't need to feel guilty about buying anything until I finally pay off the debt incurred to purchase them!

To clarify the above, debt payment itself isn't "saving."  Rather, using your cash flow to pay off debt rather than the buy things is saving.  This is analogous to the fact that buying stocks isn't "saving" in itself, rather using your income to purchase stocks instead of buying things is saving.  Whether you direct your income to debt payoff or stock purchases, you are increasing your net worth.
« Last Edit: January 26, 2016, 12:52:54 PM by dragoncar »

Think

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A house is an asset, part of your net worth.  It may appreciate in value or depreciate.  Paying off debt (including a mortgage) isn't saving.  It's paying for something you already bought--no different than paying off a credit card balance for a new TV.  If someone needs to tell themselves paying off the mortgage is "saving" in order to self-motivate, I can fully understand that.  ...But to extoll it to others as such is delusional.

I completely disagree with this.  I wouldn't consider interest payments to be savings.  However, a principal payment is definitely a form of savings.  If you sell your home, you should receive this money unless your home has depreciated in value, which isn't that different from any other investment. 

Let's say last month I had 500k in equity towards my home and today I make a 50k payment.  Now I have 550k in equity.  Why wouldn't you consider this savings?  Instead of putting this 50k in the market I'm simply investing in residential property. 

It's weird you seem to equate a television with a house.  Over time, homes tend to appreciate in value.  Maybe not at the same rate as the stock market, but they are almost always worth more 03 years down the road.  Televisions do not.  No one would consider a television an investment vehicle. 

Think

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Quote
If you sold your house, how much would 4% of the net proceeds cover in rent?

Do you do this for every possession you own?  I could sell my clothes, my wedding ring, my car, my dog.  These things are all assets, though not as much as my house.

Until I sell it, I don't count it.

The question was "So when you guys calculate your savings rate, you are including your mortgage payments, or even the part going to principle, as savings?"  My answer was "nope".

I see my house as an expense. I plan to live there until I die, or if I move, I'd be trading it for another house- so I'm not going to be cashing out on it. It isn't an investment, it isn't savings. It is a place to live that I purchased.

What about a rental property?  I make principle payments towards my rental property each month.  In x years the rental property will be paid for and I will owe it free and clear.  Same as my primary residence.  I can sell my house anytime I want to just like I can sell my rental property.  It's an asset.  It may not perform as well as other types of investments but it still is.  if you don't believe it is then you have no business owning a home or investing in any rental properties. 

zephyr911

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GAH!

Forgive my pedantry, but it's "princiPAL".

A principle is an idea or a tenet, one you might hold dearly, or live by. Principal is the non-interest portion of your mortgage payment.

Think

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GAH!

Forgive my pedantry, but it's "princiPAL".

A principle is an idea or a tenet, one you might hold dearly, or live by. Principal is the non-interest portion of your mortgage payment.

I know that.  It's called typing quickly on your iPhone. 

aspiringnomad

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A house is an asset, part of your net worth.  It may appreciate in value or depreciate.  Paying off debt (including a mortgage) isn't saving.  It's paying for something you already bought--no different than paying off a credit card balance for a new TV.  If someone needs to tell themselves paying off the mortgage is "saving" in order to self-motivate, I can fully understand that.  ...But to extoll it to others as such is delusional.

Ha, you need to revisit/take Accounting or Econ 101. By your very faulty logic, when I sell my real estate holdings and slow travel the world at FIRE, the duration of my mortgages and any additional principal payments I made are both immaterial...maybe I should just burn the principal returned - it was spent money after all.

I'm a red panda

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if you don't believe it is then you have no business owning a home or investing in any rental properties.

I own a home so I have somewhere to live.  Just like I own clothes so I have something to wear.

I could sell my clothes too, but I don't count them as savings.

Chris22

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A house is an asset, part of your net worth.  It may appreciate in value or depreciate.  Paying off debt (including a mortgage) isn't saving.  It's paying for something you already bought--no different than paying off a credit card balance for a new TV.  If someone needs to tell themselves paying off the mortgage is "saving" in order to self-motivate, I can fully understand that.  ...But to extoll it to others as such is delusional.

Ha, you need to revisit/take Accounting or Econ 101. By your very faulty logic, when I sell my real estate holdings and slow travel the world at FIRE, the duration of my mortgages and any additional principal payments I made are both immaterial...maybe I should just burn the principal returned - it was spent money after all.

If I buy a car, make the payments on it, pay it off, and then sell it and take the $5k I make on the sale and go on vacation, is that savings?

aspiringnomad

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A house is an asset, part of your net worth.  It may appreciate in value or depreciate.  Paying off debt (including a mortgage) isn't saving.  It's paying for something you already bought--no different than paying off a credit card balance for a new TV.  If someone needs to tell themselves paying off the mortgage is "saving" in order to self-motivate, I can fully understand that.  ...But to extoll it to others as such is delusional.

Ha, you need to revisit/take Accounting or Econ 101. By your very faulty logic, when I sell my real estate holdings and slow travel the world at FIRE, the duration of my mortgages and any additional principal payments I made are both immaterial...maybe I should just burn the principal returned - it was spent money after all.

If I buy a car, make the payments on it, pay it off, and then sell it and take the $5k I make on the sale and go on vacation, is that savings?

If you still can't tell the difference between a steeply depreciating asset like a car and an appreciating asset like real estate, then I guess I see why this is confusing to you.

Chris22

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A house is an asset, part of your net worth.  It may appreciate in value or depreciate.  Paying off debt (including a mortgage) isn't saving.  It's paying for something you already bought--no different than paying off a credit card balance for a new TV.  If someone needs to tell themselves paying off the mortgage is "saving" in order to self-motivate, I can fully understand that.  ...But to extoll it to others as such is delusional.

Ha, you need to revisit/take Accounting or Econ 101. By your very faulty logic, when I sell my real estate holdings and slow travel the world at FIRE, the duration of my mortgages and any additional principal payments I made are both immaterial...maybe I should just burn the principal returned - it was spent money after all.

If I buy a car, make the payments on it, pay it off, and then sell it and take the $5k I make on the sale and go on vacation, is that savings?

If you still can't tell the difference between a steeply depreciating asset like a car and an appreciating asset like real estate, then I guess I see why this is confusing to you.

If I bought into the market 3 weeks ago before it tanked, is it not an investment?  Is the house I bought in 2008 that's down about 15% from my original sales price an investment or not?


No, my issue is not a lack of understanding, the issue is you can't say paying off debt A is saving but debt B is spending based solely on speculation of what the value of the underlying asset is going to do.  I personally don't think that paying off one's house is saving.   

DividendMoney

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if you don't believe it is then you have no business owning a home or investing in any rental properties.

I own a home so I have somewhere to live.  Just like I own clothes so I have something to wear.

I could sell my clothes too, but I don't count them as savings.


I will pay you cash, the amount owing on your mortgage for your home and you can continue paying me rent in the amount of your current mortgage payment plus your taxes and insurance costs for a place to live. I'll even take on the capital expenditure costs going forward.
This will give you access to cash for investing and still allow you to keep the same 'expense' for a place to live. 

PM me with address to send my offer to purchase and rental contract agreement.

Deal?

I'm a red panda

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If you still can't tell the difference between a steeply depreciating asset like a car and an appreciating asset like real estate, then I guess I see why this is confusing to you.

If all your real estate has appreciated, you are lucky. Real estate depreciates too.

argonaut_astronaut

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A house is an asset, part of your net worth.  It may appreciate in value or depreciate.  Paying off debt (including a mortgage) isn't saving.  It's paying for something you already bought--no different than paying off a credit card balance for a new TV.  If someone needs to tell themselves paying off the mortgage is "saving" in order to self-motivate, I can fully understand that.  ...But to extoll it to others as such is delusional.

Ha, you need to revisit/take Accounting or Econ 101. By your very faulty logic, when I sell my real estate holdings and slow travel the world at FIRE, the duration of my mortgages and any additional principal payments I made are both immaterial...maybe I should just burn the principal returned - it was spent money after all.

If I buy a car, make the payments on it, pay it off, and then sell it and take the $5k I make on the sale and go on vacation, is that savings?

If you still can't tell the difference between a steeply depreciating asset like a car and an appreciating asset like real estate, then I guess I see why this is confusing to you.

I think it is worth pointing out that real estate doesn't always appreciate. I read an article (somewhere) that suggested that home prices are tied to average income and interest rates. Interest rates have been falling since 1980 and incomes have risen with inflation means that housing prices have gone up. The overarching point of the article was that to most people the price of a house is set by the monthly payment.

As an example, say an average person can afford to pay $1000 per month toward housing. With interest rates at ~4% they can afford a $200K mortgage with 30 years at $955/month (excluding taxes/insurance for simplicity). If interest rates rise to 8% then that same family can only afford a $130K mortgage. Interest rates play across the entire market, so if every middle class family can afford $70K less then the real estate market will depreciate.

BTDretire

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A house is an asset, part of your net worth.  It may appreciate in value or depreciate.  Paying off debt (including a mortgage) isn't saving.  It's paying for something you already bought--no different than paying off a credit card balance for a new TV.  If someone needs to tell themselves paying off the mortgage is "saving" in order to self-motivate, I can fully understand that.  ...But to extol it to others as such is delusional.
  I don't count my paid off house in my networth.
I can't spend it, it has a cost, insurance, maintenance, and taxes.
But it does give us place to live, and we need a place to live.
 Only my invested financial assets can either, generate spendable income or be spent directly.
I do consider my home a small insurance policy, probably for my wife, because if our investment plan
fails near the end, she can do a reverse mortgage and get a few more years income.
The house probably appreciates a little more than it costs in, insurance, maintenance, and taxes.
So, I guess it is a slightly growing insurance policy.
 But, to each, there own way of think about there home.

cube.37

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A house is an asset, part of your net worth.  It may appreciate in value or depreciate.  Paying off debt (including a mortgage) isn't saving.  It's paying for something you already bought--no different than paying off a credit card balance for a new TV.  If someone needs to tell themselves paying off the mortgage is "saving" in order to self-motivate, I can fully understand that.  ...But to extoll it to others as such is delusional.

^This. Paying off debt is not saving. Sure, it'll increase your networth, but it's not saving.

Kaspian

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A house is an asset, part of your net worth.  It may appreciate in value or depreciate.  Paying off debt (including a mortgage) isn't saving.  It's paying for something you already bought--no different than paying off a credit card balance for a new TV.  If someone needs to tell themselves paying off the mortgage is "saving" in order to self-motivate, I can fully understand that.  ...But to extoll it to others as such is delusional.

^This. Paying off debt is not saving. Sure, it'll increase your networth, but it's not saving.

It's funny how people believe in "good debt" now.  So cute!  :)

"By the way, recent surveys have indicated that young homebuyers today don’t consider mortgages to be ‘debt’. Did I ever mention this won’t end well?"   http://www.greaterfool.ca/2016/01/26/unloved/

ender

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A house is an asset, part of your net worth.  It may appreciate in value or depreciate.  Paying off debt (including a mortgage) isn't saving.  It's paying for something you already bought--no different than paying off a credit card balance for a new TV.  If someone needs to tell themselves paying off the mortgage is "saving" in order to self-motivate, I can fully understand that.  ...But to extoll it to others as such is delusional.

^This. Paying off debt is not saving. Sure, it'll increase your networth, but it's not saving.


Plenty of people plan on retiring to a lower cost of living area - in those cases, paying down a mortgage early is a form of saving - because you actually will reclaim the additional mortgage principal when you downsize.

In this situation, paying more on your mortgage is an investment of sorts, just one with a lower expected return and minimal volatility than the market (at current mortgage rates).

Chris22

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A house is an asset, part of your net worth.  It may appreciate in value or depreciate.  Paying off debt (including a mortgage) isn't saving.  It's paying for something you already bought--no different than paying off a credit card balance for a new TV.  If someone needs to tell themselves paying off the mortgage is "saving" in order to self-motivate, I can fully understand that.  ...But to extoll it to others as such is delusional.

^This. Paying off debt is not saving. Sure, it'll increase your networth, but it's not saving.


Plenty of people plan on retiring to a lower cost of living area - in those cases, paying down a mortgage early is a form of saving - because you actually will reclaim the additional mortgage principal when you downsize.

In this situation, paying more on your mortgage is an investment of sorts, just one with a lower expected return and minimal volatility than the market (at current mortgage rates).

Paying down a mortgage is a way of building equity, or acquiring an asset, or building wealth.  I just don't think it meets the definition of "Saving".

Kaspian

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Paying down a mortgage is a way of building equity, or acquiring an asset, or building wealth.  I just don't think it meets the definition of "Saving".

Exactly!  But unless you're buying a property solely to rent, real estate (or its payments) does not fall under "investment", it falls under "housing expense".  If you seriously believe you're going to make money when you later sell your property, that falls under "real estate speculation".  (Same as gold, silver, antiques, comic books, etc.)

DividendMoney

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Paying down a mortgage is a way of building equity, or acquiring an asset, or building wealth.  I just don't think it meets the definition of "Saving".

Exactly!  But unless you're buying a property solely to rent, real estate (or its payments) does not fall under "investment", it falls under "housing expense".  If you seriously believe you're going to make money when you later sell your property, that falls under "real estate speculation".  (Same as gold, silver, antiques, comic books, etc.)

Same as investing in the stock market... or, is that considered saving?

Chris22

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Paying down a mortgage is a way of building equity, or acquiring an asset, or building wealth.  I just don't think it meets the definition of "Saving".

Exactly!  But unless you're buying a property solely to rent, real estate (or its payments) does not fall under "investment", it falls under "housing expense".  If you seriously believe you're going to make money when you later sell your property, that falls under "real estate speculation".  (Same as gold, silver, antiques, comic books, etc.)

RE is a little unique because it is an expense you basically HAVE to incur.  You need a place to live, and unless you have someone else willing to support you, that's going to cost money.  So any analysis on money made or lost on RE need to be balanced against what you would have had to pay anyways (and you can net that with the tax benefit of I/T writeoffs), and theoretically against the opportunity cost of the money you could have invested had you not bought RE (which may be near $0 if you live in a place with high rent prices). 

aspiringnomad

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Oy vey, where are all the engineers and finance minded folks? I had thought this forum was more precise in applying definitions and calculations than the population at large, but I guess not.

Chris22

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Oy vey, where are all the engineers and finance minded folks? I had thought this forum was more precise in applying definitions and calculations than the population at large, but I guess not.

As a finance person, I AM applying a precise definition:  "keep and store up (something, especially money) for future use."  I don't get how sending money to someone else to pay a debt meets the strict definition of "keep and store up."  Your problem is that you are confusing "investing" with "saving". 

Kaspian

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The equation goes something like:

(Sale value of house) + (cost you would have spent renting) - (purchase cost of house downpayment and all mortage payments) - (maintenance) - (property taxes) - (6% lost opportunity cost of down payment, all mortagage payments, maintenance, and property taxes)

After inflation, most people don't actually come out much (if any) ahead on the sale of their property in the long run.  It's the lost opportunity cost which is conveniently neglected by most.  If you buy a house for $200K and sell it 20 years later for $340K, it may look good on paper, but not necessarily the case once you factor in what you would have made with the money parked elsewhere.
« Last Edit: January 27, 2016, 11:05:40 AM by Kaspian »

FenderBender

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Some people are also a lot more comfortable living close to the edge

living close to the edge defines many people such that living anywhere else is completely unfamiliar and so uncomfortable.  for them to have money is not them so they spend the money to get back to the real them which is someone who is broke. 

it is disappointing that living with stress becomes such the norm that most people can't handle the minute they have any cash windfall they find a way to spend it because having it is just too uncomfortable.

 

dragoncar

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Oy vey, where are all the engineers and finance minded folks? I had thought this forum was more precise in applying definitions and calculations than the population at large, but I guess not.

As a finance person, I AM applying a precise definition:  "keep and store up (something, especially money) for future use."  I don't get how sending money to someone else to pay a debt meets the strict definition of "keep and store up."  Your problem is that you are confusing "investing" with "saving".

Savings is money you don't spend.  Debt payoff is not an expenditure - the money was already spent.  Likewise OF COURSE investments are savings.... We don't consume the assets we buy.

Consider that almost everyone on this web site is either paying off debt or investing aggressively..  Are you saying we don't save any money here?

Chris22

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If you buy a house for $200K and sell it 20 years later for $340K, it may look good on paper, but not necessarily the case once you factor in what you would have made with the money parked elsewhere.

Correct, but there also may (or may not) be a non-trivial lifestyle cost in terms of quality of life for those 20 years.  For instance, I would not live in an apartment for 20 years to save money on not having a house, that's a lifestyle hit not worth it to me.  You would also have to correct for rent increases; my mortgage payment is not going to change over the next 20 years (property taxes likely will) but rents will likely increase over time.  One of the key factors in buying versus renting is locking in your "shelter expense" for a long term.

Chris22

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Oy vey, where are all the engineers and finance minded folks? I had thought this forum was more precise in applying definitions and calculations than the population at large, but I guess not.

As a finance person, I AM applying a precise definition:  "keep and store up (something, especially money) for future use."  I don't get how sending money to someone else to pay a debt meets the strict definition of "keep and store up."  Your problem is that you are confusing "investing" with "saving".

Savings is money you don't spend.  Debt payoff is not an expenditure - the money was already spent.  Likewise OF COURSE investments are savings.... We don't consume the assets we buy.


To be admittedly pedantic, I would argue that you do your investments WITH savings.  Your investments themselves AREN'T savings.  You SAVE money and then with it you PURCHASE investments. 

Quote
Consider that almost everyone on this web site is either paying off debt or investing aggressively..  Are you saying we don't save any money here?

No, I'm saying that paying off debt isn't savings, and I'm saying you save money to make investments.  Again, it's a pedantic distinction, but especially the part about debt repayment not being savings, it's a distinction.

TheOldestYoungMan

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http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/

The problem with this saving vs. spending discussion re: mortgage payments is that you're all answering different questions.

I include my house payment as an expense, because for decades after retirement I will have to have cashflow to cover that debt payment.  I also include the rents I receive from the rent of extra rooms as income, and forecast a reasonable amount of rents in the future as residual income for retirement.

It's an exercise in forecasting, and you want to use the best data you can.  As long as you are being self-consistent about it, it's all going to be fine.

You're like the people that want to insist that physics doesn't suck, it blows.  It honestly doesn't matter what convention you are using as long as you are applying it consistently.

The folks who don't think of their house as an asset are doing the exact same thing you are, as long as they aren't also counting their housing as an expense.

Likewise the folks who think of their house as an asset are doing the exact same thing, as long as they're factoring in their housing expense.

As long as your equation comes up with the answer that "I need to save a lot more than I spend" it's all good.

I'm a red panda

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The problem with this saving vs. spending discussion re: mortgage payments is that you're all answering different questions.


The question asked was this "So when you guys calculate your savings rate, you are including your mortgage payments, or even the part going to principle, as savings?"


Seems to me the answer is either Yes or No, and it is going to vary by person.

zephyr911

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For barely five figures down, we're paying less for PITI+maintenance on our house than we would pay for a 2BR or even a nice 1BR in our town. The monthly savings are greater than 4% or even 7% annually on our equity. And it'll be a rental someday.

I count principal payments as savings. If increasing NW dollar for dollar isn't enough, then see above.

However, my $.02: it really doesn't matter if YOU do or not, as long as you apply one consistent methodology to all your tracking and forecasting, and make any appropriate mathematical adjustments.



...............and again: princiPAL. ;)

Kaspian

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The "everybody seems wealthy" illusion — is it really just all fueled by debt?
« Reply #296 on: January 27, 2016, 01:45:10 PM »
If you buy a house for $200K and sell it 20 years later for $340K, it may look good on paper, but not necessarily the case once you factor in what you would have made with the money parked elsewhere.

Correct, but there also may (or may not) be a non-trivial lifestyle cost in terms of quality of life for those 20 years.  For instance, I would not live in an apartment for 20 years to save money on not having a house, that's a lifestyle hit not worth it to me.  You would also have to correct for rent increases; my mortgage payment is not going to change over the next 20 years (property taxes likely will) but rents will likely increase over time.  One of the key factors in buying versus renting is locking in your "shelter expense" for a long term.

Your mortgage payment could indeed increase dramatically depending on the type of lending rate you've subscribed to.  Not even in the fine print most of the time--an institution could up a variable rate from 3% to 10% pretty much any time it chose to.  And that has happened to people before.

But your main point is bang-on!  Especially if you have kids or enjoy the space, a bigger place with a nice backyard is totally worth it--whether you come out ahead of renting or not.  Home ownership is emotional for lots of people.  In the same way, I'd rather own a guitar than rent one.  :) 

But it's when people see their houses as piggybanks rather than a place to live that huge issues arise.  You can't treat it as you would a liquid asset.   Lots of people in Detroit were told 15 years ago their home was a good financial investment.  Ask them how that whole "savings" scheme worked out. 

DollarBill

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You guys are killing this post!

ender

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Quote
Consider that almost everyone on this web site is either paying off debt or investing aggressively..  Are you saying we don't save any money here?

No, I'm saying that paying off debt isn't savings, and I'm saying you save money to make investments.  Again, it's a pedantic distinction, but especially the part about debt repayment not being savings, it's a distinction.

Ok, so are you "happy" if someone says they are investing their savings by paying off their mortgage vs investing their savings in the stock market?

It feels like you are being intentionally pedantic about the word choice here, to the point you'd rather be "right" than use terminology which is more commonly understood.


Though, I will say, my pedantic weak link in financial terms is "compound interest" applied to making money investing in the stock market. It's not at all compound interest unless you have bonds paying out interest that is reinvested, it's normally compounded annual growth and/or reinvestment of dividends. Anyways.. :)

Chris22

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Quote
Consider that almost everyone on this web site is either paying off debt or investing aggressively..  Are you saying we don't save any money here?

No, I'm saying that paying off debt isn't savings, and I'm saying you save money to make investments.  Again, it's a pedantic distinction, but especially the part about debt repayment not being savings, it's a distinction.

Ok, so are you "happy" if someone says they are investing their savings by paying off their mortgage vs investing their savings in the stock market?

No, one doesn't "invest in paying off" they "retire debt". 

Quote
It feels like you are being intentionally pedantic about the word choice here, to the point you'd rather be "right" than use terminology which is more commonly understood.

I'd argue no one "understands" paying off debt as savings.