Author Topic: Debt repayment and savings rate  (Read 3404 times)

TonyC

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Debt repayment and savings rate
« on: October 03, 2014, 02:28:39 PM »
Hello,
I put 15% of my salary towards my 401(k) with a 5% match.  This gives me a 20% savings rate.  I put another 30%-40% towards debt repayment (mortgage 4.125%, car loan 3.25%, CC 0%).  Can I add the two and rightfully claim a savings rate of 50%-60%?  Or is debt repayment not considered a form of savings?

Thanks.

arebelspy

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Re: Debt repayment and savings rate
« Reply #1 on: October 03, 2014, 02:36:56 PM »
The principal amount paid towards the debt is savings.

The interest portion of the payment is not.
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Keynes'UpperLip

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Re: Debt repayment and savings rate
« Reply #2 on: October 03, 2014, 06:03:27 PM »
So, what is my savings rate if:

Employer-paid pension: 14% of pre-tax salary
Mandated employee-paid pension: 8.6% of pre-tax salary
Elective 457b contribution: 3.5% of pre-tax salary

-and-

I save 33% of my take-home pay?

Do the percentages all have to be of the same number? Do you need more info to determine this?

Thanks.

arebelspy

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Re: Debt repayment and savings rate
« Reply #3 on: October 03, 2014, 09:53:04 PM »
I would total (amount you save + amount they save for you) divided by (gross pay including all amounts they save for you).
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Retired To Win

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Re: Debt repayment and savings rate
« Reply #4 on: October 04, 2014, 07:52:33 AM »
The principal amount paid towards the debt is savings.

The interest portion of the payment is not.


I can't see that.  Well, I can see it but I can't go along with it.

Paying down debt is danged important, but any money going to that end does not increase your FI stash.  Yes, paying down the debt moves you towards FI by reducing your basic monthly outgo.  But it does not build up the FI stash from which you will fund your job-free life.

Or are you seeing something there that I do not?

studentdoc2

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Re: Debt repayment and savings rate
« Reply #5 on: October 04, 2014, 08:03:26 AM »
The principal amount paid towards the debt is savings.

The interest portion of the payment is not.


I can't see that.  Well, I can see it but I can't go along with it.

Paying down debt is danged important, but any money going to that end does not increase your FI stash.  Yes, paying down the debt moves you towards FI by reducing your basic monthly outgo.  But it does not build up the FI stash from which you will fund your job-free life.

Or are you seeing something there that I do not?

Isn't the idea that paying down the principle to you debt increases your net worth by the same amount that saving the same amount does (one by decreasing the negative net worth factors, and the other by increasing the positive net worth factors)? I mean, if your FI stash is $1 million but you have $1 million in debt, you're not really FI despite the cash in the bank. I would argue that money paying down debt IS increasing your FI stash and should be counted towards your savings rate.

At least, that's what I try to focus on right now as I watch nearly half of what I make go to aggressively pay down student loans!

Cyrano

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Re: Debt repayment and savings rate
« Reply #6 on: October 04, 2014, 08:15:42 AM »
The principal amount paid towards the debt is savings.

The interest portion of the payment is not.


I can't see that.  Well, I can see it but I can't go along with it.

Paying down debt is danged important, but any money going to that end does not increase your FI stash.  Yes, paying down the debt moves you towards FI by reducing your basic monthly outgo.  But it does not build up the FI stash from which you will fund your job-free life.

Or are you seeing something there that I do not?

If you account the entire principle as an expense when you take out the loan, then liabilty reduction and asset accumulation are equivalent.

If you don't account the entire principle as an expense when you take out the loan (so you're not paying attention to assets and liabilities, just to cash flow), then your car payment is a pure expense whenever you pay it.

If you are pursuing financial independence through asset accumulation, the first accounting system makes more sense to me. Count your principle payment as savings rate, but recognize you had a much lower savings rate in the year you took out the loan.

arebelspy

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Re: Debt repayment and savings rate
« Reply #7 on: October 04, 2014, 01:21:22 PM »

The principal amount paid towards the debt is savings.

The interest portion of the payment is not.


I can't see that.  Well, I can see it but I can't go along with it.

Paying down debt is danged important, but any money going to that end does not increase your FI stash.  Yes, paying down the debt moves you towards FI by reducing your basic monthly outgo.  But it does not build up the FI stash from which you will fund your job-free life.

Or are you seeing something there that I do not?

Consider this scenario.

I have 5k left from my paycheck after paying all expenses, including debt minimum payments. My monthly income is 10k.

A) I put it all in my bank account, earning 0.01% (or put it in stocks, or whatever).
B) I put half, 2500, in my bank account and use the other half to prepay principal Ina debt.
C) I throw all 5k at debt pay down.

In all 3 scenarios my net worth is the exact same.

You want to claim scenario A is a 50% savings rate, B is 25%, and C is a 0% savings rate?

I'd say they're all 50% savings rate. And once the debt is paid off, option A is your only choice. You'll still be "saving" 50% at that point, it's just going to a different area of your balance sheet.

We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.