Author Topic: Do mortgage payments count as savings?  (Read 4696 times)

Laurafromlasvegas

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Do mortgage payments count as savings?
« on: October 16, 2017, 02:40:39 PM »
I’m sure this is answered somewhere but for the life of me I can’t find it. Anyway, we are looking at retiring in 7 years and will be buying a house in the next couple years. According to MMM we need to save 75% of our income. Does the mortgage payment count toward that 75% savings or the 25% spending? Thanks!

doneby35

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Re: Do mortgage payments count as savings?
« Reply #1 on: October 16, 2017, 03:12:02 PM »
The principal does, the interest does not, although I personally do not count any of it and just focus on liquid assets.

sokoloff

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Re: Do mortgage payments count as savings?
« Reply #2 on: October 16, 2017, 03:25:59 PM »
Expanding on doneby35's answer:
Of the 4 components of the traditional mortgage payment (PITI), the Interest, Taxes, and Insurance clearly count towards the 25% spending.

The Principal portion could arguably count towards your savings rate, but since it's not practically "extractable" as an investment, I would exclude it entirely (count it as neither towards the 25% nor towards the 75%). In the first few years of a 30-year mortgage, the principal payment is small anyway, so it's safe to ignore either way.

Bicycle_B

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Re: Do mortgage payments count as savings?
« Reply #3 on: October 16, 2017, 04:04:20 PM »
MMM himself considers the principal portion of the mortgage payment to be savings.  So do I. 

His thoughts can be seen this article below.  In the spending section, he counts mortgage interest as an expense, but not mortgage principal. Hence the principal is savings. 

http://www.mrmoneymustache.com/2015/01/26/calculating-net-worth/

Do remember, though, you need to make sure you have enough cash flow to cover the mortgage.  Otherwise you might need to borrow against the house later, and if you can't do that, you could have a problem.

AccidentalMiser

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Re: Do mortgage payments count as savings?
« Reply #4 on: October 16, 2017, 04:26:59 PM »
Except the $ is tied up in a non-producing, illiquid asset. 

TempusFugit

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Re: Do mortgage payments count as savings?
« Reply #5 on: October 16, 2017, 04:38:52 PM »
I think the principal portion (and only that portion) definitely counts as savings if you are calculating your savings rate. I don't remember where MMM specifically recommended saving 75%, but clearly the rate at which you save impacts the time frame in which you will be FI and can live from your stash. 

But note that this is a different question than whether your home equity should be used to calculate your FI number. 
It may or may not depending on your plans for your home.  It is not liquid, certainly.  If you intend to sell your home and downsize as part of your FIRE plan, then a case can be made to count some portion of your equity in your stash for FI calculation purposes.  I would deduct the anticipated expenses related to selling your home against that number, since those expenses can be non-trivial.    This doesn't seem to be the plan, based on the 7 year RE and 'couple of years' to purchasing a home.



nexus

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Re: Do mortgage payments count as savings?
« Reply #6 on: October 16, 2017, 04:53:45 PM »
I'd just count the mortgage as an expense. Regardless of how much equity ends up in your assets column, you still have to cut a check to your bank for 100% of the payment each month. Perhaps define your savings rate as, "The percentage of my income that I am able to invest in the [stock market/real estate/whatever] that produces passive income [predictably and] periodically such that it offsets the amount of money I need to earn from work/my job to cover my expenses."
So...
1. A mortgage payment affects the amount of money you have left to spend/save until you no longer have to pay it
2. The money tied up in your mortgage isn't producing passive income for you to retire on. You can't say "My house just paid me $x in dividends!"
3. You'll only realize a gain or loss IF you ever sell the house

Hope this helps!
« Last Edit: October 16, 2017, 04:56:02 PM by nexus »

chasesfish

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Re: Do mortgage payments count as savings?
« Reply #7 on: October 16, 2017, 05:01:49 PM »
I count my principal each month as savings.

To me its about the total dollar amount of savings.  I don't get caught up in the rate, you start getting into nuances at a certain point.  High income earners start struggling to get past 50% ,60% ,70% because of taxes.  Low income earners struggle to get past a certain point because of the necessity to eat..

Save the most that you can monthly and cut your core expenses, it'll work out

 

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