Author Topic: Do you count the principal part of your mortgage payment in your savings calc?  (Read 15456 times)

octavius

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Greetings, I found this site by accident recently while reading the bogleheads forum (which I also found by accident while doing some comparison research between a couple of vanguard index funds).  I had no idea there was an entire online community of people devoted to what I've always thought of as intentional frugality and saving for the future.  This is awesome.

Anyway, I've been reading some of the blogs and a few forum posts here and there, and I've been looking at my own savings to earnings ratio to see how I'm doing, and I have a question... do most people here that have mortgages, count the principal portion of their monthly mortgage payment in their savings calculation? 

It hadn't occurred to me before to include that, but I was feeling guilty that I'm not at the 50% saving rate, until I realized that if I include the principal portion of my mortgage, I am much closer to 50%. 

Thanks



« Last Edit: March 08, 2015, 07:29:52 PM by octavius »

jj20051

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I'm new here... and I don't own a home so feel free to take what I say with a grain of salt:

I do not feel mortgage payments on the principal are a traceable investment as the market can change at any time and as a result your "investment" could be worthless in a month or less. It's a place to live and it's a sunk cost... If you get money out later that's wonderful, but I wouldn't count it as part of my `Stash.

Yankuba

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I count mortgage principal in my calculations. I believe MMM had a post a couple of months ago about how he calculates the ever important savings rate.

OneCoolCat

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I wouldn't.  I don't think a principal residence should be factored into ones net worth.  Investment property, sure.

rpr

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Are you paying extra principal ? A case could be made that this should count as savings. I am ok either way on this.


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tomsang

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I wouldn't.  I don't think a principal residence should be factored into ones net worth.  Investment property, sure.

Your assets all contribute to your net worth. Some have a return and others don't. Paying off your mortgage has the effect of reducing your housing expense. Your principal payments are an asset that will reduce your future housing expense when the loan is paid off

agent_clone

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It depends on what your calculating.  Sure count it as your savings, however I wouldn't count it as the savings required until retirement as it won't provide you the money to live off.  In calculating the savings required until retirement you can count how much left until you pay off the mortgage and how much/little you will need after you have paid off the mortgage.

gomike

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I consider my home as part of my net worth and I am calculating it as part of my retirement.  In 20 years when our kids are grown we plan to downsize which will free up several hundred thousand dollars that will go right into investments which will pay dividends for us to live off.

octavius

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I'm actually surprised by the wide range of answers from the forum, thought it was a fairly standard financial question about the magic 50% savings rate number that the blogs here refer to.  I'm really just curious if those who claim to save 50% of their yearly income, are counting the principal portion of their mortgage in that formula.  I'm really just trying to gauge how far off I am in my own savings rate to this board's "gold standard" of savings.

In my own case, while this is my principal residence, I also consider it an investment. If I someday move elsewhere (downsize), I'll probably keep it as a rental. It will be paid off in 9 more years (sooner if I decide to pay down the principal faster). It is in a great part of Seattle, with terrific bus service to downtown, Microsoft, Amazon, and the University of Washington, and only a 3/4 mile walk to the most popular park in the city (Green Lake).

CorpRaider

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The guy who created the site says to count it. 

zolotiyeruki

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Net worth calculations?  Yes.
Retirement savings? No.*
Savings rate? Eh, it could go either way, assuming that once your home is paid off, you apply your payment towards retirement.

*Unless you're planning to sell your current home when you retire and find something cheaper/elsewhere, in which case, I'd prorate the difference in home price.

MDM

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Depends on what you want to do with the results of the calculation.  If you want to plot the number over time so you can see whether it goes up or down, do whatever feels good to you.

If you want to use it as input to a back-of-the-envelope "how long until am I FI?" calculation, you may want to ignore "savings ratio" and "mortgage payments" completely (as some here have already stated or implied), and use

Time in years to FI = Ln((S + i*E/WR) / (S + i*A)) / Ln(1 + i)

A = Asset amount currently invested in funds you will draw upon in retirement.
E = Total (including taxes) annual expenses in retirement
i =  Return on invested retirement funds.
S = Annual amount invested in funds you will draw upon in retirement.
WR = Withdrawal Rate planned for retirement, using Trinity Study definitions.

See http://forum.mrmoneymustache.com/welcome-to-the-forum/good-article-on-savings-and-fi/ and links therein for a little more discussion.

octavius

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Depends on what you want to do with the results of the calculation.

I'm interested in knowing if most of the people here that claim they save 50% of their after tax income, are counting the principle portion of their mortgage payment as savings.

This isn't about calculating my Fi timeline (but thank you for that formula).

I think that saving 50% is very impressive, but whether or not you include the principle portion of your mortgage payment, can make a big difference in whether or not you are saving 50% or maybe 35%.  I'm just trying to understand how impressed I should be :)



tomsang

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Depends on what you want to do with the results of the calculation.

I'm interested in knowing if most of the people here that claim they save 50% of their after tax income, are counting the principle portion of their mortgage payment as savings.

This isn't about calculating my Fi timeline (but thank you for that formula).

I think that saving 50% is very impressive, but whether or not you include the principle portion of your mortgage payment, can make a big difference in whether or not you are saving 50% or maybe 35%.  I'm just trying to understand how impressed I should be :)

So if someone rents do they need to add something or how do you account for two people that have housing expenses of $2,000 and one rents and one has $500 going to principal? What about those that are prepaying a $1,000 a month? It seems crazy that people are not counting their principal as part of their savings. What about those that do a 15 year vs 30 year or interest only? You are paying more to save in the future. That is the definition of an asset. With that mindset no one would prepay, which actually would be beneficial in the long run.

octavius

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Depends on what you want to do with the results of the calculation.

I'm interested in knowing if most of the people here that claim they save 50% of their after tax income, are counting the principle portion of their mortgage payment as savings.

This isn't about calculating my Fi timeline (but thank you for that formula).

I think that saving 50% is very impressive, but whether or not you include the principle portion of your mortgage payment, can make a big difference in whether or not you are saving 50% or maybe 35%.  I'm just trying to understand how impressed I should be :)

So if someone rents do they need to add something or how do you account for two people that have housing expenses of $2,000 and one rents and one has $500 going to principal? What about those that are prepaying a $1,000 a month? It seems crazy that people are not counting their principal as part of their savings. What about those that do a 15 year vs 30 year or interest only? You are paying more to save in the future. That is the definition of an asset. With that mindset no one would prepay, which actually would be beneficial in the long run.

I don't disagree with you -- I'm just trying to understand what people here mean when they say they are saving 50%.

I thought it would be a simple question with fairly simple and unanimous responses, for the case of those that have mortgage payments.  I don't see that it matters if someone is adding extra or has a 15 year vs a 30... the principle portion of the payment goes to principle, regardless. 


TN_Steve

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....
I thought it would be a simple question with fairly simple and unanimous responses, for the case of those that have mortgage payments.  I don't see that it matters if someone is adding extra or has a 15 year vs a 30... the principle portion of the payment goes to principle, regardless.

Hah!  You mention that you found the Bogleheads forum by accident, and then this forum.  Per chance, have you perused the 8 page (and counting!) thread over there on whether to include mortgage payments as savings?  https://www.bogleheads.org/forum/viewtopic.php?f=2&t=159671

Define "Savings," "include," "principal," and "Savings" (oh, and don't forget "calc"!).....

:-)


(I haven't joined in over there, but consider substantial acreage in near-term growth path of suburbs, which happens to have your house on it.  Do those facts change the consideration of how to treat the principal payments on the mortgage that covers all the real estate?).  :-)

<I include mtg and purchase value of property in my net worth, so I suppose I should answer "yes" to your question insofar as each payment increases my net worth, but I am doing some weird stuff because of my reserve price on selling....>
« Last Edit: March 08, 2015, 09:40:25 PM by TN_Steve »

Chuck

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The guy who created the site says to count it.
QFT

octavius

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....
I thought it would be a simple question with fairly simple and unanimous responses, for the case of those that have mortgage payments.  I don't see that it matters if someone is adding extra or has a 15 year vs a 30... the principle portion of the payment goes to principle, regardless.

Hah!  You mention that you found the Bogleheads forum by accident, and then this forum.  Per chance, have you perused the 8 page (and counting!) thread over there on whether to include mortgage payments as savings?  https://www.bogleheads.org/forum/viewtopic.php?f=2&t=159671

Define "Savings," "include," "principal," and "Savings" (oh, and don't forget "calc"!).....

:-)


Yes, I probably did see that thread last weekend.  I've been on vacation this week, and so I've had a lot more free time to think about savings rate, my budget, and how to save more to retire sooner.

I'm glad I found both sites, both very interesting. 

aspiringnomad

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It seems incredibly straightforward to me that paying down the principal owed on a long-term (stable or even appreciating) asset is technically savings. Maybe it's because I have a finance background, but I thought since there were so many engineers on this board, that it would be the overwhelming consensus. Having said that, people can count their own savings any which way they want. If it makes someone feel better to mind-trick herself into saving more by not counting principal paydown, more power to that person. But if someone is looking for the financially correct answer, then yes, principal paydown counts towards savings.

To quickly illustrate, if principal paydown were an expense, you would have to be mad to take out a 10-year mortgage no matter what the interest rate environment because it is so much more "expensive" than a 30-year mortgage.

octavius

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It seems incredibly straightforward to me that paying down the principal owed on a long-term (stable or even appreciating) asset is technically savings. Maybe it's because I have a finance background, but I thought since there were so many engineers on this board, that it would be the overwhelming consensus. Having said that, people can count their own savings any which way they want. If it makes someone feel better to mind-trick herself into saving more by not counting principal paydown, more power to that person. But if someone is looking for the financially correct answer, then yes, principal paydown counts towards savings.

To quickly illustrate, if principal paydown were an expense, you would have to be mad to take out a 10-year mortgage no matter what the interest rate environment because it is so much more "expensive" than a 30-year mortgage.

Makes perfect sense, I was just trying to understand what people here were counting when they reported 50% savings (if they had a mortgage).  I was a bit surprised that the answer was not unanimous... though the "yes" folks are in a large majority now. 

okonumiyaki

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I don't have a mortgage, so a moot question.

But, yes, I would count principal repayment as savings.  It is also how it is seen in national accounts

forummm

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Yes, I count it as savings for my savings rate.

No, I don't count home equity in my calculations for my investment total for FIRE purposes. It's not an investment that brings me income. It does decrease my spending rate if I have no mortgage.

minimustache1985

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Yes, absolutely.

It's just the kind of savings that eventually reduces the amount needed to retire, instead of the kind that eventually generates more cash to work with in retirement.  Although some can be both if downsizing or moving to a LCOL area in retirement is part of the plan.

arebelspy

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No, I don't, just because I don't bother.

But in theory, yes, you should.
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.
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sol

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really just curious if those who claim to save 50% of their yearly income, are counting the principal portion of their mortgage
I'm interested in knowing if most of the people here that claim they save 50% of their after tax income, are counting the principle portion of their mortgage payment as savings.

We're saving 50% of our after-tax income and no,  I don't count mortgage principal contributions in that number.  In my mind my home is an expense, one that I hope to one day reduce to taxes and insurance only.

For our rental properties, I don't count the rent as income and I don't count the mortgage pay-down by the renter as savings.  Basically, I think of the rentals as a separate pot of money equal to the amount of equity I could get out of them by selling today.  I include that dollar figure in my net worth, but it doesn't factor into my savings rate.

I can certainly see an argument for doing things differently, but this feels most accurately reflective of our situation. 

willow

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Greetings, I found this site by accident recently while reading the bogleheads forum (which I also found by accident while doing some comparison research between a couple of vanguard index funds).  I had no idea there was an entire online community of people devoted to what I've always thought of as intentional frugality and saving for the future.  This is awesome.

Anyway, I've been reading some of the blogs and a few forum posts here and there, and I've been looking at my own savings to earnings ratio to see how I'm doing, and I have a question... do most people here that have mortgages, count the principal portion of their monthly mortgage payment in their savings calculation? 

It hadn't occurred to me before to include that, but I was feeling guilty that I'm not at the 50% saving rate, until I realized that if I include the principal portion of my mortgage, I am much closer to 50%. 

Thanks

I think the principal part of your mortgage counts in the overall grand scheme of things.

bacchi

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I'm interested in knowing if most of the people here that claim they save 50% of their after tax income, are counting the principle portion of their mortgage payment as savings.

No. Too much work. Investing/work income is a nice and easy formula.

I'm a red panda

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I do not. To me, my house is spending- it is something that I bought.

tomsang

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I do not. To me, my house is spending- it is something that I bought.

The definition of an asset is something that has future value. Paying off your house provides future value in the form of lower monthly expenses. You should not own a house a house if you don't think that it will provide a future value. You may want to get an interest only loan and invest the difference if you don't consider principal payments to be saving for the future.

Chuck

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I haven't been counting it... but I should have been.

I will count it from now on.

Cookie78

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really just curious if those who claim to save 50% of their yearly income, are counting the principal portion of their mortgage
I'm interested in knowing if most of the people here that claim they save 50% of their after tax income, are counting the principle portion of their mortgage payment as savings.

We're saving 50% of our after-tax income and no,  I don't count mortgage principal contributions in that number.  In my mind my home is an expense, one that I hope to one day reduce to taxes and insurance only.

For our rental properties, I don't count the rent as income and I don't count the mortgage pay-down by the renter as savings.  Basically, I think of the rentals as a separate pot of money equal to the amount of equity I could get out of them by selling today.  I include that dollar figure in my net worth, but it doesn't factor into my savings rate.

I can certainly see an argument for doing things differently, but this feels most accurately reflective of our situation.

Ooohhh. I'm going to go home and recalculate my savings rate with this method, just to see what it looks like. I was counting both the income and expenses for rental properties before, but it gets fuzzy. It also might get fuzzy if I don't factor in the rental from my basement suite, but include the mortgage/etc because it's also my primary home.

Curious.

mak1277

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I mean..I understand the whole idea of savings rate being an input into your "time to FIRE" calc....but who honestly cares what their savings rate is?  I only care about my cash outflows, and having enough assets to cover those outflows.  Mortgage payments are outflows, and I know that if I keep my mortgage, I'll have to account for those outflows in my monthly budget.  I certainly don't consider putting money in my 401(k) or taxable accounts to be an outflow, so there is clearly something different about mortgage payments vs. investments/saving (at least to me).


BaldingStoic

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I do count mortgage principal in my Net Worth, but don't include it in my "Free Cash Flow" stash calculation. 

For the Net Worth calculation, I take a conservative estimate of my property value and multiply it by .93 (to offset the Realtor commissions and closing costs) and then deduct out my mortgage amount.  I feel this method provides an accurate pulse of my financial situation, while my related "Free Cash Flow" gives me a better snapshot of my liquid investments by excluding my residence and vehicles. 


octavius

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For the Net Worth calculation, I take a conservative estimate of my property value and multiply it by .93 (to offset the Realtor commissions and closing costs) 

Great idea...  need to update my spreadsheet.

mozar

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I have a mortgage, and I do not count it when I say that I have 50% plus savings rate. But of course when it is paid off my living expenses will be lower. With mortgage included in savings rate (principle plus interest) I have a 61% savings rate. I'm just saying that to brag though.

I'm a red panda

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I do not. To me, my house is spending- it is something that I bought.

The definition of an asset is something that has future value. Paying off your house provides future value in the form of lower monthly expenses. You should not own a house a house if you don't think that it will provide a future value. You may want to get an interest only loan and invest the difference if you don't consider principal payments to be saving for the future.

It only becomes an asset if I sell it.  Right now, it provides me shelter.  It adds to my net worth, but it is not savings.  If I sell it, and then put the proceeds somewhere, that money could become savings. 

I have no idea what the market will be like when I sell it, so assigning any value to it today is meaningless.  I have equity against the purchase price, I have an appraisal I pay taxes based on, but I have no idea what the actual "worth" of my house is to someone who wants to pay for it- therefore, in a Schrodinger's cat way, I don't know if it is a savings or a liability.

tomsang

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I do not. To me, my house is spending- it is something that I bought.

The definition of an asset is something that has future value. Paying off your house provides future value in the form of lower monthly expenses. You should not own a house a house if you don't think that it will provide a future value. You may want to get an interest only loan and invest the difference if you don't consider principal payments to be saving for the future.

It only becomes an asset if I sell it.  Right now, it provides me shelter.  It adds to my net worth, but it is not savings.  If I sell it, and then put the proceeds somewhere, that money could become savings. 

I have no idea what the market will be like when I sell it, so assigning any value to it today is meaningless.  I have equity against the purchase price, I have an appraisal I pay taxes based on, but I have no idea what the actual "worth" of my house is to someone who wants to pay for it- therefore, in a Schrodinger's cat way, I don't know if it is a savings or a liability.

Sounds like you should rent.

frugaliknowit

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I do not, simply because it is possible for my condo to go down in value as well as stay the same or go up.  For that reason, I do not see principal payments as necessarily being savings for me, personally.

I DO think it is valid for one to choose to do that, especially if one is planning on living in the home indefinitely.

aspiringnomad

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I don't really concern myself with my savings rate as much as I do with my spending and net worth accumulation so maybe it's pointless for me to post this.

But again, the confusion on this issue, and even moreso the convoluted and sometimes contradictory attempts to justify that confusion, is remarkable. We have some people saying it doesn't count as savings unless you sell and others  saying it doesn't count unless you plan to hold indefinitely.

Interest paid is an expense. Property taxes are an expense. Insurance, homeowner dues, and maintenance are all expenses. Principal paydown is technically savings, regardless of whether you plan to flip the house or die in it and regardless of whether the housing market in your area  goes up or down. Similar to how money invested in retirement accounts is savings irrespective of the market.

Villanelle

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For those who say you don't count it because it could go down, does that mean you don't count money toward investments as savings, since those could go down as well?

If we only count toward savings rate or net worth those things that can't lose value, I guess a savings account in an FDIC insured bank is the only thing that is really savings.

intirb

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I have no idea what the market will be like when I sell it, so assigning any value to it today is meaningless.

I do not, simply because it is possible for my condo to go down in value as well as stay the same or go up. 

The same is true of the stock market.  You have no idea what the market will be like when you sell it, and it could go up or down in value.

sol

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I think we all agree that it is totally savings, in the sense that it does not deplete your net worth.

It's just not savings in the sense that contributes to calculating your savings rate for purposes of estimating your time to retirement from your savings rate.  Different end uses require different definitions of the term.

MustachianAccountant

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I wouldn't.  I don't think a principal residence should be factored into ones net worth.  Investment property, sure.

Why would you not count it in savings rate, and then turn around and count it in net worth? Your savings is what's growing your net worth. They're connected.

MustachianAccountant

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I do not feel mortgage payments on the principal are a traceable investment as the market can change at any time...

And that's different from stocks how?

GetItRight

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I do not. A house is an expense, I pay for it because it provides utility to me (shelter, comfort). Just like a car is an expense, it provides utility (transport). Sure I can sell my house and get money out of it that way, just like I can sell my car and get money out of it. Both are a necessary expense. Unless bought an investment property rather than a primary residence, or buying a car to flip, and even then I wouldn't consider either to be part of my savings rate but rather a separate entity intended to turn a profit. If it was flipping a house (or car, or clothes/furniture/electronics/etc.) then the profit would be included as income that year and whatever percent of all income I saved in traditional accounts/funds/etc. would be my savings rate.

Too much creative bean counting here for my tastes to make savings rates sound a lot higher than they actually are. I consider savings rate, particularly in the context of this forum, to be mainly retirement and other long term savings to achieve FI, not inclusive or short term savings for an expense such as a house/car/vacation/etc. Is it really savings if you spend it on either a required expense or a luxury in 6 or 12 months? I think the cost of those sort of things should be averaged over a longer time frame to figure a realistic monthly cost.

octavius

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I do not. A house is an expense, I pay for it because it provides utility to me (shelter, comfort). Just like a car is an expense, it provides utility (transport). Sure I can sell my house and get money out of it that way, just like I can sell my car and get money out of it. Both are a necessary expense. Unless bought an investment property rather than a primary residence, or buying a car to flip, and even then I wouldn't consider either to be part of my savings rate but rather a separate entity intended to turn a profit. If it was flipping a house (or car, or clothes/furniture/electronics/etc.) then the profit would be included as income that year and whatever percent of all income I saved in traditional accounts/funds/etc. would be my savings rate.

Too much creative bean counting here for my tastes to make savings rates sound a lot higher than they actually are. I consider savings rate, particularly in the context of this forum, to be mainly retirement and other long term savings to achieve FI, not inclusive or short term savings for an expense such as a house/car/vacation/etc. Is it really savings if you spend it on either a required expense or a luxury in 6 or 12 months? I think the cost of those sort of things should be averaged over a longer time frame to figure a realistic monthly cost.

Still curious to see so a wide range of opinions about this.

I see houses and cars as very different, one is an appreciating asset, the other is a quickly depreciating asset.  Houses in my city have appreciated greatly in the last 25 years, and there is no end in site -- probably due in part to the strong economy here (Microsoft, Boeing, Amazon, Starbucks, T-Mobile, Expedia, etc), and probably also due in part that the west coast major cities all are appreciating -- and tend to move in tandem (with SF & LA being at the top).

If a person really views a house as just an expense, then why not just rent?

Anyway I think I've gotten the answer to my original question -- some count it and some do not :)

ShoulderThingThatGoesUp

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Was it part of my savings rate when I bought my house in cash?

octavius

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Was it part of my savings rate when I bought my house in cash?

If this was money you had already saved, then it isn't an *increase* in your savings, it is a transfer from one savings vehicle to another, at least that is how I see it. (the savings vehicles might have different future returns though...)

My original question was to those that are saving monthly, and calculating where their monthly salary is going: mortgage, food, gas, etc.  Since MMM makes such a big deal of being able to save 50% of his monthly income, and some posters here do as well... I was trying to understand if he and the majority counted the portion of their mortgage that went to principal -- as part of their monthly savings rate, especially for those that say they save 50% of their income each month.

I've gotten the answer... some do (maybe the majority) and some do not.  In my case, I think it makes sense, because my house is an appreciating asset.  There is a good chance that 10 years from now, I will sell it and downsize. 

« Last Edit: March 11, 2015, 08:18:20 PM by octavius »

Numbers Man

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I count my principal payments as part of my net worth and part of my savings. In fact, I will use that money when I cash out my McMansion house and move to a low cost area. The difference in what I net from the house and the purchase of the retirement home will act as my income for a few years where I'll only take out the $20k or so of 401(k) funds each year and pay zero taxes (married standard deductions and exemptions wipes out the 401(k) income).

bludreamin

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  • Posts: 81
I'm just getting started on MMM myself and I'm interested in this discussion so figured I'd post to follow along... and of course I can't help but put in my $0.02.

Personally, I'm going to include principal in my "savings" percentage. The reason being I just made an additional principal payment ($750) on my mortgage and using a mortgage amortization spreadsheet I found through google docs it estimates an interest savings of about $1700 over the life of the mortgage (I'm only 4 years into a 30 year mortgage).  I understand that if I had invested the same $750 in the stock market I could get a better return but I definitely get a psychological benefit from seeing my liabilities go down.

Another way I think about it has already been discussed - you can eventually sell your house and get the value back out.  Is it possible that I can loose money on my house - yes if I don't time the sale of my house and sell for less than I bought it but the same can be said of stocks.  And I get to live in my house - can't live in my stocks.
« Last Edit: March 11, 2015, 09:27:28 PM by bludreamin »