Author Topic: Do you count the principal part of your mortgage payment in your savings calc?  (Read 15137 times)

powersuitrecall

  • Pencil Stache
  • ****
  • Posts: 510
  • Location: Ontario, Canada
Great discussion!  It's interesting to see how others see this. 

In my view if it contributes to net worth, then it's savings.

Often, I run "invest vs. extra mortgage payment" scenarios ... probably more often than is considered healthy by normal people.  Anyways ... if I didn't consider the principle portion to be savings, it would never make sense to pay more than the interest.

I'm a red panda

  • Walrus Stache
  • *******
  • Posts: 8009
  • Location: United States

Sounds like you should rent.

For me, rent would likely be higher than my house, and without the nice backyard and ability to do whatever I want inside the property.

Not to mention, rent has no possible return on the spending.  It is highly probable, I will get a good amount of the money I've spent on the house back.  But until I do, it isn't "saved".

johnhenry

  • Bristles
  • ***
  • Posts: 304
  • Age: 39
  • Location: Midwest
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.

+1

johnhenry

  • Bristles
  • ***
  • Posts: 304
  • Age: 39
  • Location: Midwest
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.

I'm puzzled by all the responses that are focusing on the "asset" in question, the house.  Obviously a house is an asset.  And by definition that asset contributes to net worth.

I can understand why different folks may "estimate" the value of that asset realistically (at say 93% of the true estimated value) or even more conservatively.  But let's not forget since our example has a mortgage payment, that means there is a mortgage.  And a mortgage is a liability.  There is no estimating required to know the value of that liability!!  If you forget, the bank will remind you with a bill.  And if you forget long enough, they'll gladly take your house that ain't worth anything. :)  Every principal payment reduces that liability.  The "saving" that occurs is represented by a lower mortgage balance.  It's sometimes called "forced savings" because you don't have the option to just pay the interest and keep the rest in your savings account (where you would rightfully call it saving).  You have to pay the principal as well.  It is still savings and it is still yours because you no longer owe it to the bank!  Doesn't have anything to do with what you can sell your house for.

Mr. FI

  • 5 O'Clock Shadow
  • *
  • Posts: 82
  • Age: 31
    • Fi Under the Big Sky
I do not count it--I've never thought of putting equity into my home as savings since to me it's a sunk cost. However, if we did, our savings rate would be around 70%. But since it's no guarantee it appreciates or gives me money in retirement, I don't count it.

It's kind of a floating metric as far as the home's worth so I prefer to handle what I know. My plan is to have $625,000 and a paid off house going into ER. I would need more than $625,000 if we still have the mortgage.

ChaseJuggler

  • Stubble
  • **
  • Posts: 124
I have a 15 year mortgage, so I most definitely include it.

couponvan

  • Walrus Stache
  • *******
  • Posts: 5964
  • Location: VA
    • My journal
We have 2 houses - I include the extra principal payments because we plan to sell the bigger house in FIRE and live in the smaller house once the kids graduate from high school (or possibly before FIRE when 2 of the 3 graduate if we decide we might as well just rent in the school district for a year or two). We think the appreciation/equity from the bigger house will allow us to do the Roth Ladder for our 401(k) investments - i.e. live off that tax free equity while we build the ladder. 

ChaseJuggler

  • Stubble
  • **
  • Posts: 124
We've got a similar plan, Numbers Man.

BlackIronStubble

  • 5 O'Clock Shadow
  • *
  • Posts: 41
  • Location: Mid-sized Southern City
Agree with DCM. I count all principal payments as savings. When those loans are gone, I'll shift that cash to investments, but I figure both are additions to my net worth.

Edit:  and when the loans are paid off, I'll count the disappearing interest payments as a reduction in my spending.
« Last Edit: April 03, 2015, 07:07:24 AM by BlackIronStubble »

snshijuptr

  • Stubble
  • **
  • Posts: 147
  • Age: 33
  • Location: Southern California
For time to retire, don't count either your savings toward your mortgage in your "savings", but also don't count PI in your expenses. I also take childcare out of these calculations. Since I plan to have vastly different expenses in retirement for the "shockingly simple" calculation, I use

Savings Rate = (retirement savings)/(retirement expenses + retirement savings)

or I use one of the time to retire calculators. YOu then have to play the time to pay off mortgage vs time to retirement game so that both happen at the same time.

zurich78

  • Stubble
  • **
  • Posts: 180
As many others have said, it depends on what you're calculating.  For my net worth, certainly.

For my savings rate, I don't count it.  I don't even count my 401K contributions.  For purposes of savings rate calculation, I consider my 401K contribution to be a fixed expense since under normal circumstances, I would never not contribute to it.

The purpose of understanding my savings rate for me is to know how much of my disposable income I am saving relative to my expenses.  And my "adjusted income" as I like to look at it, is the sum of all money that goes in to my checking account on a monthly basis. 

I subtract out my expenses, and the remainder is my savings.

What that savings number represents, to me, is an indicator of how well (or poorly) I am managing my expenses.  So in one month, if my savings rate goes down, I can look at what I spent and make the proper adjustments for the next month (it's usually less entertainment, ha).