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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: LiseE on December 04, 2014, 07:26:38 AM

Title: Saving Rate and paying down debt ..
Post by: LiseE on December 04, 2014, 07:26:38 AM
This year we've dug ourselves out of a huge credit card hole (Yay us!) .. and now all of that extra income that was going to CC debt will go to mortgage debt.  My question is about the "savings rate" I constantly read so much about ..

1.  Do you include, as part of your savings rate, monies used to pay down debt? 
2.  Do you include investment allocations? (401K's etc.)

We are currently putting 50% of our income to pay down debt .. is that part of our savings rate?

I haven't been feeling very good about our 'savings rate' because we are currently not really saving anything and putting everything against debt ..
Title: Re: Saving Rate and paying down debt ..
Post by: otherbarry on December 04, 2014, 07:37:30 AM
Getting rid of debt increases your saving rate by default as long as you don't increase spending. Do you have any debt besides your mortgage? Since mortgages are so long people usually just make the minimum payments because they have more results with investing the difference.

Anyway, to answer your questions:

1) Generally no, since that money is being paid to someone else who isn't your future self.
2) Of course!

Pay off high interest debt but things like mortgages are less urgent. Start saving some of that money instead of sending it all to the debtors.
Title: Re: Saving Rate and paying down debt ..
Post by: Aphalite on December 04, 2014, 08:10:22 AM
I disagree with barry, payment of debt (at the very least the principal portion) is an increase of your networth. The money paid lessens the burden on your future self, so it definitely counts as part of your savings rate. Once your debt is extinguished, you would still have that cash flow left, and how you allocate it (saving or spending) will then have a new effect on your spending rate
Title: Re: Saving Rate and paying down debt ..
Post by: NinetyFour on December 04, 2014, 08:20:10 AM
You will see different methods for calculating savings rates.  It doesn't really matter, as long as you are consistent.  I do include principal payments on debt.  Here is my formula:

(Savings + debt principal paid + retirement contributions)/(Take-home income + retirement contributions)

Congrats on killing the CC debt!
Title: Re: Saving Rate and paying down debt ..
Post by: starguru on December 04, 2014, 08:28:35 AM
Paying down debt does NOT increase savings rate, but it will increase your net worth, since you are removing liabilities. 
Title: Re: Saving Rate and paying down debt ..
Post by: skunkfunk on December 04, 2014, 08:46:38 AM
I like to have my "immediate" savings rate which includes only investments (and extra principal payments if I'm feeling down), and a long-term rate which includes that which will eventually be directed towards investments once debts are under control.
Title: Re: Saving Rate and paying down debt ..
Post by: MooseOutFront on December 04, 2014, 09:02:07 AM
You will see different methods for calculating savings rates.  It doesn't really matter, as long as you are consistent.  I do include principal payments on debt.  Here is my formula:

(Savings + debt principal paid + retirement contributions)/(Take-home income + retirement contributions)

Congrats on killing the CC debt!
This method lets payroll deducted expenses like medical insurance, FSAs, disability insurance, life insurance, etc slide under the radar.  Additionally I don't count principal reductions on any debt that isn't a mortgaged asset as savings.  So no go on student loans or credit card principal reductions counting as anything other than an expense.  I wouldn't count car either.

I do:
(Savings + mortgage principal paid + retirement contributions + employer 401k match, profit sharing, free HSA money, etc)/(Gross Salary - FICA Taxes - Federal Taxes - State Taxes + employer 401k match, profit sharing, free HSA money, etc)

Added bonus that this method forces you to learn how to calculate your own federal taxes.
Title: Re: Saving Rate and paying down debt ..
Post by: neo von retorch on December 04, 2014, 09:10:44 AM
I track my mortgage balance in my software, and each month I add the mortgage interest but subtract the overall payment (and I subtract that payment from my checking account) so the end result is a change of net worth comparable to just the mortgage interest.

In other words, the portion of your mortgage payment going towards principal is equivalent to an account transfer of funds. It does not add or subtract from your net worth. But the mortgage interest you are paying the bank does decrease your net worth. But that money going towards principal is equivalent to savings. The interest part is an expense.
Title: Re: Saving Rate and paying down debt ..
Post by: catccc on December 04, 2014, 09:22:56 AM
I echo others here in that it isn't part of savings, but it is still an increase in net worth.  Call it whatever you want, it's a good thing to be doing either way!
Title: Re: Saving Rate and paying down debt ..
Post by: neo von retorch on December 04, 2014, 09:46:35 AM
Well it's "not" an increase in net worth ;)

It's just not a decrease. The increase was when you got paid. But instead of it being spent or paying bills, it's going towards mortgage principal. So that's good.
Title: Re: Saving Rate and paying down debt ..
Post by: geek101 on December 04, 2014, 10:39:07 AM
"Savings rate" might not be the right term because you aren't saving. However, I would develop a different number so you can add any debt with over 6% interest as a percentage of post-tax pay, because it is a good 'investment.'

I track three percentages hat are important to me. Traditional savings rate (post-tax income minus spending divided by post tax income), retirement savings rate (monthly retirement contributions divided by post tax income) and spending rate with charitable contributions not counted as spending.

Whatever is important to you and motivates you, track it. The number isn't a badge of honor or something to brag about, it's a tool to see how you are doing and motivate you to be better.
Title: Re: Saving Rate and paying down debt ..
Post by: Aphalite on December 05, 2014, 09:52:43 AM
Well it's "not" an increase in net worth ;)

It's just not a decrease. The increase was when you got paid. But instead of it being spent or paying bills, it's going towards mortgage principal. So that's good.

Your mortgage loan balance is negative networth, paying down principal results in an increase to networth
Title: Re: Saving Rate and paying down debt ..
Post by: skunkfunk on December 05, 2014, 10:32:36 AM
Well it's "not" an increase in net worth ;)

It's just not a decrease. The increase was when you got paid. But instead of it being spent or paying bills, it's going towards mortgage principal. So that's good.

Your mortgage loan balance is negative networth, paying down principal results in an increase to networth

He's saying your net worth goes up the moment you get paid. Would you argue that moving that money from your bank account to a loan increases net worth, then?
Title: Re: Saving Rate and paying down debt ..
Post by: Aphalite on December 05, 2014, 10:40:02 AM
Well it's "not" an increase in net worth ;)

It's just not a decrease. The increase was when you got paid. But instead of it being spent or paying bills, it's going towards mortgage principal. So that's good.

Your mortgage loan balance is negative networth, paying down principal results in an increase to networth

He's saying your net worth goes up the moment you get paid. Would you argue that moving that money from your bank account to a loan increases net worth, then?

The general question in this thread was whether debt repayment constitutes a savings or an expense. If something is an expense, it decreases your networth, because now that money is gone forever. Loan repayment might be a shift in money, but the overall result is a net increase in networth. Would you disagree with this?
Title: Re: Saving Rate and paying down debt ..
Post by: neo von retorch on December 05, 2014, 10:51:39 AM
Loan repayment does not affect net worth. Neither does transferring money from checking to savings. Therefore it can be counted as savings, but it still doesn't increase your net worth. Neither does moving money into a savings account :) The net worth increase still occurred when you got paid.

However, if you're looking at "the result of one month," the fact that you would put money into savings or paid off principal would mean that you didn't decrease your net worth through spending/expenses, so assuming you had income, your net worth would increase for that month.
Title: Re: Saving Rate and paying down debt ..
Post by: otherbarry on December 06, 2014, 02:01:58 PM
I disagree with barry, payment of debt (at the very least the principal portion) is an increase of your networth. The money paid lessens the burden on your future self, so it definitely counts as part of your savings rate. Once your debt is extinguished, you would still have that cash flow left, and how you allocate it (saving or spending) will then have a new effect on your spending rate

I mentioned getting rid of debt increases your savings rate automatically by increasing income that doesn't go towards debt payments. While paying the debt though he isn't really "saving" anything. The savings rate as I interpret it is something that goes towards an account that can be withdrawn in case of emergency or retirement. You cant really dip into your debt payments, and therefore they shouldn't be considered part of savings in my opinion.


Title: Re: Saving Rate and paying down debt ..
Post by: Jags4186 on December 06, 2014, 02:26:13 PM
IMO savings is money you don't spend and have available to either invest or stick in a bank account. If you make $4000 a month, and have $2000 of living expenses and $2000 of debt payments your savings rate is 0%. It seems illogical to me to include debt payments as savings because you already spent that money!! That's why you have debt!

I don't include paying your mortgage principle because again...you already spent the money on the house.  Now yes eventually by paying off your home you will decrease your monthly required income, but no one includes dividends or stock appreciation in the savings rates that I know of here so no reason to include your mortgage payment.
Title: Re: Saving Rate and paying down debt ..
Post by: LiseE on December 06, 2014, 06:37:28 PM
It seems illogical to me to include debt payments as savings because you already spent that money!! That's why you have debt!


What a great simple way of explaining it.  Thank you.
Title: Re: Saving Rate and paying down debt ..
Post by: NinetyFour on December 06, 2014, 07:37:41 PM
Here's another discussion, if anyone is interested:

http://forum.mrmoneymustache.com/ask-a-mustachian/savings-rate-calculation/