The Money Mustache Community

Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: zenath on September 17, 2016, 10:34:21 AM

Title: What is considered "Savings"?
Post by: zenath on September 17, 2016, 10:34:21 AM
In the last case study http://www.mrmoneymustache.com/2016/09/12/reader-case-study-young-man-saved-from-jeep-suicide/ (http://www.mrmoneymustache.com/2016/09/12/reader-case-study-young-man-saved-from-jeep-suicide/) MMM considered some debt repayments "savings" since presumably the debt payments would go into savings once paid off. What are the thoughts on other payments that count as "Savings"? For example I have 3 debts:

$5k to parents (0% interest, $250/month)
$8k for car (1.85% interest, $414/month)
$268k mortgage on $285k house (3.65% interest, $2000/month - $800 interest, $600 insurance/tax, $500 principal, $100 PMI). The house is probably worth a bit more now as the market I'm in is in high demand.

Additionally I am putting aside $250 in a betterment account for house related expenditures like a new roof or water heater (50/50 stock bond). Is this "saving" when it is the approximate cost of maintaining the house?

I'm thinking of contributing in a college 529 plan for my kids. This occupies an interesting space as not FI money, but still "savings" in my book.

The money I'm putting toward the small debts I consider "saving" since they'll be paid off in ~20 months freeing up that cash flow.
The PMI can be eliminated by making extra mortgage payments. Would that be "saving"? Personally I'm calculating it like an investment. It would take 40k-45k to eliminate the PMI for a return of 1.2k per year. So approximately a 3% rate of return plus 3.65% in saved interest payments.
Does the principal payments against my mortgage count as "saving" or just the cost of my choices (not saving and paying in full for a house)?

Other thoughts welcome.
Title: Re: What is considered "Savings"?
Post by: ruraljuror on September 17, 2016, 01:22:00 PM
I would consider any payment toward the principal of a debt "savings". To me, if it's increasing your net worth (adding to an account or decreasing debt), it's a positive move that you can call savings if you want. I would consider a sinking fund savings as well, b/c it's not certain that it will be spent. If it is spent on maintenance or whatever, in that month/year it would be accounted for as an expense and your savings rate would reflect the expense.
Title: Re: What is considered "Savings"?
Post by: Spork on September 17, 2016, 02:46:30 PM

It's simple.

savings = income - expense
net worth = assets - liabilities

It really is that simple.  If you correctly categorize assets/liabilities/income/expense, savings is the difference between income and expense.

Paying down debt increases net worth.  I wouldn't call it savings.  If you are increasing the amount of equity in a significant asset (by paying down debt) you do end up categorizing it as savings -- because the principle payment is an asset transfer (and not an expense).  So for mortgage, the principle payment ends up showing up as savings because the income is retained.  For cars and student loans and consumer debt -- I would not say they are savings as the income is not retained.
Title: Re: What is considered "Savings"?
Post by: MDM on September 17, 2016, 06:28:35 PM
You can consider "savings" to be anything you want.

If, however, you are looking to calculate "time to FI" and want to include debt payments as "savings" then you should subtract the debt principal from any investment balances.

See Getting Confused Trying to Calculate Savings Rate (http://forum.mrmoneymustache.com/ask-a-mustachian/getting-confused-trying-to-calculate-savings-rate/msg1072904/#msg1072904) for more.
Title: Re: What is considered "Savings"?
Post by: BlueHouse on September 17, 2016, 06:54:50 PM
It depends what you're really trying to measure, so all of the previous posters are correct. 

This year, I've been trying to increase my savings rate because my goal is to stop spending mindlessly.  I've been counting any extra money that I put toward early mortgage principal repayment because the alternative would be that I put it into a savings/investment account.  But I haven't been counting the regular principal portion of my mortgage, because that's an expense for living in my house.  Both of those payments go toward the same thing, and they both can increase my net worth.  But this is how I started measuring at the beginning of the year, so I keep doing it.  Next year, I might measure something different.

When my goal is to figure out my time to FI, my calculations are slightly different.  Just do what works for you.  Be consistent for the time you're measuring, and if it makes sense to change, then change.  Don't pay too much attention to the "savings police". 
Title: Re: What is considered "Savings"?
Post by: csprof on September 17, 2016, 08:51:20 PM
You can consider "savings" to be anything you want.

If, however, you are looking to calculate "time to FI" and want to include debt payments as "savings" then you should subtract the debt principal from any investment balances.

See Getting Confused Trying to Calculate Savings Rate (http://forum.mrmoneymustache.com/ask-a-mustachian/getting-confused-trying-to-calculate-savings-rate/msg1072904/#msg1072904) for more.

And, if you're assuming that your kids are going to be using up everything in the 529, you may want to discount that.

I consider our 529 contributions part of our expenses, and I ignore the 529 fund when calculating net worth for FI purposes.

(Which does make our expenses seem even more spendypants than they are, alas. :)
Title: Re: What is considered "Savings"?
Post by: K-ice on September 17, 2016, 10:36:50 PM
I do not consider debt repayment savings. I had to reread that part of the case study a few times.

Those debts were Car, student loan, Cc & personal loan.

I can't go blow money on a new car and consider my loan payments for the next 5 years "savings". A car is a depreciating asset.

Sure, rack up a few thousand in Cc debt. Then pat myself on the back as I take six months to pay it off and call that savings.

I think I miss understood the MMM comment & that guy has the potential for $30K in savings once the debts are paid off.

Some people do count principal or extra principal payments on a mortgage as savings. I could maybe be convinced that is savings because it does help increase your net worth. But in that case I think you would need to be prepared to sell and downsize to a smaller house. If the money is just tied up in a McMansion it's not really "savings" either.

For me my savings is the extra money I have at the end of the month that I can take from my bank account & move into my investment account. It's also money I don't touch until I retire. I wouldn't even really consider the money I stock pile for a holiday "savings". That is just longer term budgeting.



Title: Re: What is considered "Savings"?
Post by: zenath on September 20, 2016, 04:00:21 PM
Everyone has good points. I think for myself, I am going to categorize my saving into two buckets: FI saving and everything else. Right now my goal is to get my FI saving equal to my expenditures while still saving 10% in everything else (college/house repair fund). That basically breaks down the budget to 45% needs/wants, 45% FI saving, and 10% other saving.

I still have a ways to go as the current budget breakdown will be 57% needs/wants, 33% FI, and 10% other assuming no new debt and paying off all non-mortgage loans.
Title: Re: What is considered "Savings"?
Post by: BrickByBrick on September 20, 2016, 07:09:00 PM
For all the reasons above, I've always found savings rate confusing to calculate.  Depending on how I calculate it my rate is as low as ~30% or as high as ~65%.  Does paying down debt count as savings or should it really be considered 'investing' since your getting a 'return' by eliminating interest working against you?  Then again, in many cases there's no tangible, non-depreciating asset to back up many forms of debt down-payment so maybe it really is savings for the purpose of increasing ones' net worth, at that point in time...really it's kind of up to you to decide what it means for you.

So I try to focus more on net worth and most importantly, my "investing rate".  Net worth is a good way to keep score in my mind, but can be artificially boosted by short-term savings.  Case in point - for the past year I've seen my savings and therefor NW increase significantly mostly because I've been stockpiling as much liquid cash as I can, but that's because before the end of the year and most of 2017 I will have many major expenses and debt hitting my personal net worth statement as that cash stockpile gets depleted.  So, long term, how much I'm able to put away in my 401k/IRA/Other Accounts is what really impacts my FI(RE) goals, which is the most important metric here.
Title: Re: What is considered "Savings"?
Post by: SeaEhm on September 20, 2016, 08:19:08 PM
Hard thing about calculating paying off debt as savings is if that item depreciates.


Would love to say I save $10/mo paying off a car loan, however, that car may be depreciating which makes me having to guess how much I am saving.  Would still be fun to say, "I am saving an addition $9/mo" by paying off this car loan. 

I have never heard of the mortgage principal payment counting towards savings, but then it does make sense in a way that your debt goes down by $X dollars while your net worth increases by $X assuming asset value remains.

Talking about these gets fun when you have taxed retirements and non taxed. 
Title: Re: What is considered "Savings"?
Post by: FIRE_at_45 on September 20, 2016, 10:09:18 PM
I do not consider debt repayment savings. I had to reread that part of the case study a few times.

Those debts were Car, student loan, Cc & personal loan.

I can't go blow money on a new car and consider my loan payments for the next 5 years "savings". A car is a depreciating asset.

Sure, rack up a few thousand in Cc debt. Then pat myself on the back as I take six months to pay it off and call that savings.

I think I miss understood the MMM comment & that guy has the potential for $30K in savings once the debts are paid off.

Some people do count principal or extra principal payments on a mortgage as savings. I could maybe be convinced that is savings because it does help increase your net worth. But in that case I think you would need to be prepared to sell and downsize to a smaller house. If the money is just tied up in a McMansion it's not really "savings" either.

For me my savings is the extra money I have at the end of the month that I can take from my bank account & move into my investment account. It's also money I don't touch until I retire. I wouldn't even really consider the money I stock pile for a holiday "savings". That is just longer term budgeting.

+1 I agree that debt repayment is not savings.  But it is the best place you can put your money assuming you have high interests rates like a cc. 
Title: Re: What is considered "Savings"?
Post by: Greystache on September 20, 2016, 10:12:22 PM
I struggled with this question recently. I was sitting on a large pile of cash and looking for a safe place to put it to work.  I decided to spend $12K on solar panels.  Over their 20 year life, they will not only pay for themselves but they will safe me thousands of dollars.  I ran the numbers and it works out about the same as buying a bond that yields 3.5%. So, is buying solar panels an expense or a savings?
Title: Re: What is considered "Savings"?
Post by: FIRE_at_45 on September 20, 2016, 10:23:04 PM
I struggled with this question recently. I was sitting on a large pile of cash and looking for a safe place to put it to work.  I decided to spend $12K on solar panels.  Over their 20 year life, they will not only pay for themselves but they will safe me thousands of dollars.  I ran the numbers and it works out about the same as buying a bond that yields 3.5%. So, is buying solar panels an expense or a savings?

Personally I think this falls into the category of home improvements where only a portion actually increases the value of your home.  What's the number for a kitchen 60% or something like that?  I don't think as many people would get excited about solar panels although they would be a nice bonus.  So, probably safe to say that only a portion of that $12 k could be considered savings and the majority would be an expense.  Did you do the MMM analysis as a 10 year outlook?  It makes sense to look that far out if you plan on staying for a long time.
Title: Re: What is considered "Savings"?
Post by: Spork on September 21, 2016, 08:45:54 AM
I struggled with this question recently. I was sitting on a large pile of cash and looking for a safe place to put it to work.  I decided to spend $12K on solar panels.  Over their 20 year life, they will not only pay for themselves but they will safe me thousands of dollars.  I ran the numbers and it works out about the same as buying a bond that yields 3.5%. So, is buying solar panels an expense or a savings?

It's an expense*.  You can't just call something 'savings' because it saves money over another alternative. 

Your grid connected electricity cost you a monthly amount.  The new panels (amortized) cost you less.  This is like selling an SUV and buying a Honda Fit.  The Fit isn't "savings".

BUT... go back to my post above (http://forum.mrmoneymustache.com/ask-a-mustachian/what-is-considered-'savings'/msg1231641/#msg1231641).

You DO end up getting savings.  Savings is not from "buying new panels".  Savings is from the difference between your monthly electric bill and the amortized cost of the panels.  It can still make sense to buy panels mathematically, even though it is an expense.

Savings is actually a real, well defined principle.  There doesn't need to be a lot of discussion here.  Identify income/expense/asset/liability and >POOF< you magically identify what your savings is. 

--

*note...  You probably could make an argument for calling it an asset IF buying panels increases the value of your house by $12k.  In other words, it would be a transfer of an asset (your savings account) into another asset (solar panels).  I hesitate to call it an asset because I suspect it has a limited lifetime and depreciates up to some replacement cost in 20-30 years.  If you DO consider it an asset, then you probably should sort out that depreciation and call that an expense every year.  This pretty much puts you in the same boat as before, it just levels out the expenses over time.  This is how I track large depreciating assets like cars.  It makes yearly expenses more level.