Do you consider mortgage payments as savings?

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JoeJohnson
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Re: Do you consider mortgage payments as savings?

Post by JoeJohnson »

hoops777 wrote:Well with all due respect when someone says savings I take that as money put into an account that is safe,not something that can lose value like a stock or a house.Maybe I misunderstood his meaning.
When somebody asks, "What percent of your income are you saving?" you are going to include money contributed to retirement accounts.

(Inflow - outflow)/Inflow = savings %
dbr
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Re: Do you consider mortgage payments as savings?

Post by dbr »

JoeJohnson wrote:
hoops777 wrote:Well with all due respect when someone says savings I take that as money put into an account that is safe,not something that can lose value like a stock or a house.Maybe I misunderstood his meaning.
When somebody asks, "What percent of your income are you saving?" you are going to include money contributed to retirement accounts.

(Inflow - outflow)/Inflow = savings %
The essence is that saving is defined in the cash flow sense and has nothing to do with how the increment is placed in one asset or another.
MathWizard
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Re: Do you consider mortgage payments as savings?

Post by MathWizard »

I consider the mortgage payment as savings, and did the same for student loans.
(Not consumer debt, and I had very little of that.)

You dig a big hole increasing your potential income especially with professional degrees.
Now you are increasing your net worth every month as you pay off the loans.

When .,people ask what the savings rate is, those late in their careers with paid off
student loans and a paid off house can say they are saving 35% or 60% of income.
That discourages the new graduates who are struggling with saving 10% or 15% of their salary,
especially if they have made a wise decision to take a 15 or 20 year mortgage rather than
a 30 year mortgage.

If these new graduates have committed to directing those extra payments to saving
when they pay off the student loans and mortgage, then I say include them,
Suppose they are saving 15% of income and paying off student loans at 5% of income and
the mortgage at 15% of income. Then I am comfortable with saying they are saving at a rate
of 35%. They will need to up the original 15% savings to keep up with inflation in their
salary to stay at the 35%, but they could then have a consistent savings rate through their entire career rather than having a big jump at the end.
toto238
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Re: Do you consider mortgage payments as savings?

Post by toto238 »

Flashes1 wrote:I don't consider the principle portion of my mortgage payment savings, although I do include the equity in my home as part of my Net Worth.
So when the equity in your home increases, due to you paying down principal, you recognize that your net worth has increased. But you don't consider that saving?

For me saving is a simple formula:

Net worth this month - Net worth last month - increase/decrease in asset values.

The first part tells you the total change in net worth. That amount consists of two numbers, increases/decreases in asset values, and your savings, which is how we get the second part.

So if my net worth was $100,000 and now it is $110,000, my total change in net worth was $10,000. I can easily calculate that $6,000 of that was because my home, my mutual funds, and other assets gained value. So I know the other $4,000 I gained was my saving. Whether I save by reducing debt or by increasing assets doesn't matter. I saved $4,000 that month.

I used round numbers to make it simple. Those aren't my actual personal numbers.
dbr
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Re: Do you consider mortgage payments as savings?

Post by dbr »

toto238 wrote:
Flashes1 wrote:I don't consider the principle portion of my mortgage payment savings, although I do include the equity in my home as part of my Net Worth.
So when the equity in your home increases, due to you paying down principal, you recognize that your net worth has increased. But you don't consider that saving?

For me saving is a simple formula:

Net worth this month - Net worth last month - increase/decrease in asset values.

The first part tells you the total change in net worth. That amount consists of two numbers, increases/decreases in asset values, and your savings, which is how we get the second part.

So if my net worth was $100,000 and now it is $110,000, my total change in net worth was $10,000. I can easily calculate that $6,000 of that was because my home, my mutual funds, and other assets gained value. So I know the other $4,000 I gained was my saving. Whether I save by reducing debt or by increasing assets doesn't matter. I saved $4,000 that month.

I used round numbers to make it simple. Those aren't my actual personal numbers.
Right. The cash flow account and the asset account should be consistent and are logically so using the formula you suggest.
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G12
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Re: Do you consider mortgage payments as savings?

Post by G12 »

avenger wrote:It's not saving.

It's paying for something you already bought.
It's more like you are systematically paying for something you agreed to buy via installments. If if it is the normal 5-20% downpayment, one has a minority equity interest in property that a bank and the county/city government encumbers, and the government component never goes away. I had communications with city officials when I wanted to build a much more aesthetically appealing and more secure 6-feet high fence around my backyard and was told I had two front yards being on a corner lot and the city had to approve everything pre-installation, that ended up costing a lot of usable space since they would not allow the replacement fence to be installed along the original fence line, which was well within the perimeter boundary of the yard. Then there was an eminent domain issue involving a piece of commercial property in another state which which was acquired by a city at below market rates, believe me the ownership factor of real property may be misplaced.
Twins Fan
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Re: Do you consider mortgage payments as savings?

Post by Twins Fan »

I don't know that the saving as building home equity holds water. Not all the time at least. Sure, the housing market goes up over the long haul usually. But, I bet there's a lot of folks in and around Detroit, for example, that would say paying a mortgage as a form of savings is a bunch of rubbish... "You mean to tell me I was "saving" for 30 years to have a home worth $20k?!" :) Growing net worth by owning a home is not guaranteed.

That can all depend on timing and location, IMO. There's the mortgage and then there's the home value. The mortgage is set and the home value can vary.

The "saving" for/on a home really comes down to the purchase price. One either saves up and pays cash for it, or takes a loan out and pays it back.
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tylerdurden
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Re: Do you consider mortgage payments as savings?

Post by tylerdurden »

Carefreeap wrote:
Bacchus01 wrote:Do I consider it "savings"? No. Do I consider it as growing net worth? Absolutely.
+1
+2.

And I generally underestimate home value when I do my net worth calculations (taking into account the costs of selling).
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toto238
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Re: Do you consider mortgage payments as savings?

Post by toto238 »

Twins Fan wrote:I don't know that the saving as building home equity holds water. Not all the time at least. Sure, the housing market goes up over the long haul usually. But, I bet there's a lot of folks in and around Detroit, for example, that would say paying a mortgage as a form of savings is a bunch of rubbish... "You mean to tell me I was "saving" for 30 years to have a home worth $20k?!" :) Growing net worth by owning a home is not guaranteed.

That can all depend on timing and location, IMO. There's the mortgage and then there's the home value. The mortgage is set and the home value can vary.

The "saving" for/on a home really comes down to the purchase price. One either saves up and pays cash for it, or takes a loan out and pays it back.
Any kind of "saving" has the potential to go down in value. Putting money in stocks or bonds can have swings in market value. Even putting money in the bank account has the remote potential of losing assets in the case of a large bank panic that the FDIC is unable to completely cover. How safe your savings are has no bearings on whether you're saving. Whether you're putting your savings in low-risk FDIC-insured CD or into a highly leveraged piece of real estate, it's still saving. Whether it's a "good investment" or "good risk" is irrelevant. You're still saving money. You just might be saving it in a poor place.
Twins Fan
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Re: Do you consider mortgage payments as savings?

Post by Twins Fan »

That is true... no complete guarantee on anything.

Okay, maybe it comes down to saving money is some way, or spending it like Charlie Sheen on drugs and hookers? :D

It all depends on how one views it, I suppose. My mortgage feels more like a bill to me though.
Atilla
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Re: Do you consider mortgage payments as savings?

Post by Atilla »

I looked at mortgage payments as buying bonds. Now that the house is paid off that investment is maxed out. :happy
whomever
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Re: Do you consider mortgage payments as savings?

Post by whomever »

I'm not an accountant, so I call it savings (or I did, before the mortgage was paid off).

"Okay, maybe it comes down to saving money is some way, or spending it like Charlie Sheen on drugs and hookers?"

Not just drugs and hookers :-), but any other recurring expense.

My justification goes like this: imagine an efficient market where renting and owning are financially equivalent. If I choose to rent, I could decide to save money as stocks/bonds/cash with the intent of, after N years, purchasing an annuity to fund my housing costs - the rent - for the remainder of my life. I think most people would call that 'saving for retirement'.

If instead I choose to buy, in our perfectly efficient market, I'd be putting the same amount into paying off the mortgage over N years, and then living in the house after it's paid off. Either way, I'm doing the same thing; paying for lifetime housing costs over N years.

Paying off the mortgage or funding the lifetime housing cost annuity seem functionally equivalent to me, so if one is savings I think the other is.

As with many terms in life, the definition depends on context. In the personal finance context, if you're putting half your net income into paying off the mortgage I'd call that a 50% savings rate. If you're taking the CPA exam, I suspect the definition is different.
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Crimsontide
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Re: Do you consider mortgage payments as savings?

Post by Crimsontide »

toto238 wrote:
Flashes1 wrote:I don't consider the principle portion of my mortgage payment savings, although I do include the equity in my home as part of my Net Worth.
So when the equity in your home increases, due to you paying down principal, you recognize that your net worth has increased. But you don't consider that saving?

For me saving is a simple formula:

Net worth this month - Net worth last month - increase/decrease in asset values.

The first part tells you the total change in net worth. That amount consists of two numbers, increases/decreases in asset values, and your savings, which is how we get the second part.

So if my net worth was $100,000 and now it is $110,000, my total change in net worth was $10,000. I can easily calculate that $6,000 of that was because my home, my mutual funds, and other assets gained value. So I know the other $4,000 I gained was my saving. Whether I save by reducing debt or by increasing assets doesn't matter. I saved $4,000 that month.
So when the next bubble comes along and you lose $10K in equity/valuation are you going to claim you spent $10K?
mikep
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Re: Do you consider mortgage payments as savings?

Post by mikep »

I consider the principal part of the payment as savings. To those that don't : Do you treat cashing out of your home consumption? You shouldn't. Would I increase my savings by 100k if I took 100k out of my house and put it in the bank?
bac573
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Re: Do you consider mortgage payments as savings?

Post by bac573 »

No, I do not consider mortgage payments as savings.

A mortgage, like a credit card, is purchasing an item that you cannot afford to pay for, in full, up front, regardless of whether it will increase or decrease in value over time.

If you buy a painting with a credit card, expecting the painting to increase in value over time, would you consider your monthly credit card payment as savings? No, you are simply paying down the balance on the credit card. Same goes for a mortgage.

In determining our net worth, our liability = our remaining mortgage balance and our asset = our home's assessed value (via our county appraisal district's website). Keep it simple.
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AllYouNeedIsLove
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Re: Do you consider mortgage payments as savings?

Post by AllYouNeedIsLove »

I think the important issue is whether the contribution is toward a "appreciating asset."

I am very much in favor of having data. Understanding how much money you have annually placed into appreciating assets is important to know.
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randomguy
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Re: Do you consider mortgage payments as savings?

Post by randomguy »

bac573 wrote:No, I do not consider mortgage payments as savings.

A mortgage, like a credit card, is purchasing an item that you cannot afford to pay for, in full, up front, regardless of whether it will increase or decrease in value over time.

If you buy a painting with a credit card, expecting the painting to increase in value over time, would you consider your monthly credit card payment as savings? No, you are simply paying down the balance on the credit card. Same goes for a mortgage.

In determining our net worth, our liability = our remaining mortgage balance and our asset = our home's assessed value (via our county appraisal district's website). Keep it simple.


Why wouldn't you count the paying off the painting as savings? You have a 100k asset and 100k of debt. If you pay off 10k of debt, your net worth went up by 10k. I would have no problem counting anything that increases my net worth as savings. That is even simpler than debating which assets to count or not count.

Given that things like savings rate as meaningless numbers, just pick whatever methodology makes you happy. Nobody else in the world cares.
toto238
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Re: Do you consider mortgage payments as savings?

Post by toto238 »

Crimsontide wrote:
toto238 wrote:
Flashes1 wrote:I don't consider the principle portion of my mortgage payment savings, although I do include the equity in my home as part of my Net Worth.
So when the equity in your home increases, due to you paying down principal, you recognize that your net worth has increased. But you don't consider that saving?

For me saving is a simple formula:

Net worth this month - Net worth last month - increase/decrease in asset values.

The first part tells you the total change in net worth. That amount consists of two numbers, increases/decreases in asset values, and your savings, which is how we get the second part.

So if my net worth was $100,000 and now it is $110,000, my total change in net worth was $10,000. I can easily calculate that $6,000 of that was because my home, my mutual funds, and other assets gained value. So I know the other $4,000 I gained was my saving. Whether I save by reducing debt or by increasing assets doesn't matter. I saved $4,000 that month.
So when the next bubble comes along and you lose $10K in equity/valuation are you going to claim you spent $10K?
Absolutely not, and my simple formula clearly shows that. Here's your theoretical situation:

Net worth this month ($94,000) - Net worth last month ($100,000) - increase/decrease in asset values ($-10,000) = 94K - 100k - (-10k) = -6k + 10k = 4k

So I still saved 4k that month. Unfortunately, I also lost 10k in asset valuation. It doesn't change the fact that I put away 4k in savings that month. Whether I used that 4k to add to assets or eliminate debt is irrelevant.
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Cosmo
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Re: Do you consider mortgage payments as savings?

Post by Cosmo »

JoeJohnson wrote:
Cosmo wrote:Interesting thread here. Bottom line: this changes your bottom line. With each mortgage payment as your principle gets paid off, your NET WORTH increases by the same amount. So as with saving and investing, it is just another way to increase your net worth.
Cosmo
On the other hand, each time you buy/sell a house there are huge costs associated with the transaction that eat at that bottom line significantly. A year in which you sell your house, would you count that as negative savings?
That depends on how you value your home. I conservatively value my home at the purchase price and if I was to sell, I would likely get more than I paid, which would more than offset any transaction costs.
toto238
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Re: Do you consider mortgage payments as savings?

Post by toto238 »

Cosmo wrote:
JoeJohnson wrote:
Cosmo wrote:Interesting thread here. Bottom line: this changes your bottom line. With each mortgage payment as your principle gets paid off, your NET WORTH increases by the same amount. So as with saving and investing, it is just another way to increase your net worth.
Cosmo
On the other hand, each time you buy/sell a house there are huge costs associated with the transaction that eat at that bottom line significantly. A year in which you sell your house, would you count that as negative savings?
That depends on how you value your home. I conservatively value my home at the purchase price and if I was to sell, I would likely get more than I paid, which would more than offset any transaction costs.
How is that conservative? Home values go up and down. If your home goes down in value 10%, are you still going to value it at purchase price? Wouldn't it make more sense to get a decent estimate and knock 10% or some other % off of that to be conservative? You can get a ballpark figure within a minute on Zillow. For free.

I don't understand treating something as if it's worth something other than what it's worth. What I bought the house at is absolutely nothing but a psychological barrier. Once you've already bought the house that number becomes completely irrelevant. What matters is what you could sell your house for if you had to, and what you owe on it.
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Re: Do you consider mortgage payments as savings?

Post by stan1 »

JoeJohnson wrote:
hoops777 wrote:Well with all due respect when someone says savings I take that as money put into an account that is safe,not something that can lose value like a stock or a house.Maybe I misunderstood his meaning.
When somebody asks, "What percent of your income are you saving?" you are going to include money contributed to retirement accounts.

(Inflow - outflow)/Inflow = savings %
I'd tell them to mind their own business (if someone were to ask).
toto238
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Re: Do you consider mortgage payments as savings?

Post by toto238 »

stan1 wrote:
JoeJohnson wrote:
hoops777 wrote:Well with all due respect when someone says savings I take that as money put into an account that is safe,not something that can lose value like a stock or a house.Maybe I misunderstood his meaning.
When somebody asks, "What percent of your income are you saving?" you are going to include money contributed to retirement accounts.

(Inflow - outflow)/Inflow = savings %
I'd tell them to mind their own business (if someone were to ask).
Inflow and outflow is a terrible way to measure saving. If you take a $1000 cash advance on your credit card did you just save another $1000 that month? Of course not. You added a liability and added an asset and they cancel each other out. That $1000 didn't come from nowhere. It was t free. In the same way, when you pay DOWN debt, you are decreasing a liability.

Cash flow is only relevant to make sure you have enough liquidity to cover variable expenses. It has no relevance to savings rate.

Seriously, if we're only looking at cash flow, then why not maximize your credit limit on your credit cards in retirement and stop paying them off? That's free cash flow! As long as you can make the minimum payments your cash flow is fine!
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Re: Do you consider mortgage payments as savings?

Post by MnD »

The principal portion yes.
I consider the portion of our current earned income that is converted to building net worth to be savings, the rest consumption.
Our mortgage payment is 92% principal so it's not an insignificant contributor to net worth gains.
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Re: Do you consider mortgage payments as savings?

Post by acegolfer »

For me, it's straightforward.

If I recognize the purchase as spending at the time of purchase, then the subsequent principal payments are not spending and hence savings.

If I don't recognize as spending at the time of purchase, then loan payments are spending and not savings.
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Re: Do you consider mortgage payments as savings?

Post by mesaverde »

I have a mortgage on a condo I rent out. Without question, I consider both regular & extra payments towards the principal as savings.
But a rental property is quite different from one's own home. I can sell this rental property and cash out on it if I choose.
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Re: Do you consider mortgage payments as savings?

Post by basspond »

Incredible. The same logics could be used for anything you buy since it has some value. Problem with applying only your mortgage principle as savings is because you have a lot of expenses with maintaining your home. If one is to do this they need to also consider offsetting the savings with interest, taxes, insurance, utilities, and maintenance expenses. Once you do that I feel most will have an expense ratio over 100%.
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Re: Do you consider mortgage payments as savings?

Post by alex_686 »

basspond wrote:Incredible. The same logics could be used for anything you buy since it has some value. Problem with applying only your mortgage principle as savings is because you have a lot of expenses with maintaining your home. If one is to do this they need to also consider offsetting the savings with interest, taxes, insurance, utilities, and maintenance expenses. Once you do that I feel most will have an expense ratio over 100%.
Think about it in terms of opportunity costs.

Let us say you bought an investment property. You have rent coming in. You have expenses such as mortgage, taxes, insurance, maintenance, deprecation – roofs only last 20 years or so. How do you calculate your profit? Profit = cash flow + change in the net asset value.

If the expense ratio was over 100% you would be losing money. Like most business, real estate has thin margins so don't freak out when your expense ratio hits over 90%.

Now, let us say your own a house. What has changed? Not much. You are in effect renting the house from yourself at the market rate. In terms of opportunity costs, one always has the option of moving out and renting the house.

As I have said in a earlier post, a person's home tends to emotionally warped people's mind so logical thought home investment tends to go out the window.
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Xpe
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Re: Do you consider mortgage payments as savings?

Post by Xpe »

Your mortgage decreases your net worth, so anything that decreases your mortgage increases your net worth.

Mortgage payments are decreasing your debt, any other debt payment would be considered saving, why not this?
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Re: Do you consider mortgage payments as savings?

Post by Wildebeest »

alex_686 wrote:
basspond wrote:Incredible. The same logics could be used for anything you buy since it has some value. Problem with applying only your mortgage principle as savings is because you have a lot of expenses with maintaining your home. If one is to do this they need to also consider offsetting the savings with interest, taxes, insurance, utilities, and maintenance expenses. Once you do that I feel most will have an expense ratio over 100%.
Think about it in terms of opportunity costs.

Let us say you bought an investment property. You have rent coming in. You have expenses such as mortgage, taxes, insurance, maintenance, deprecation – roofs only last 20 years or so. How do you calculate your profit? Profit = cash flow + change in the net asset value.

If the expense ratio was over 100% you would be losing money. Like most business, real estate has thin margins so don't freak out when your expense ratio hits over 90%.

Now, let us say your own a house. What has changed? Not much. You are in effect renting the house from yourself at the market rate. In terms of opportunity costs, one always has the option of moving out and renting the house.

As I have said in a earlier post, a person's home tends to emotionally warped people's mind so logical thought home investment tends to go out the window.
Could not agree with basspond and alex more.

Initially when I saw the thread listed as "Do you consider mortgage payments as savings" , I assumed it must be a request for jokes along the lines of:
"I spent my money on fast women, fast cars and booze and the rest I wasted".

I tried to come up with my own joke as in:
"My lottery tickets, mortgage payments and money spent on blow are part of my investment scheme so I do not have to save for retirement",
but I am not funny.

Maybe the best way to look at mortgagepayments as savings is, that the payments may prevent you from spending on fast cars, fast women and booze. and the "savings" would be that it would save you from excitement.
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Re: Do you consider mortgage payments as savings?

Post by grabiner »

I would consider an extra mortgage payment as an investment, because it serves the same purpose. If you have a 4% mortgage with ten years left on it, and you pay $1000 extra towards your mortgage today, you have eliminated a $1480 payment you would have to make ten years from now. This is just as good as if you had invested $1000 in a ten-year bond or CD, which would also pay $1480 ten years from now. Thus, you might find it a better deal to pay extra on your mortgage rather than investing.
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dbr
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Re: Do you consider mortgage payments as savings?

Post by dbr »

As a previous poster pointed out, moving money from one asset, cash in the bank for example, to another, reduction of loan liability for example, is not saving. If the question is whether or not it is saving to make use one's new paycheck to make a payment against mortgage principal versus not making the payment and spending the money on booze instead, then the mortgage payment is saving. Actually, I am not sure exactly what the question really is.
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Re: Do you consider mortgage payments as savings?

Post by The Wizard »

avenger wrote:It's not saving.

It's paying for something you already bought.
Correct.
If I get a big inheritance, for instance, and buy a house for cash, would THAT count as "savings"?
No it would not, and neither does paying down a loan or debt for any reason...
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Re: Do you consider mortgage payments as savings?

Post by The Wizard »

Xpe wrote:Your mortgage decreases your net worth, so anything that decreases your mortgage increases your net worth.

Mortgage payments are decreasing your debt, any other debt payment would be considered saving, why not this?
Incorrect logic.
Let's say I owe $100,000 on my mortgage loan.
And let's say I have $10,000 in my savings account.
Does using that $10K to pay my mortgage balance down to $90K change my net worth?
No it does not...
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dbr
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Re: Do you consider mortgage payments as savings?

Post by dbr »

The Wizard wrote:
avenger wrote:It's not saving.

It's paying for something you already bought.
Correct.
If I get a big inheritance, for instance, and buy a house for cash, would THAT count as "savings"?
No it would not, and neither does paying down a loan or debt for any reason...
But getting the big inheritance and keeping the money in whatever variety of assets you choose is saving the inheritance. What assets the inheritance is in when it is received or directed into after receipt has nothing to do with the question, as you say. To not save the inheritance would mean that you had spent the money or given it away. One could even go so far as to propose that since money is fungible that it is not even possible to speak of saving or spending any particular asset or any particular source of income. One can say that the definition of savings for any interval of time is the excess of income over outgo, and there is nothing more to say than that. That makes the question in the OP a nonsensical question, ie not a question at all.

What causes this ongoing confusion about what it means to save?
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Re: Do you consider mortgage payments as savings?

Post by stan1 »

dbr wrote: What causes this ongoing confusion about what it means to save?
Because saving 30% or 50% is obviously better than saving 20%, especially if you want to tell your spouse/friends about it or gloat on the internet. :moneybag
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Re: Do you consider mortgage payments as savings?

Post by dbr »

stan1 wrote:
dbr wrote: What causes this ongoing confusion about what it means to save?
Because saving 30% or 50% is obviously better than saving 20%, especially if you want to tell your spouse/friends about it or gloat on the internet. :moneybag
Maybe that is exactly it.
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Re: Do you consider mortgage payments as savings?

Post by Dickerson »

There are many interesting points made here. No straightforward answer.

I do not include primary residence as part of our net worth. One has to live somewhere. Not everyone uses this method and I do not consider there is a right or wrong answer. If you include your house as part of net worth, do you include cars, furniture, etc.?

If you sell your house and buy a cheaper one then your net worth increases. (Opposite is true too.) This increases (or decreases) your net worth.
At your death, the after costs dollars is part of your net worth that goes to your heirs so your net worth goes up the day you die.
Go figure.
Topic Author
LateStarter1975
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Re: Do you consider mortgage payments as savings?

Post by LateStarter1975 »

Many responses thus far and it does look like Bogleheads are split on this one. Not really surprised. Like I said earlier, I'm a bit ambivalent on this one. At the end of the day, the bottom line is what's important: gradually increasing your net worth.
Debt is dangerous...simple is beautiful
Rodc
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Re: Do you consider mortgage payments as savings?

Post by Rodc »

I think you all are not debating whether or not mortgage (principle) counts as savings.

You are sort of dancing around the question of what the definition of "savings" should be. If you actually came up with a definition the answer to the question would be clear.

But it really does not matter unless there is some contest where everyone gets to brag about their savings rate and whomever claims the highest number wins, or if one is feel insecure about their savings rate wants to boost it.

All sorts of things could be thought of as "savings" if you want a bigger number. Social Security (and throw in the part your employer is paying!).

The key is, are you amassing enough wealth to weather an emergency, send your kids to college (if you wish), retire at some reasonable age with sufficient income from all your sources? If they answer is yes you are in good shape. If not, you need to cut expenses and build wealth faster by one or more methods (save more in college funds, invest more in your IRA, build home equity, whatever works for you).
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Topic Author
LateStarter1975
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Re: Do you consider mortgage payments as savings?

Post by LateStarter1975 »

Rodc wrote:I think you all are not debating whether or not mortgage (principle) counts as savings.

You are sort of dancing around the question of what the definition of "savings" should be. If you actually came up with a definition the answer to the question would be clear.

But it really does not matter unless there is some contest where everyone gets to brag about their savings rate and whomever claims the highest number wins, or if one is feel insecure about their savings rate wants to boost it.

All sorts of things could be thought of as "savings" if you want a bigger number. Social Security (and throw in the part your employer is paying!).

The key is, are you amassing enough wealth to weather an emergency, send your kids to college (if you wish), retire at some reasonable age with sufficient income from all your sources? If they answer is yes you are in good shape. If not, you need to cut expenses and build wealth faster by one or more methods (save more in college funds, invest more in your IRA, build home equity, whatever works for you).
Good point
Debt is dangerous...simple is beautiful
dbr
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Re: Do you consider mortgage payments as savings?

Post by dbr »

Rodc wrote:I think you all are not debating whether or not mortgage (principle) counts as savings.

You are sort of dancing around the question of what the definition of "savings" should be. If you actually came up with a definition the answer to the question would be clear.
Has anyone wanted to explicitly discard the definition that savings is the difference between income and outgo in any particular period of time? Is it that there has been some implicit discarding of this definition, perhaps by altering what is defined as income and what is defined as outgo? Does anyone want to discard the fact that what is defined as savings in cash flow will also appear as an addition to assets in a net worth tabulation? Is there an implicit discarding of this fact in altering what is defined as an asset?
Rodc
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Re: Do you consider mortgage payments as savings?

Post by Rodc »

dbr wrote:
Rodc wrote:I think you all are not debating whether or not mortgage (principle) counts as savings.

You are sort of dancing around the question of what the definition of "savings" should be. If you actually came up with a definition the answer to the question would be clear.
Has anyone wanted to explicitly discard the definition that savings is the difference between income and outgo in any particular period of time? Is it that there has been some implicit discarding of this definition, perhaps by altering what is defined as income and what is defined as outgo? Does anyone want to discard the fact that what is defined as savings in cash flow will also appear as an addition to assets in a net worth tabulation? Is there an implicit discarding of this fact in altering what is defined as an asset?
I may have missed it.

Is there a post that defines savings and some set of posts where folks agreed to that definition? (note it would be best of the OP provides the definition and asks folks to use that for the purposes of the thread. Many will wander off to other definitions because few can hold a definition for the purposes of a given thread but that is another issue.)

If not than I'll stick with my point.

This is a very common problem here and elsewhere. Folks have their own, often unstated, definition in mind and assume everyone has the same definition in mind. And so a long debate ensues but no common ground is found because there is no shared definition.

Added: if you want to use your definition which is fine by me I think the next debate is going to be what is "outgo". I think perhaps there is income, outgo and move sideways. Is principle outgo or sideways? I think of it as moving cash from liquid cash to illiquid real estate, so is neither income or outgo. Folks in the "Well I'll never sell my house so it is not an investment" might call it an outgo. I don't happen to agree with them, but unless we carefully define terms and all agree to those terms, no progress will be made.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
poker27
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Re: Do you consider mortgage payments as savings?

Post by poker27 »

I get about $500 in equity with every monthly payment. I will need to pay more than $20k in just realtor commissions when I sell. Which means the first 4 years I will only be paying down fees for when I sell. So maybe some day savings, not today.
dbr
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Re: Do you consider mortgage payments as savings?

Post by dbr »

Rodc wrote:
Has anyone wanted to explicitly discard the definition that savings is the difference between income and outgo in any particular period of time? Is it that there has been some implicit discarding of this definition, perhaps by altering what is defined as income and what is defined as outgo? Does anyone want to discard the fact that what is defined as savings in cash flow will also appear as an addition to assets in a net worth tabulation? Is there an implicit discarding of this fact in altering what is defined as an asset?
I may have missed it.

Is there an post that defines savings and some set of posts were folks agreed to that definition?

Yes, I think there have been a couple of posts that have referenced this definition and you are correct that the acknowledgement was deafening silence. Hence the question regarding what people posting in this thread do think the definition of savings actually is. I wrote my piece above because it does not seem to me there is much to debate there, but apparently there are all sorts of implicit ideas about the definition. Also, I think several posters have mooted that a mortgage liability is part of assets, but agreement to that definition has not been clearly established, either You can ignore mortgage liability as an asset while considering payment on the principal to be outgo and the result is self consistent. In that case the payment is not savings. You can also consider mortgage payment not as outgo but as movement from one asset to another, incuding mortgage liability as an (negative) asset, of course. In that case the payment is not per se savings either.

Given that both ways of setting up definitions of savings and assets in a self-consistent manner conclude that mortgage payments are not savings, there actually is a resolution to the question. I am not sure that this is quite what the OP had in mind, however.


If not than I'll stick with my point.

I agree with your point, of course.

This is a very common problem here and elsewhere. Folks have their own, often unstated, definition in mind and assume everyone has the same definition in mind. And so a long debate ensues but no common ground is found because there is no shared definition.

Except strangely enough at least two concepts of the definitions actually conclude that payment on a mortgage is not savings. Maybe there are some other definitions of savings and assets that give a different result, but I am not thinking of any right now.

[/quote]
toto238
Posts: 1891
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Re: Do you consider mortgage payments as savings?

Post by toto238 »

Rodc wrote:
dbr wrote:
Rodc wrote:I think you all are not debating whether or not mortgage (principle) counts as savings.

You are sort of dancing around the question of what the definition of "savings" should be. If you actually came up with a definition the answer to the question would be clear.
Has anyone wanted to explicitly discard the definition that savings is the difference between income and outgo in any particular period of time? Is it that there has been some implicit discarding of this definition, perhaps by altering what is defined as income and what is defined as outgo? Does anyone want to discard the fact that what is defined as savings in cash flow will also appear as an addition to assets in a net worth tabulation? Is there an implicit discarding of this fact in altering what is defined as an asset?
I may have missed it.

Is there a post that defines savings and some set of posts where folks agreed to that definition? (note it would be best of the OP provides the definition and asks folks to use that for the purposes of the thread. Many will wander off to other definitions because few can hold a definition for the purposes of a given thread but that is another issue.)

If not than I'll stick with my point.

This is a very common problem here and elsewhere. Folks have their own, often unstated, definition in mind and assume everyone has the same definition in mind. And so a long debate ensues but no common ground is found because there is no shared definition.

Added: if you want to use your definition which is fine by me I think the next debate is going to be what is "outgo". I think perhaps there is income, outgo and move sideways. Is principle outgo or sideways? I think of it as moving cash from liquid cash to illiquid real estate, so is neither income or outgo. Folks in the "Well I'll never sell my house so it is not an investment" might call it an outgo. I don't happen to agree with them, but unless we carefully define terms and all agree to those terms, no progress will be made.
I did propose a definition in an earlier post that I will re-state here.

Put in words, I consider savings to be the change in my net worth in a given period that is not accounted for by the change in value of assets. Meaning if my net worth increased by $10,000, but $6,000 of that was because my assets went up in value, then I know the other $4,000 was savings. Whether you want to divide that by gross or net income (or how you define those terms) is your own business to find a savings rate.

Put in a formula, it looks like this:

Net worth at end of period - Net worth at beginning of period - increase in valuation of assets = savings for that period

savings for that period / income for that period (net, gross, whatever you want) = savings rate

So for example, if your net worth started out at $100,000, and then rose to $110,000, but you know that $6,000 of that increase was because your house/stocks/bonds/mutual funds/whatever went up in value, then you know the remaining $4,000 was savings.

If your net worth went down from $100,000 to $90,000, but you know that $5,000 of that decrease was because your assets fell in value, then you know that you had negative savings of $-5000 that period.

Can we agree on that definition of savings? I feel like it's the only logical one. Everything else is laden with emotion, where people change rules to make things seem more "conservative" but they're really just making it less accurate.
Khanmots
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Re: Do you consider mortgage payments as savings?

Post by Khanmots »

Intellectually I consider paying down the mortgage faster than "normal" as bonds with a maturation date equal to the payoff date at the time I put the extra towards the mortgage. This accounts for the X months that I'll be saving (i.e., making) interest on the extra principle. When I have the mortgage paid off, then the extra payment that was used to purchase those multitude of "bonds" with a nice spread of maturity dates (as the payoff date keeps getting closer...) will become available in the form of increased cash-flow that needs to be reinvested same as any other fixed income investment that matures (CD, bond, whatever).

How I handle this in reality is with lots of simplifying assumptions :mrgreen:
toto238
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Re: Do you consider mortgage payments as savings?

Post by toto238 »

I did state earlier that cash flow is a very very very flawed way to measure saving of any kind. It can easily be manipulated by taking on more debt or reducing debt. Someone taking on loads and loads of debt could have very healthy cash flow and many people here, by their definition, would consider them to be saving. But they're not.

Cash flow is only a useful exercise for measuring your liquidity and making sure you have enough cash on hand to meet the volatility of your daily/monthly expenses.

Net worth, and change in net worth, is what is truly relevant. Increases in net worth due to your assets gaining value are not your doing, therefore you can't count that as savings. In the same way decreases in asset values is not your doing either, so you can't count that against your savings. So if your house goes underwater and you lose all your equity, it didn't change the fact that you were saving money all those years. It just means you saved it in an investment that lost 100% of its value. Which sucks.
dbr
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Re: Do you consider mortgage payments as savings?

Post by dbr »

toto238 wrote:
I may have missed it.

Is there a post that defines savings and some set of posts where folks agreed to that definition? (note it would be best of the OP provides the definition and asks folks to use that for the purposes of the thread. Many will wander off to other definitions because few can hold a definition for the purposes of a given thread but that is another issue.)

If not than I'll stick with my point.

This is a very common problem here and elsewhere. Folks have their own, often unstated, definition in mind and assume everyone has the same definition in mind. And so a long debate ensues but no common ground is found because there is no shared definition.

Added: if you want to use your definition which is fine by me I think the next debate is going to be what is "outgo". I think perhaps there is income, outgo and move sideways. Is principle outgo or sideways? I think of it as moving cash from liquid cash to illiquid real estate, so is neither income or outgo. Folks in the "Well I'll never sell my house so it is not an investment" might call it an outgo. I don't happen to agree with them, but unless we carefully define terms and all agree to those terms, no progress will be made.
I did propose a definition in an earlier post that I will re-state here.

Put in words, I consider savings to be the change in my net worth in a given period that is not accounted for by the change in value of assets. Meaning if my net worth increased by $10,000, but $6,000 of that was because my assets went up in value, then I know the other $4,000 was savings. Whether you want to divide that by gross or net income (or how you define those terms) is your own business to find a savings rate.

Put in a formula, it looks like this:

Net worth at end of period - Net worth at beginning of period - increase in valuation of assets = savings for that period

savings for that period / income for that period (net, gross, whatever you want) = savings rate

So for example, if your net worth started out at $100,000, and then rose to $110,000, but you know that $6,000 of that increase was because your house/stocks/bonds/mutual funds/whatever went up in value, then you know the remaining $4,000 was savings.

If your net worth went down from $100,000 to $90,000, but you know that $5,000 of that decrease was because your assets fell in value, then you know that you had negative savings of $-5000 that period.

Can we agree on that definition of savings? I feel like it's the only logical one. Everything else is laden with emotion, where people change rules to make things seem more "conservative" but they're really just making it less accurate.[/quote]

Yours one was of the posts that I had in mind. As Rodc points out there was not a deafening response acknowledging that your definition somehow offered helpful clarification. I think it does offer helpful clarification. One thing that would be included in your definition if the OP wants the scope to extend to mortgages is that mortgage loan liability is included in assets. Thus if the liability decreases, there is an increase in assets that might be part of that $4000, hence there was savings. However, that is not the same thing as saying that the act of paying the mortgage makes the payment savings. As another poster pointed out making the mortgage payment was just a transaction that reduced assets in cash and increased assets in the mortgage.

I think that to be complete two pieces are required here. One is that savings is the excess of income over outgo and the other that savings must appear as in your definition that savings are a contribution to change in assets balance. Lastly, income, outgo, and assets accounting must be self-consistent.

I personally would find it very strange to both include mortgage liability as an asset and also call payments on mortgage principal outgo. On the other hand, if mortgage liability is not an asset, then payments on mortgage principal must be outgo.
dbr
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Re: Do you consider mortgage payments as savings?

Post by dbr »

toto238 wrote:I did state earlier that cash flow is a very very very flawed way to measure saving of any kind. It can easily be manipulated by taking on more debt or reducing debt. Someone taking on loads and loads of debt could have very healthy cash flow and many people here, by their definition, would consider them to be saving. But they're not.

That is a valid point. I would consider that the taking on of debt does not involve cash flow. Rather, the appearance of the loan proceeds is simply a transfer from one asset to another, in the same way that paying a mortgage is a transfer from one asset to another. I will admit that your point means that one has to apply a great deal of detail to definitions and to self consistency of definitions to not be misled.

You have an excellent point overall that the key lies in analysis of assets, but you also have to finesse how to separate contributions to assets from return on assets, so there is always a detail involved.


Cash flow is only a useful exercise for measuring your liquidity and making sure you have enough cash on hand to meet the volatility of your daily/monthly expenses.

Net worth, and change in net worth, is what is truly relevant. Increases in net worth due to your assets gaining value are not your doing, therefore you can't count that as savings. In the same way decreases in asset values is not your doing either, so you can't count that against your savings. So if your house goes underwater and you lose all your equity, it didn't change the fact that you were saving money all those years. It just means you saved it in an investment that lost 100% of its value. Which sucks.
toto238
Posts: 1891
Joined: Wed Feb 05, 2014 2:39 am

Re: Do you consider mortgage payments as savings?

Post by toto238 »

dbr wrote:Yours one was of the posts that I had in mind. As Rodc points out there was not a deafening response acknowledging that your definition somehow offered helpful clarification. I think it does offer helpful clarification. One thing that would be included in your definition if the OP wants the scope to extend to mortgages is that mortgage loan liability is included in assets. Thus if the liability decreases, there is an increase in assets that might be part of that $4000, hence there was savings. However, that is not the same thing as saying that the act of paying the mortgage makes the payment savings. As another poster pointed out making the mortgage payment was just a transaction that reduced assets in cash and increased assets in the mortgage.

I think that to be complete two pieces are required here. One is that savings is the excess of income over outgo and the other that savings must appear as in your definition that savings are a contribution to change in assets balance. Lastly, income, outgo, and assets accounting must be self-consistent.

I personally would find it very strange to both include mortgage liability as an asset and also call payments on mortgage principal outgo. On the other hand, if mortgage liability is not an asset, then payments on mortgage principal must be outgo.
So a liability, any liability, mortgage or otherwise, is a negative asset. Simple as that. I'm thinking really straightforward balance sheet here. Assets go on one side. Liabilities go on the other. Total assets - Total liabilities = net worth

If any of your assets increased/decreased in value, or any of your liabilities increased/decreased in value, without you taking any action, then you can't count that as savings. Your house went up in value $10k? That's nice, but it's not saving. Your stocks returned $50k for you this year? Very nice. Still not saving. $20k of your student loans got forgiven by the federal government? Cool. That's not saving though.

Saving is the action that you take to either increase assets or decrease liabilities. It doesn't matter which one you do.

Presumably, if that money had not gone to pay down principal, it would be sitting in a bank account earning nothing. It would still be saving, since you didn't spend it. But investing it, in this case in debt reduction, doesn't magically create some new expense. That money didn't disappear. It goes on the right side of your balance sheet, under liabilities, because it just decreased one of your liabilities.

Look i'm not an accountant, and I don't enjoy accounting. But that's no excuse to do accounting incorrectly or inaccurately. Just make a balance sheet. Assets and liabilities. What effect does each transaction have on each of those sides? I don't think it gets much more simple than that. People are trying to play head games with themselves either to make themselves look better or to psychologically motivate themselves to save more. Hey, if that's what you want to do, that's fine. But it's not accurate. You're making an inaccurate calculation to make yourself look better.
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