Is principal portion of mortgage counted for savings rate purposes?

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bigtex
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Is principal portion of mortgage counted for savings rate purposes?

Post by bigtex » Tue Oct 22, 2019 4:33 pm

I save 30% of gross income into 401k and Roth, but would my principal portion of my monthly payment also be considered in the savings rate since it is directly reducing debt? Thanks.

retiredjg
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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by retiredjg » Tue Oct 22, 2019 4:36 pm

I would not count that as savings.

alex_686
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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by alex_686 » Tue Oct 22, 2019 4:43 pm

Why do you want to know? I can't think of why your specific savings rate is important. Unless you are trying to brag to your friends.

From a technical standpoint it does not. You are transferring money from one account (savings/checking) to another account (mortgage). As such it is just a transfer. This is coming from somebody who considers a mortgage to be a negative bond, who keeps track of their home's value and the mortgage, and believes that these are important drivers in your financial success and meeting your goals.

What is key is figuring out your goals (liabilities), your assets, and your continued progression - in dollars.

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ResearchMed
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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by ResearchMed » Tue Oct 22, 2019 4:49 pm

bigtex wrote:
Tue Oct 22, 2019 4:33 pm
I save 30% of gross income into 401k and Roth, but would my principal portion of my monthly payment also be considered in the savings rate since it is directly reducing debt? Thanks.
Not as "savings", but we don't ignore that money, either.

We figure the approximate equity in our home (we still have a significant mortgage), and discount it somewhat, and then figure 50% of that reduced equity estimate will be among the funds available for retirement (when we do not intend to own a home).
That seems reasonable to us.
If we've underestimated, that will be nice. If we've overestimated somewhat, we won't really notice all that much.

But we don't think about that money for "now" in any way.

RM
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petulant
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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by petulant » Tue Oct 22, 2019 4:53 pm

It can be, but it usually isn't. It's your own personal decision what to think about it.

Here is a situation where it would be a bad idea. You've heard a rule of thumb to save 10, 15, or 20 percent of pay. You should not include the principal payment. The rule of thumb was developed to exclude mortgage payments.

Here is a situation where it may be helpful. You are considering renting, buying a house with a 15-year mortgage, or buying a house with a 30-year mortgage. The higher 15-year payment would reduce your ability to save, and same with the 30-year payment but less so. However, each would include principal payments. You may wish to consider a savings rate across all options that includes some portion of the principal payment.

aristotelian
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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by aristotelian » Tue Oct 22, 2019 4:57 pm

:| Depends on what you mean by savings and what the metric is suppo.sed to measure. For me, savings is anything that accelerates your progress toward retirement/financial independence. From that standpoint, paying down your mortgage is savings just as much as buying bonds, but with better return. You could count it as an ongoing expense, but to me that is not helpful because I do not plan to carry the mortgage forever.

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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by LongRoad » Tue Oct 22, 2019 5:09 pm

While I don't think of it as 'savings', being largely illiquid, transferring $100 from checking to VTSAX vs. transferring $100 from checking to your mortgage principal has exactly the same effect on your net worth. Whether the effect is equal between these options in 5 years, nobody knows.

UpperNwGuy
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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by UpperNwGuy » Tue Oct 22, 2019 5:21 pm

No, it is not.

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Nate79
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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by Nate79 » Tue Oct 22, 2019 5:28 pm

Yes, in many formulas it is. If you consider everything not spent is saved then it is. It is not consumed and the asset could be sold, like any other asset to get the money back. This is why house principle is included in net worth calculations.

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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by dbr » Tue Oct 22, 2019 5:34 pm

Questions like this depend on what use is being made of the result.

A fairly typical case is that one is interested in the income one can get in retirement from investments while still living in the house. The effect of paying down the house is not an increase in assets that produce income. But there is an effect in reducing cash flow needs and also reducing net expenses as mortgage interest is no longer paid out.

On the other hand, if the plan is to sell the house and add the proceeds to the asset base while also increasing expenses to pay rent somewhere, the net worth in the house will be part of the asset base and it does matter how much has been paid off.

The lesson is that you plan out how things are going to work instead of following naive rules such as savings rate.

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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by galawdawg » Tue Oct 22, 2019 5:54 pm

In my opinion, no. Your mortgage payment is an expense, the principal portion of which results in a reduction in a liability. While using income to make your mortgage payment (vs using existing savings or investments) does result in an increase in your net worth (all other things being equal), increases in net worth do not equate to savings.

The same can be true when your home value rises. While that would also cause an increase in your net worth (again, all other things being equal) it does not equate to savings.

I consider your savings to be your net income (gross income minus taxes minus expenses) that is invested or held in cash or cash equivalents.

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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by DonIce » Tue Oct 22, 2019 6:21 pm

Payments towards the principal of your mortgage increase your net worth. Every $1 deposited into a savings account increases your NW by $1, and so does every $1 of principal paid on your mortgage. Therefore from the perspective of NW, it should be counted for your savings rate.

But really it just semantics, and the correct answer all depends on what specific question you are trying to answer.

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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by Maven » Tue Oct 22, 2019 6:37 pm

Conflicting opinions on this but if you do choose to include it, I like this explanation of how to calculate your "power percentage".

https://petetheplanner.com/power-percentage/

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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by retiredjg » Tue Oct 22, 2019 6:52 pm

DonIce wrote:
Tue Oct 22, 2019 6:21 pm
Payments towards the principal of your mortgage increase your net worth. Every $1 deposited into a savings account increases your NW by $1, and so does every $1 of principal paid on your mortgage. Therefore from the perspective of NW, it should be counted for your savings rate.

But really it just semantics, and the correct answer all depends on what specific question you are trying to answer.
I think this answer is worth noting. Yes, your mortgage payment does decrease your debt and does increase your net worth (assuming you didn't just put in new landscaping or a new well pump or have a baby or or buy an expensive car or whatever).

The problem is that "net worth" is not really a useful or worthwhile number. You can use it to compare yourself to last year, or other times in the past. But you should rarely (probably never) use it to make financial decisions and you should not assume it implies anything about your financial health or stability.

Well, I suppose if you have little to no debt, it would say something about your financial stability, but people who talk about net worth don't seem to think about these things.

DonIce, sorry to pick on your post which is entirely reasonable. I just think that "net worth" is a completely worthless concept for the most part. You are entirely correct that the correct interpretation of this poster's question depends on what question the poster is trying to answer.

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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by dratkinson » Tue Oct 22, 2019 8:15 pm

Is repayment of mortgage principal savings? Like do-anything cash-in-hand money? I don't believe so.

Semantics. Since a mortgage is a voluntary liability that reduces net worth, you could argue that our net worth would be increased by not having a mortgage. (Believe some folks may use this argument to rent forever and invest more, sooner. Their expectation is that market growth and distributions will more than offset rent inflation.)

Why take on a voluntary liability when avoiding it would benefit our net worth?

It's more conservative to buy a future cost-of-living reduction, than it is to trust in the market's growth.

I reasoned that a mortgage is an expense undertaken by my current self, which will allow a future cost-of-living reduction for my retired self, at the same time as my income is reduced. As the principal (+ interest) payments just unroll a voluntary liability, so it's not really savings.


Maybe a mortgage is a transfer payment from your current self to your future self. So still not savings.


Whatever floats your boat.
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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by Starfish » Tue Oct 22, 2019 8:22 pm

bigtex wrote:
Tue Oct 22, 2019 4:33 pm
I save 30% of gross income into 401k and Roth, but would my principal portion of my monthly payment also be considered in the savings rate since it is directly reducing debt? Thanks.
I count the equity in the house as net worth, which is savings.
Not the principal, I don't care about the pricipal.

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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by HEDGEFUNDIE » Tue Oct 22, 2019 8:32 pm

Of course it counts as savings. If I pay off my mortgage would I become that much poorer?

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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by nps » Tue Oct 22, 2019 8:41 pm

Yes, it is.

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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by Ron Ronnerson » Tue Oct 22, 2019 9:02 pm

I count it as savings. For example, take someone with a 10-year mortgage that is putting a lot of money toward house payments, much of it going toward principal. If he were to instead take a loan for, say, 30 years, he’d be able to put a lot more into his savings account every month that is currently going toward paying off the house. If mortgage principal doesn’t count as savings (and saving is a good thing), this would mean that people should put money into savings accounts rather than toward their mortgage (since that counts as spending). In that case, to maximize the amount of savings, take out loans with long terms and keep refinancing them over and over. While the house may never get paid off, at least you will have saved a ton in your savings accounts due to the low payments. That just doesn’t make sense to me.

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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by LinusP » Tue Oct 22, 2019 9:16 pm

galawdawg wrote:
Tue Oct 22, 2019 5:54 pm
I consider your savings to be your net income (gross income minus taxes minus expenses) that is invested or held in cash or cash equivalents.
Just because "savings account" and "savings rate" share a word doesn't mean they're that closely related. When you contribute to a stock fund in your 401k, that clearly increases your savings rate, but not your "amount in savings". Just because paying down your mortgage doesn't increase your "amount in savings" doesn't mean it shouldn't be counted towards your savings rate.

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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by randomguy » Tue Oct 22, 2019 9:49 pm

retiredjg wrote:
Tue Oct 22, 2019 6:52 pm
DonIce wrote:
Tue Oct 22, 2019 6:21 pm
Payments towards the principal of your mortgage increase your net worth. Every $1 deposited into a savings account increases your NW by $1, and so does every $1 of principal paid on your mortgage. Therefore from the perspective of NW, it should be counted for your savings rate.

But really it just semantics, and the correct answer all depends on what specific question you are trying to answer.
I think this answer is worth noting. Yes, your mortgage payment does decrease your debt and does increase your net worth (assuming you didn't just put in new landscaping or a new well pump or have a baby or or buy an expensive car or whatever).

The problem is that "net worth" is not really a useful or worthwhile number. You can use it to compare yourself to last year, or other times in the past. But you should rarely (probably never) use it to make financial decisions and you should not assume it implies anything about your financial health or stability.

Well, I suppose if you have little to no debt, it would say something about your financial stability, but people who talk about net worth don't seem to think about these things.

DonIce, sorry to pick on your post which is entirely reasonable. I just think that "net worth" is a completely worthless concept for the most part. You are entirely correct that the correct interpretation of this poster's question depends on what question the poster is trying to answer.
Net worth has a ton more meaning that savings rate. but yeah it has limited uses other than figuring out what estate tax I will owe :) Nobody on this board will agree with the definition of savings rate. You can debate both the defintion of income (i.e. do you include employer matches, what about portfolio income, what about employer provided health care?), savings (mortgage, portfolio reinvestment, employer matches, ...) and if it should be before or after tax.

In the end none of it matters. You don't retire after having a SWR of 30% for 20 years. You retire when you have enough money. It is much easier to use a calculator with your assumptions to come up with that number than try and make SWR work.

The only places things like savings rate make sense is when talking at really high level. When you are giving a talk, telling someone that if they save 15% of their salary in a 401(k) they can retire in 40 years and if they save 25% they can do it 30 years, the people you are talking to get a good feel for what is required. Debating if you should include mortgage payments requires knowing what you are trying to use the number for.

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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by 22twain » Tue Oct 22, 2019 10:49 pm

We didn’t include mortgage principal in “savings” because we live in a LCOL area, and we figured our paid-off house would be a small part of our net worth in retirement. In fact It turned out to be about 5%.

If we lived in a HCOL area with our house being a much larger part of our net worth, we would have felt differently. In that case we would have the option of using some of the home equity to finance our retirement by selling the house and downsizing or moving to a LCOL area.
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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by HornedToad » Tue Oct 22, 2019 11:02 pm

I think of savings like what is my increase in net worth that I can control, e.g ignoring market fluctuations

So in that case it is savings just like saving to 401k, Roth IRA or investment accounts. It’s just illiquid.

However, I guess I treat it both ways when I look at monthly expenses, I count the mortgage payment there too when I say I spend $Xk a month

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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by willthrill81 » Wed Oct 23, 2019 12:28 am

bigtex wrote:
Tue Oct 22, 2019 4:33 pm
I save 30% of gross income into 401k and Roth, but would my principal portion of my monthly payment also be considered in the savings rate since it is directly reducing debt? Thanks.
It absolutely, objectively should be. If you were investing the funds by buying bonds, everyone would rightly say that it should be part of your savings rate. Paying down a negative bond (i.e. mortgage) should be no different at all.
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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by 1789 » Wed Oct 23, 2019 2:30 am

No i wouldn’t count that as savings
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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by snackdog » Wed Oct 23, 2019 6:00 am

Savings should strictly be cash in your bank account. Once you take that money out of your bank account and buy something you have spent it. Maybe you bought something safe like a treasury bill, something volatile like a mutual fund or stock, a collectible stamp, or property. Any of these things may hold their value vs inflation, lose value, or appreciate. Your savings may grow or be lost. It’s not saved if it is lost, like when your home value decreases.

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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by acegolfer » Wed Oct 23, 2019 7:35 am

Savings = Income - Expense

Answer to your question depends on whether you consider principal pmt as expense/spending or not. Ppl have different opinion so there's no one answer. If you consider principal pmt as expense, then it's not savings. Otherwise, it counts for savings rate.

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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by JoeRetire » Wed Oct 23, 2019 7:39 am

bigtex wrote:
Tue Oct 22, 2019 4:33 pm
I save 30% of gross income into 401k and Roth, but would my principal portion of my monthly payment also be considered in the savings rate since it is directly reducing debt? Thanks.
No.

Would you count credit card payments as "savings"? Auto loan payments? Student loan payments?

Reducing debt isn't saving.
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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by simplesimon » Wed Oct 23, 2019 7:40 am

You bought a car. Did you save money, spend money, both, or neither?

Using debt to buy the car does not change the answer.

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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by Nate79 » Wed Oct 23, 2019 8:06 am

acegolfer wrote:
Wed Oct 23, 2019 7:35 am
Savings = Income - Expense

Answer to your question depends on whether you consider principal pmt as expense/spending or not. Ppl have different opinion so there's no one answer. If you consider principal pmt as expense, then it's not savings. Otherwise, it counts for savings rate.
Another way to look at it from this equation is if I have $1 of extra income I can either choose to buy a candy bar or pay extra on the mortgage principal. Those who equate paying more on the principal as an expense then consider these two activities to be equivalent. I don't. That principal can be considered an asset on the home ledger and can be accessed by either selling the asset or thru a home equity loan. The fact that it is less liquid than a savings account, stock, bond, etc does not mean it isn't an asset.

The same goes for buying a car. The buying the car event isn't a spending event. It has no net impact on net worth. You are trading one asset (cash) for another asset (a car) and debt if you took a loan. The spending comes from the operating cost of the car which includes the depreciation of the asset. The asset still has value and can be liquidated at any point. An extra put towards the loan principal is still an asset.

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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by Ron Ronnerson » Wed Oct 23, 2019 8:39 am

If someone buys a $1m house, pays it off over the years but doesn’t save anything elsewhere, and then retires in style to a lower cost of living area (such as another country), how did they manage to do this if they spent all their money over the years?

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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by bloom2708 » Wed Oct 23, 2019 8:48 am

Ron Ronnerson wrote:
Wed Oct 23, 2019 8:39 am
If someone buys a $1m house, pays it off over the years but doesn’t save anything elsewhere, and then retires in style to a lower cost of living area (such as another country), how did they manage to do this if they spent all their money over the years?
They spent future earned money on the house and then slowly paid it back. Paying interest along the way.

After 30 years they now own the house and the appreciation that came with it. If they could have paid cash for the house, that would not have been savings.

Nobody is required to buy a house, so it is spend and pay.
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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by KlangFool » Wed Oct 23, 2019 8:56 am

Nate79 wrote:
Wed Oct 23, 2019 8:06 am
acegolfer wrote:
Wed Oct 23, 2019 7:35 am
Savings = Income - Expense

Answer to your question depends on whether you consider principal pmt as expense/spending or not. Ppl have different opinion so there's no one answer. If you consider principal pmt as expense, then it's not savings. Otherwise, it counts for savings rate.
Another way to look at it from this equation is if I have $1 of extra income I can either choose to buy a candy bar or pay extra on the mortgage principal. Those who equate paying more on the principal as an expense then consider these two activities to be equivalent. I don't. That principal can be considered an asset on the home ledger and can be accessed by either selling the asset or thru a home equity loan. The fact that it is less liquid than a savings account, stock, bond, etc does not mean it isn't an asset.
Nate79,

<< Those who equate paying more on the principal as an expense then consider these two activities to be equivalent. I don't. >>

1) If the PITI is significantly less than renting, I make money on the imputed rent every year. Why would I reduce my return on imputed rent by prepaying the mortgage principal?

2) It is very simple. People that treat the whole PITI as an expense spend less on their houses as compared to their overall net worth. Hence, they do not care to prepay the mortgage principal or counting the mortgage principal as saving.

3) If someone asked this question, it is obvious that the house and the home equity is a significant part of his net worth.

KlangFool

stan1
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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by stan1 » Wed Oct 23, 2019 9:06 am

It's semantics and psychology. If you "sleep better" having calculated a 40% savings rate rather than a 30% savings rate go ahead, but if you want to brag about your substantial savings rate to family, friends, and the internet I'd find something more interesting to talk about. If you are hyper competitive it may get the adrenaline pumping to see a higher rate and motivate you to stay the course. I find savings rate benchmarks don't mean a lot. Everyone's situation is different.

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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by KlangFool » Wed Oct 23, 2019 9:10 am

stan1 wrote:
Wed Oct 23, 2019 9:06 am
It's semantics and psychology. If you "sleep better" having calculated a 40% savings rate rather than a 30% savings rate go ahead, but if you want to brag about your substantial savings rate to family, friends, and the internet I'd find something more interesting to talk about. If you are hyper competitive it may get the adrenaline pumping to see a higher rate and motivate you to stay the course. I find savings rate benchmarks don't mean a lot. Everyone's situation is different.
stan1,

1) Someone would only brag about the saving rate when the net worth is not big enough. Aka, the potential to be rich. If and when a person's net worth is big enough, why bother with the saving rate. The person is rich now. There is no point to talk about the potential.

In fact, if a person is rich now, the person is less likely to brag. Or else, the person may attract the wrong kind of attention.

2) I have no job security. So, the saving rate does not keep me sleep better at night. It is my portfolio size that keeps me "Sleep Well At Night" (SWAN)

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Last edited by KlangFool on Wed Oct 23, 2019 9:12 am, edited 1 time in total.

michaeljc70
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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by michaeljc70 » Wed Oct 23, 2019 9:10 am

It is putting money into a net asset just like a brokerage account. The asset could presumably be sold and the money pulled (but you won't have somewhere to live). Think of it this way. If you have an extra $500 a month, you can put it into an investment account or pay additional principal on your mortgage. From an accounting perspective, should they be treated differently? "Saved" maybe isn't the perfect word, but you are increasing the net value (after debt) of an asset.

On the other hand, if I had a goal of saving/investing 30% of my income (net or gross), I wouldn't include principal payments in that since it is really a mandatory payment.

Coming at it from one more accounting angle, if you make $100k, $25k goes to taxes, you save $25k and spend $35k that comes to $85k. Where is the $15k paid to principal on the mortgage? It has to be accounted for somewhere. It is not a tax or expense...

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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by smitcat » Wed Oct 23, 2019 9:13 am

KlangFool wrote:
Wed Oct 23, 2019 8:56 am
Nate79 wrote:
Wed Oct 23, 2019 8:06 am
acegolfer wrote:
Wed Oct 23, 2019 7:35 am
Savings = Income - Expense

Answer to your question depends on whether you consider principal pmt as expense/spending or not. Ppl have different opinion so there's no one answer. If you consider principal pmt as expense, then it's not savings. Otherwise, it counts for savings rate.
Another way to look at it from this equation is if I have $1 of extra income I can either choose to buy a candy bar or pay extra on the mortgage principal. Those who equate paying more on the principal as an expense then consider these two activities to be equivalent. I don't. That principal can be considered an asset on the home ledger and can be accessed by either selling the asset or thru a home equity loan. The fact that it is less liquid than a savings account, stock, bond, etc does not mean it isn't an asset.
Nate79,

<< Those who equate paying more on the principal as an expense then consider these two activities to be equivalent. I don't. >>

1) If the PITI is significantly less than renting, I make money on the imputed rent every year. Why would I reduce my return on imputed rent by prepaying the mortgage principal?

2) It is very simple. People that treat the whole PITI as an expense spend less on their houses as compared to their overall net worth. Hence, they do not care to prepay the mortgage principal or counting the mortgage principal as saving.

3) If someone asked this question, it is obvious that the house and the home equity is a significant part of his net worth.

KlangFool
1) If the PITI is significantly less than renting, I make money on the imputed rent every year. Why would I reduce my return on imputed rent by prepaying the mortgage principal?"

We prepay a mortgage when the after tax % of the mortgage rate is larger than the corresponding interest we could get with our desired investments.
This same rule applies to all debt including but not limited to car/boat/business loans.

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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by smitcat » Wed Oct 23, 2019 9:17 am

stan1 wrote:
Wed Oct 23, 2019 9:06 am
It's semantics and psychology. If you "sleep better" having calculated a 40% savings rate rather than a 30% savings rate go ahead, but if you want to brag about your substantial savings rate to family, friends, and the internet I'd find something more interesting to talk about. If you are hyper competitive it may get the adrenaline pumping to see a higher rate and motivate you to stay the course. I find savings rate benchmarks don't mean a lot. Everyone's situation is different.
Paying back a mortgage directly increases your value in the home - it is a savings.
For whatever it is worth your thoughts on savings rates are not fundamentally sound based on %'s.

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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by KlangFool » Wed Oct 23, 2019 9:23 am

smitcat wrote:
Wed Oct 23, 2019 9:13 am


1) If the PITI is significantly less than renting, I make money on the imputed rent every year. Why would I reduce my return on imputed rent by prepaying the mortgage principal?"

We prepay a mortgage when the after tax % of the mortgage rate is larger than the corresponding interest we could get with our desired investments.
This same rule applies to all debt including but not limited to car/boat/business loans.
smitcat,

<<We prepay a mortgage when the after tax % of the mortgage rate is larger than the corresponding interest we could get with our desired investments.>>

1) I do not consider the house as risk-free. Hence, tying up more money into the illiquid house is not risk-free.

2) I do not consider the mortgage a negative bond.

3) I invest as per my AA of 60/40. I am not comparing pre-paying the mortgage principal versus the bond investment as equivalent.

4) If it works for you, great!

5) I would not pre-pay a mortgage. I may pay off the whole mortgage when I retire.

KlangFool

smitcat
Posts: 5266
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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by smitcat » Wed Oct 23, 2019 9:29 am

KlangFool wrote:
Wed Oct 23, 2019 9:23 am
smitcat wrote:
Wed Oct 23, 2019 9:13 am


1) If the PITI is significantly less than renting, I make money on the imputed rent every year. Why would I reduce my return on imputed rent by prepaying the mortgage principal?"

We prepay a mortgage when the after tax % of the mortgage rate is larger than the corresponding interest we could get with our desired investments.
This same rule applies to all debt including but not limited to car/boat/business loans.
smitcat,

<<We prepay a mortgage when the after tax % of the mortgage rate is larger than the corresponding interest we could get with our desired investments.>>

1) I do not consider the house as risk-free. Hence, tying up more money into the illiquid house is not risk-free.

2) I do not consider the mortgage a negative bond.

3) I invest as per my AA of 60/40. I am not comparing pre-paying the mortgage principal versus the bond investment as equivalent.

4) If it works for you, great!

5) I would not pre-pay a mortgage. I may pay off the whole mortgage when I retire.

KlangFool
"1) I do not consider the house as risk-free. Hence, tying up more money into the illiquid house is not risk-free.
5) I would not pre-pay a mortgage. I may pay off the whole mortgage when I retire."

#1 & #5 are contradictory - never add more risk and/or add sequence of risk when you retire.
If you choose to hold a mortgage in retirement you would not be following the generally accepted best practices that I have read.


"3) I invest as per my AA of 60/40. I am not comparing pre-paying the mortgage principal versus the bond investment as equivalent."
We compare prepaying anything to our overall AA - in your case that would be the average of the 60/40.

acegolfer
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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by acegolfer » Wed Oct 23, 2019 9:29 am

Nate79 wrote:
Wed Oct 23, 2019 8:06 am

The same goes for buying a car. The buying the car event isn't a spending event. It has no net impact on net worth. You are trading one asset (cash) for another asset (a car) and debt if you took a loan. The spending comes from the operating cost of the car which includes the depreciation of the asset. The asset still has value and can be liquidated at any point. An extra put towards the loan principal is still an asset.
This is also how I do my finance as well. When I purchase a car with $20k cash, journal entry is debit fixed asset $20k, credit cash $20k. No change in net worth. Over time, I depreciate the $20k to recognize the car expense. I suppose we are in the minority.

michaeljc70
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Joined: Thu Oct 15, 2015 3:53 pm

Re: Is principal portion of mortgage counted for savings rate purposes?

Post by michaeljc70 » Wed Oct 23, 2019 9:34 am

acegolfer wrote:
Wed Oct 23, 2019 9:29 am
Nate79 wrote:
Wed Oct 23, 2019 8:06 am

The same goes for buying a car. The buying the car event isn't a spending event. It has no net impact on net worth. You are trading one asset (cash) for another asset (a car) and debt if you took a loan. The spending comes from the operating cost of the car which includes the depreciation of the asset. The asset still has value and can be liquidated at any point. An extra put towards the loan principal is still an asset.
This is also how I do my finance as well. When I purchase a car with $20k cash, journal entry is debit fixed asset $20k, credit cash $20k. No change in net worth. Over time, I depreciate the $20k to recognize the car expense. I suppose we are in the minority.
That is also how I account for vehicles I purchase with cash. I use a 7 year straight line depreciation to keep it simple.

MotoTrojan
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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by MotoTrojan » Wed Oct 23, 2019 9:36 am

People are being too extreme. Savings is debatable but I’d certainly count principal payments as an increase in my overall net worth.

smitcat
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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by smitcat » Wed Oct 23, 2019 9:39 am

acegolfer wrote:
Wed Oct 23, 2019 9:29 am
Nate79 wrote:
Wed Oct 23, 2019 8:06 am

The same goes for buying a car. The buying the car event isn't a spending event. It has no net impact on net worth. You are trading one asset (cash) for another asset (a car) and debt if you took a loan. The spending comes from the operating cost of the car which includes the depreciation of the asset. The asset still has value and can be liquidated at any point. An extra put towards the loan principal is still an asset.
This is also how I do my finance as well. When I purchase a car with $20k cash, journal entry is debit fixed asset $20k, credit cash $20k. No change in net worth. Over time, I depreciate the $20k to recognize the car expense. I suppose we are in the minority.
Yes - exactly , account for assets and debt.

michaeljc70
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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by michaeljc70 » Wed Oct 23, 2019 9:48 am

I gave my answer above, but if you are just starting out with your typical 30 year mortgage, the vast majority is going to go to interest (over 80%). As time goes by, it goes the other way. It takes 222 months to get to paying more principal than interest. At that point, hopefully you have a decent amount of savings and don't need to do mental gymnastics to be confident in your savings.

csmath
Posts: 193
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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by csmath » Wed Oct 23, 2019 9:48 am

Here is a thread from 2 months ago that is very similar:
Do you categorize additional contribution to debt repay as saving?

KlangFool
Posts: 15603
Joined: Sat Oct 11, 2008 12:35 pm

Re: Is principal portion of mortgage counted for savings rate purposes?

Post by KlangFool » Wed Oct 23, 2019 9:49 am

smitcat wrote:
Wed Oct 23, 2019 9:29 am
KlangFool wrote:
Wed Oct 23, 2019 9:23 am
smitcat wrote:
Wed Oct 23, 2019 9:13 am


1) If the PITI is significantly less than renting, I make money on the imputed rent every year. Why would I reduce my return on imputed rent by prepaying the mortgage principal?"

We prepay a mortgage when the after tax % of the mortgage rate is larger than the corresponding interest we could get with our desired investments.
This same rule applies to all debt including but not limited to car/boat/business loans.
smitcat,

<<We prepay a mortgage when the after tax % of the mortgage rate is larger than the corresponding interest we could get with our desired investments.>>

1) I do not consider the house as risk-free. Hence, tying up more money into the illiquid house is not risk-free.

2) I do not consider the mortgage a negative bond.

3) I invest as per my AA of 60/40. I am not comparing pre-paying the mortgage principal versus the bond investment as equivalent.

4) If it works for you, great!

5) I would not pre-pay a mortgage. I may pay off the whole mortgage when I retire.

KlangFool
"1) I do not consider the house as risk-free. Hence, tying up more money into the illiquid house is not risk-free.
5) I would not pre-pay a mortgage. I may pay off the whole mortgage when I retire."

#1 & #5 are contradictory - never add more risk and/or add sequence of risk when you retire.
If you choose to hold a mortgage in retirement you would not be following the generally accepted best practices that I have read.

smitcat,

<<add sequence of risk when you retire.>>

Pre-paying the mortgage principal does not reduce the mortgage payment. Hence, it does not reduce the sequence of return risk.

<<If you choose to hold a mortgage in retirement you would not be following the generally accepted best practices that I have read.>>

How is this a best practice if the inflation rate is much higher than your mortgage interest rate? The correct answer should be it depends on the adjusted REAL interest rate.

For example, if the mortgage interest rate is 3.49% but the inflation rate is 5%, keeping the mortgage provide good inflation hedging. I am betting that in the longer term, the inflation rate would be much higher than 3.49%.

KlangFool

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Kenkat
Posts: 5967
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Location: Cincinnati, OH

Re: Is principal portion of mortgage counted for savings rate purposes?

Post by Kenkat » Wed Oct 23, 2019 10:03 am

michaeljc70 wrote:
Wed Oct 23, 2019 9:34 am
acegolfer wrote:
Wed Oct 23, 2019 9:29 am
Nate79 wrote:
Wed Oct 23, 2019 8:06 am

The same goes for buying a car. The buying the car event isn't a spending event. It has no net impact on net worth. You are trading one asset (cash) for another asset (a car) and debt if you took a loan. The spending comes from the operating cost of the car which includes the depreciation of the asset. The asset still has value and can be liquidated at any point. An extra put towards the loan principal is still an asset.
This is also how I do my finance as well. When I purchase a car with $20k cash, journal entry is debit fixed asset $20k, credit cash $20k. No change in net worth. Over time, I depreciate the $20k to recognize the car expense. I suppose we are in the minority.
That is also how I account for vehicles I purchase with cash. I use a 7 year straight line depreciation to keep it simple.
Sign me up as another finance geek as this is what I do also. I use KBB private party value to periodically depreciate the asset vs. 7 year but it’s a similar result.

smitcat
Posts: 5266
Joined: Mon Nov 07, 2016 10:51 am

Re: Is principal portion of mortgage counted for savings rate purposes?

Post by smitcat » Wed Oct 23, 2019 10:22 am

KlangFool wrote:
Wed Oct 23, 2019 9:49 am
smitcat wrote:
Wed Oct 23, 2019 9:29 am
KlangFool wrote:
Wed Oct 23, 2019 9:23 am
smitcat wrote:
Wed Oct 23, 2019 9:13 am


1) If the PITI is significantly less than renting, I make money on the imputed rent every year. Why would I reduce my return on imputed rent by prepaying the mortgage principal?"

We prepay a mortgage when the after tax % of the mortgage rate is larger than the corresponding interest we could get with our desired investments.
This same rule applies to all debt including but not limited to car/boat/business loans.
smitcat,

<<We prepay a mortgage when the after tax % of the mortgage rate is larger than the corresponding interest we could get with our desired investments.>>

1) I do not consider the house as risk-free. Hence, tying up more money into the illiquid house is not risk-free.

2) I do not consider the mortgage a negative bond.

3) I invest as per my AA of 60/40. I am not comparing pre-paying the mortgage principal versus the bond investment as equivalent.

4) If it works for you, great!

5) I would not pre-pay a mortgage. I may pay off the whole mortgage when I retire.

KlangFool
"1) I do not consider the house as risk-free. Hence, tying up more money into the illiquid house is not risk-free.
5) I would not pre-pay a mortgage. I may pay off the whole mortgage when I retire."

#1 & #5 are contradictory - never add more risk and/or add sequence of risk when you retire.
If you choose to hold a mortgage in retirement you would not be following the generally accepted best practices that I have read.

smitcat,

<<add sequence of risk when you retire.>>

Pre-paying the mortgage principal does not reduce the mortgage payment. Hence, it does not reduce the sequence of return risk.

<<If you choose to hold a mortgage in retirement you would not be following the generally accepted best practices that I have read.>>

How is this a best practice if the inflation rate is much higher than your mortgage interest rate? The correct answer should be it depends on the adjusted REAL interest rate.

For example, if the mortgage interest rate is 3.49% but the inflation rate is 5%, keeping the mortgage provide good inflation hedging. I am betting that in the longer term, the inflation rate would be much higher than 3.49%.

KlangFool

"Pre-paying the mortgage principal does not reduce the mortgage payment. Hence, it does not reduce the sequence of return risk."
Having a mortgage in retirement adds to sequence of return risk.

"How is this a best practice if the inflation rate is much higher than your mortgage interest rate? The correct answer should be it depends on the adjusted REAL interest rate."
Yes - I would base it on the calculation of adjusted interest rates.
Certainly not making a decision on an imputed rent - now you are agreeing with my first post on this.

Reamus294
Posts: 73
Joined: Wed Jul 24, 2019 8:54 am

Re: Is principal portion of mortgage counted for savings rate purposes?

Post by Reamus294 » Wed Oct 23, 2019 11:36 am

For my savings rate, I only use what I put towards money I plan to use in retirement (401k, 457, pension, and taxable brokerage). I do not include any employer matching to be conservative, but I can see why someone would. Also pension structures could make it difficult to determine employer matching.

I have other savings for emergency, home improvements and cars that are not included since I plan on spending those (less than 10 years). That said, I also calculate a savings rate plus additional mortgage principal, because it makes me feel a little better. If a friend were to ask me, I'd probably give both of these. I like the idea of the power percentage number in the previous post, but wouldn't include some of those items if it were me.

This is very much like the net worth question. It all depends on what you use this information for. Since I am still 15'ish years away from retirement, I use my savings rate as a very rough guide and as a goal to encourage me to save more. If I am close to a nice round number, I may try to squeeze a little bit, to get to a higher savings rate to make myself feel better. For my net worth I use assets (over about $1,000)-liabilities and I call it my move to a different country number. I only use net worth as a guide for comparing year to year to encourage me to save more and it's fun to tell my significant other we are worth a number.

I think it's much more important to calculate estimated expenses in retirement and see if your asset allocation and projections get you close to that with a safe withdrawal strategy. I spend a lot more time thinking about and adjusting this. Savings rates can be a great starting tool for individuals who have no idea what retirement looks like for them, but know they want to retire or be FI in the future.

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