Is principal portion of mortgage counted for savings rate purposes?

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

Post by BergeronsBuddies » Wed Oct 23, 2019 11:50 am

Personal decision.

I calculate an investing rate and a savings rate. In my mind savings is anything which increases your net worth, or basically not spending.

I calculate it this way to account for paying down student loans as a motivational tool mostly.

So investing rate for me is simply how much money as a % of my income I am placing into index funds, and savings rate adds pay down of principal of both mortgage and student loans.

But like I said, it's a personal decision for you.

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

Post by aristotelian » Wed Oct 23, 2019 1:05 pm

Let's say you have two people with the same income and same expenses, and therefore the same cashflow. They also have identical mortgages. Bill chooses to invest his extra cashflow. This increases his net worth and future expected income. Therefore, we would all agree that it is savings.

With the exact same cashflow, Barbara chooses to pay down her mortgage. This also increases her net worth, but instead of increasing her future income, it decreases her future expense.

Neither Bill nor Barbara has spent the money, but rather used it to strengthen their future financial position. Bill has a bigger investment pile with more debt. Barbara has smaller investment pile with less debt. Both are better off than they were before. There are differences in liquidity and risk/return, but I don't see how you can say that one is savings and the other is not.

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

Post by KlangFool » Wed Oct 23, 2019 1:44 pm

aristotelian wrote:
Wed Oct 23, 2019 1:05 pm
Let's say you have two people with the same income and same expenses, and therefore the same cashflow. They also have identical mortgages. Bill chooses to invest his extra cashflow. This increases his net worth and future expected income. Therefore, we would all agree that it is savings.

With the exact same cashflow, Barbara chooses to pay down her mortgage. This also increases her net worth, but instead of increasing her future income, it decreases her future expense.

Neither Bill nor Barbara has spent the money, but rather used it to strengthen their future financial position. Bill has a bigger investment pile with more debt. Barbara has smaller investment pile with less debt. Both are better off than they were before. There are differences in liquidity and risk/return, but I don't see how you can say that one is savings and the other is not.
aristotelian,

This is personal finance. You can choose to count anything as long as it helps you to achieve your financial goal. Counting for the sake of counting only works for financial geeks.

My goal is FI. I only count money added to my financial portfolio as savings. And, I count the saving rate based on my annual expense instead of income. It helps me to measure my progress towards FI. I really do not care how others choose to count their saving rate.

So, we need to go back to the higher-level question:

1) What is the financial goal? Retirement? FI?

2) How does counting saving rate based on gross income helps in achieving (1)?

3) Does counting payment toward principal help or hurts in terms of (1)?

In term of FI, back to your example, until Barbara refinances the mortgage and/or pay off the mortgage, the principal portion of the mortgage does not help Barbara. Meanwhile, Bill's saving helps him to achieve his FI goal.

KlangFool

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

Post by aristotelian » Wed Oct 23, 2019 2:04 pm

KlangFool wrote:
Wed Oct 23, 2019 1:44 pm
aristotelian wrote:
Wed Oct 23, 2019 1:05 pm
Let's say you have two people with the same income and same expenses, and therefore the same cashflow. They also have identical mortgages. Bill chooses to invest his extra cashflow. This increases his net worth and future expected income. Therefore, we would all agree that it is savings.

With the exact same cashflow, Barbara chooses to pay down her mortgage. This also increases her net worth, but instead of increasing her future income, it decreases her future expense.

Neither Bill nor Barbara has spent the money, but rather used it to strengthen their future financial position. Bill has a bigger investment pile with more debt. Barbara has smaller investment pile with less debt. Both are better off than they were before. There are differences in liquidity and risk/return, but I don't see how you can say that one is savings and the other is not.
aristotelian,

This is personal finance. You can choose to count anything as long as it helps you to achieve your financial goal. Counting for the sake of counting only works for financial geeks.

My goal is FI. I only count money added to my financial portfolio as savings. And, I count the saving rate based on my annual expense instead of income. It helps me to measure my progress towards FI. I really do not care how others choose to count their saving rate.

So, we need to go back to the higher-level question:

1) What is the financial goal? Retirement? FI?

2) How does counting saving rate based on gross income helps in achieving (1)?

3) Does counting payment toward principal help or hurts in terms of (1)?

In term of FI, back to your example, until Barbara refinances the mortgage and/or pay off the mortgage, the principal portion of the mortgage does not help Barbara. Meanwhile, Bill's saving helps him to achieve his FI goal.

KlangFool
Sure it helps her. If her mortgage is paid off, she has lower expense and lower FI number.

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willthrill81
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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by willthrill81 » Wed Oct 23, 2019 2:08 pm

Those who say that it should not count are saying that there is a qualitative difference with regard to one's net worth between contributing to a positive bond vs. a negative bond.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by randomguy » Wed Oct 23, 2019 2:54 pm

willthrill81 wrote:
Wed Oct 23, 2019 2:08 pm
Those who say that it should not count are saying that there is a qualitative difference with regard to one's net worth between contributing to a positive bond vs. a negative bond.
Not really. Nobody really questions if paying off the mortgage helps your net worth. The question is do you count it as savings or not.
The people that don't count it are using logic along the lines of
a) I need x dollars and a paid off house to retire so including the mortgage payments doesn't help meet that goal

The people that count it are going
b) I need x dollars and having equity in the house sure does help.

Case A make some sense if you aren't moving. Case B makes a ton of sense if you plan on moving and your housing situation will change.

But to make this real simple, what difference does it make to your life if your savings rate is 20% (don't count mortgage payments) or 35% (you do count mortgage payments)? Do you retire one day sooner by picking one number over the other? What value are you trying to get out of this number?

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

Post by chevca » Wed Oct 23, 2019 4:00 pm

Gotta love these threads...

Count it if you want. Don't count it if you don't want. Who cares? We can all come up with some formula to make our savings percentages or net worth what we want them to be. As many members as we have on Bogleheads, there seems to be about as many ways to come up with these numbers....

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

Post by LiterallyIronic » Wed Oct 23, 2019 4:21 pm

This is the "personal" part of personal finance, but I count as little as possible in my savings rate.

I count the amount I put into my 401k and our IRAs and divide by my gross income. I do not count employer match (though it vests immediately). I do not count the principal portion of our mortgage. I do not count the extra money I send to mortgage principal every month. I do not count the money I set aside money saving for a dream car. I do not count the money I set aside every month for a dream vacation. I do not count the money left over at the end of the month.

My goal is to make every percentage point in "savings rate" as hard as possible to achieve. There are different ways to measure the savings rate, and some people use different ones. But using the strictest definition possible results in having to save the most amount of raw dollars in order to achieve any given percentage of savings rate.

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

Post by Abe » Wed Oct 23, 2019 4:24 pm

If I had a mortgage, I would not consider the principal pay down as savings, but that's just me. I guess one could do that, but I'm just not that concerned with knowing my exact savings rate. When I had mortgage debt, not on my principal residence but on rental property, I would periodically keep track of my equity for the purpose of determining my net worth.
Slow and steady wins the race.

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willthrill81
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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by willthrill81 » Wed Oct 23, 2019 4:49 pm

randomguy wrote:
Wed Oct 23, 2019 2:54 pm
willthrill81 wrote:
Wed Oct 23, 2019 2:08 pm
Those who say that it should not count are saying that there is a qualitative difference with regard to one's net worth between contributing to a positive bond vs. a negative bond.
Not really. Nobody really questions if paying off the mortgage helps your net worth. The question is do you count it as savings or not.
The people that don't count it are using logic along the lines of
a) I need x dollars and a paid off house to retire so including the mortgage payments doesn't help meet that goal

The people that count it are going
b) I need x dollars and having equity in the house sure does help.

Case A make some sense if you aren't moving. Case B makes a ton of sense if you plan on moving and your housing situation will change.

But to make this real simple, what difference does it make to your life if your savings rate is 20% (don't count mortgage payments) or 35% (you do count mortgage payments)? Do you retire one day sooner by picking one number over the other? What value are you trying to get out of this number?
Those who are investing 15% of their gross income into a 401k and also paying a 15 year mortgage may think that they're just barely okay, when the reality is that they might be doing very well if the principal portion of their mortgage payment is added to their 401k contributions.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by KlangFool » Wed Oct 23, 2019 5:05 pm

willthrill81 wrote:
Wed Oct 23, 2019 4:49 pm
randomguy wrote:
Wed Oct 23, 2019 2:54 pm
willthrill81 wrote:
Wed Oct 23, 2019 2:08 pm
Those who say that it should not count are saying that there is a qualitative difference with regard to one's net worth between contributing to a positive bond vs. a negative bond.
Not really. Nobody really questions if paying off the mortgage helps your net worth. The question is do you count it as savings or not.
The people that don't count it are using logic along the lines of
a) I need x dollars and a paid off house to retire so including the mortgage payments doesn't help meet that goal

The people that count it are going
b) I need x dollars and having equity in the house sure does help.

Case A make some sense if you aren't moving. Case B makes a ton of sense if you plan on moving and your housing situation will change.

But to make this real simple, what difference does it make to your life if your savings rate is 20% (don't count mortgage payments) or 35% (you do count mortgage payments)? Do you retire one day sooner by picking one number over the other? What value are you trying to get out of this number?
Those who are investing 15% of their gross income into a 401k and also paying a 15 year mortgage may think that they're just barely okay, when the reality is that they might be doing very well if the principal portion of their mortgage payment is added to their 401k contributions.
willthrill81,

I disagreed. That is not true if that person is not maxing up their 401K. The reality is they are paying a lot of taxes by taking the 15 years mortgage.

How does paying 20+% to 30+% taxes for the extra payment in the 15 years mortgage in order to save 3% to 4% interest financially rewarding? It does not.

KlangFool

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willthrill81
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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by willthrill81 » Wed Oct 23, 2019 5:14 pm

KlangFool wrote:
Wed Oct 23, 2019 5:05 pm
willthrill81 wrote:
Wed Oct 23, 2019 4:49 pm
randomguy wrote:
Wed Oct 23, 2019 2:54 pm
willthrill81 wrote:
Wed Oct 23, 2019 2:08 pm
Those who say that it should not count are saying that there is a qualitative difference with regard to one's net worth between contributing to a positive bond vs. a negative bond.
Not really. Nobody really questions if paying off the mortgage helps your net worth. The question is do you count it as savings or not.
The people that don't count it are using logic along the lines of
a) I need x dollars and a paid off house to retire so including the mortgage payments doesn't help meet that goal

The people that count it are going
b) I need x dollars and having equity in the house sure does help.

Case A make some sense if you aren't moving. Case B makes a ton of sense if you plan on moving and your housing situation will change.

But to make this real simple, what difference does it make to your life if your savings rate is 20% (don't count mortgage payments) or 35% (you do count mortgage payments)? Do you retire one day sooner by picking one number over the other? What value are you trying to get out of this number?
Those who are investing 15% of their gross income into a 401k and also paying a 15 year mortgage may think that they're just barely okay, when the reality is that they might be doing very well if the principal portion of their mortgage payment is added to their 401k contributions.
willthrill81,

I disagreed. That is not true if that person is not maxing up their 401K. The reality is they are paying a lot of taxes by taking the 15 years mortgage.

How does paying 20+% to 30+% taxes for the extra payment in the 15 years mortgage in order to save 3% to 4% interest financially rewarding? It does not.

KlangFool
I'm not saying that a 15 year mortgage is optimal, although you are assuming a high tax marginal tax bracket. But the point remains that the principal portion of their mortgage is contributing toward reducing their future expenses (i.e. once the mortgage is paid off).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by Kenkat » Wed Oct 23, 2019 5:39 pm

KlangFool wrote:
Wed Oct 23, 2019 5:05 pm
willthrill81 wrote:
Wed Oct 23, 2019 4:49 pm
randomguy wrote:
Wed Oct 23, 2019 2:54 pm
willthrill81 wrote:
Wed Oct 23, 2019 2:08 pm
Those who say that it should not count are saying that there is a qualitative difference with regard to one's net worth between contributing to a positive bond vs. a negative bond.
Not really. Nobody really questions if paying off the mortgage helps your net worth. The question is do you count it as savings or not.
The people that don't count it are using logic along the lines of
a) I need x dollars and a paid off house to retire so including the mortgage payments doesn't help meet that goal

The people that count it are going
b) I need x dollars and having equity in the house sure does help.

Case A make some sense if you aren't moving. Case B makes a ton of sense if you plan on moving and your housing situation will change.

But to make this real simple, what difference does it make to your life if your savings rate is 20% (don't count mortgage payments) or 35% (you do count mortgage payments)? Do you retire one day sooner by picking one number over the other? What value are you trying to get out of this number?
Those who are investing 15% of their gross income into a 401k and also paying a 15 year mortgage may think that they're just barely okay, when the reality is that they might be doing very well if the principal portion of their mortgage payment is added to their 401k contributions.
willthrill81,

I disagreed. That is not true if that person is not maxing up their 401K. The reality is they are paying a lot of taxes by taking the 15 years mortgage.

How does paying 20+% to 30+% taxes for the extra payment in the 15 years mortgage in order to save 3% to 4% interest financially rewarding? It does not.

KlangFool
A $300,000 loan @3.5% for 30 years will cost you about $185,000 in interest over the life of the loan and have a payment of about $1347/mo.

A $300,000 loan @3% for 15 years will cost you about $73,000 in interest over the life of the loan and have a payment of about $2072/mo.

So you save $112,000 in interest with the 15 year loan.

If instead you take the difference in loan payments (2072 - 1347 = $725/mo. and invest that in your 401k, you save (@25% tax bracket) 725 x 12 x 15 years x 0.25% = $32,625 in taxes with the 30 year loan. Plus after 15 years, you can begin saving the full $2072 you paid for the mortgage in your 401k.

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

Post by KlangFool » Wed Oct 23, 2019 5:47 pm

Kenkat wrote:
Wed Oct 23, 2019 5:39 pm

A $300,000 loan @3.5% for 30 years will cost you about $185,000 in interest over the life of the loan and have a payment of about $1347/mo.

A $300,000 loan @3% for 15 years will cost you about $73,000 in interest over the life of the loan and have a payment of about $2072/mo.

So you save $112,000 in interest with the 15 year loan.

If instead you take the difference in loan payments (2072 - 1347 = $725/mo. and invest that in your 401k, you save (@25% tax bracket) 725 x 12 x 15 years x 0.25% = $32,625 in taxes with the 30 year loan. Plus after 15 years, you can begin saving the full $2072 you paid for the mortgage in your 401k.
Kenkat,

1) The difference is not $725 per month. It is $725 plus 25% taxes for the 15 years option.

2) You missed the investment return for the $725 plus 25% over 15 years.

KlangFool

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

Post by Ron Ronnerson » Wed Oct 23, 2019 5:52 pm

The average American saves almost nothing outside of mortgage principal and all they pretty much have that is worth anything is their home.

If two people have little to nothing saved (like almost everybody) but one owns a house with a decent amount of equity and the other doesn’t, the one with the house has options that the one without doesn’t. Even if a person doesn’t plan to move, having options isn’t worthless. The person with the house doesn’t have to worry about mortgage payments and would have lower expenses in the future, could rent out rooms and generate income, could sell the house and live off the proceeds, etc.

Personally, I would rather have a $2M house that is paid off than $1M in retirement accounts. Houses aren’t like used tissue paper or an apple with a bite taken out of it.

Sure, you have to live somewhere. However, it doesn’t necessarily have to be the house you currently have. For example, if a person found out they only had a year to live, maybe they would sell the house and travel the world. It would be good they had their house because, if they are like most people, their bank and retirement accounts sit close to empty.

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

Post by scubadiver » Wed Oct 23, 2019 7:07 pm

How you determine your personal savings rate is entirely subjective. It's just a number for you to use to see how you are doing. Most people count things like 401k and Roth IRA contributions or money you might deposit into a money market account, but beyond that, it's the Wild West. If you want to spend $10 a week on scratch off lotto tickets and tell people you're saving $500+ per year, have at it. Of course the expected rate of return on your investments is pretty poor, but that's got nothing to do with your savings rate.

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

Post by JoeRetire » Wed Oct 23, 2019 7:29 pm

Savings.

"When I use a word it means just what I choose it to mean — neither more nor less"
- Humpty Dumpty
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.

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

Post by CurlyDave » Wed Oct 23, 2019 10:53 pm

Ron Ronnerson wrote:
Wed Oct 23, 2019 5:52 pm
...Sure, you have to live somewhere. However, it doesn’t necessarily have to be the house you currently have. For example, if a person found out they only had a year to live, maybe they would sell the house and travel the world. It would be good they had their house because, if they are like most people, their bank and retirement accounts sit close to empty.
I think it counts as savings for another reason. I don't have to postulate a health emergency to see that value of greater home equity at retirement.

DW and I moved from a VHCOL area to a MCOL area. The equity in our old house allowed the purchase of a much, much nicer house in our chosen retirement location. Would not have been possible without that equity.

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

Post by novemberrain » Wed Oct 23, 2019 11:22 pm

Personally I would count it since it directly increases my Net Worth. But a bank or another financial institution might not see it that way

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

Post by CyclingDuo » Thu Oct 24, 2019 6:55 am

novemberrain wrote:
Wed Oct 23, 2019 11:22 pm
Personally I would count it since it directly increases my Net Worth. But a bank or another financial institution might not see it that way
https://thefinancebuff.com/savings-rate ... l#comments

We finally have a logically consistent answer. Loan principal payments are savings. Feel free to make additional principal payments toward your loans. .... The principal payments are just as valid as savings as sending money to your own bank account.

And of course the 415 posts to date thread here at the Bogleheads that was referenced in the above blog post:

viewtopic.php?f=2&t=159671
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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by bloom2708 » Thu Oct 24, 2019 8:22 am

It is a mixed bag.

1. You have to save the money previously or momentarily from your paycheck or investments to pay your mortgage payment. Temporarily (at least) this is savings.
2. Part is spent on paying down past spending (principal). This part has no effect on net worth. Cash goes out. Debt goes down. No change in net worth.
3. Part is spent on current spending (interest). This part lowers your net worth. Cash goes out. Nothing to balance with. It is regular spending.

You can go farther down the rabbit hole if your payment includes escrow for insurance, special assessments and property taxes. Special assessments and property taxes are a liability (you owe them each year or over multiple years), so that part of the payment would have a net zero affect on net worth. I would guess most wouldn't put current year property taxes due or special assessment balances on their balance sheet (I do :wink: )
Last edited by bloom2708 on Thu Oct 24, 2019 1:50 pm, edited 1 time in total.
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Re: Is principal portion of mortgage counted for savings rate purposes?

Post by Phineas J. Whoopee » Thu Oct 24, 2019 1:46 pm

As is frequently the case here at bogleheads.org we are arguing about the definitions of words, in this case savings.

Paying principal on a loan rather than spending the income certainly increases one's net worth, using the ordinary definition of the term. Net worth of course can be negative. Mine, although eventually rising, was negative for an uncomfortable time.

Individuals are not constrained by GAAP. They can say whatever they want, unless perhaps they're in legal proceedings, including a tax dispute.

PJW

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

Post by Artsdoctor » Thu Oct 24, 2019 3:43 pm

Nate79 wrote:
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.
No one would argue that any equity you have in your house(s) would be included in your net worth calculations. But so would yours cars, your art, your wine cellar, your clothing, and anything else you can conceivably sell.

Your house is nothing more than an item which you've purchased, just like all of the other objects in your life. For most people, it's the largest purchase they make, but it's a purchase nonetheless. I don't think there's anything to be gained by including the principal of your mortgage payment in your savings rate.

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

Post by willthrill81 » Thu Oct 24, 2019 4:48 pm

Artsdoctor wrote:
Thu Oct 24, 2019 3:43 pm
Nate79 wrote:
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.
No one would argue that any equity you have in your house(s) would be included in your net worth calculations. But so would yours cars, your art, your wine cellar, your clothing, and anything else you can conceivably sell.

Your house is nothing more than an item which you've purchased, just like all of the other objects in your life. For most people, it's the largest purchase they make, but it's a purchase nonetheless. I don't think there's anything to be gained by including the principal of your mortgage payment in your savings rate.
Principal payments made to a mortgage will eventually reduce one's living expenses (i.e. no more mortgage), which is the flip side of the same coin as investing one's capital for the purpose of providing one with future income. As I noted above, investing funds in a negative bond is not qualitatively different than investing funds in a positive bond.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by Nate79 » Thu Oct 24, 2019 5:00 pm

Artsdoctor wrote:
Thu Oct 24, 2019 3:43 pm
Nate79 wrote:
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.
No one would argue that any equity you have in your house(s) would be included in your net worth calculations. But so would yours cars, your art, your wine cellar, your clothing, and anything else you can conceivably sell.

Your house is nothing more than an item which you've purchased, just like all of the other objects in your life. For most people, it's the largest purchase they make, but it's a purchase nonetheless. I don't think there's anything to be gained by including the principal of your mortgage payment in your savings rate.
Equity in a home along with all assets are part of net worth by definition yet people do try and argue that it is not part of net worth. Tons of threads attempting to argue this though I find little value in arguing with people who flunk basic financial literacy trying to argue that home equity is not included in net worth.

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

Post by Artsdoctor » Thu Oct 24, 2019 5:25 pm

^ I find it hard to believe that anyone would seriously argue that house equity is not part of net worth.

If you're aiming to put aside 30% of your pre-tax earnings into your retirement savings, I'm not sure what benefit it is to count portions of mortgage payments in your plans. It seems like mental accounting to me.

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

Post by Ron Ronnerson » Fri Oct 25, 2019 9:01 am

Artsdoctor wrote:
Thu Oct 24, 2019 5:25 pm
^ I find it hard to believe that anyone would seriously argue that house equity is not part of net worth.

If you're aiming to put aside 30% of your pre-tax earnings into your retirement savings, I'm not sure what benefit it is to count portions of mortgage payments in your plans. It seems like mental accounting to me.
I look at it as options, not plans. The principal portion of your mortgage payments can be turned into cash later on. Plans are great but life doesn’t always go according to those plans. Plans can sometimes not materialize into reality. Plans can sometimes change. It’s good to have options, particularly when plans don’t work out but even when they do. Home equity provides options. By the way, most people don’t save 30%. I think the average is something like 4%.

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

Post by MrBeaver » Fri Oct 25, 2019 12:42 pm

Just one thing to add here:

To be internally consistent, one who counts principal payments as savings should also include home equity as 'undiversified real estate holdings' within their asset allocation.

One who does not count principal payments as savings should probably likewise not count home equity within their net worth calculation.

In the end, 'savings rate' doesn't really matter and doesn't suggest a date at which you become financially independent. What does matter? How much you save each year, how much you already have saved, how much you plan to spend in the future, and how many years are in between.

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

Post by civility » Fri Oct 25, 2019 3:14 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 would not consider, home is worth what the buyer willing to pay.

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

Post by aristotelian » Fri Oct 25, 2019 3:29 pm

Artsdoctor wrote:
Thu Oct 24, 2019 3:43 pm

No one would argue that any equity you have in your house(s) would be included in your net worth calculations. But so would yours cars, your art, your wine cellar, your clothing, and anything else you can conceivably sell.

Your house is nothing more than an item which you've purchased, just like all of the other objects in your life. For most people, it's the largest purchase they make, but it's a purchase nonetheless. I don't think there's anything to be gained by including the principal of your mortgage payment in your savings rate.
Paying off car loans are also savings! If you could mortgage your art and wine collection, so would paying down those debts.

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

Post by acegolfer » Fri Oct 25, 2019 9:14 pm

aristotelian wrote:
Fri Oct 25, 2019 3:29 pm
Paying off car loans are also savings! If you could mortgage your art and wine collection, so would paying down those debts.
I totally agree. But apparently others disagree.

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

Post by MathIsMyWayr » Fri Oct 25, 2019 9:26 pm

For your current spending pattern, yes. For a retirement savings, no.

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

Post by EddyB » Fri Oct 25, 2019 9:54 pm

dratkinson wrote:
Tue Oct 22, 2019 8:15 pm

Maybe a mortgage is a transfer payment from your current self to your future self.
Great, that’s exactly how I see savings!
dratkinson wrote:
Tue Oct 22, 2019 8:15 pm

So still not savings.
Oh....
dratkinson wrote:
Tue Oct 22, 2019 8:15 pm

Whatever floats your boat.
Agreed.

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

Post by basspond » Fri Oct 25, 2019 11:34 pm

I am going to buy everything on my credit card and when I pay it off I will call it savings. Just a point to show that this logic is not correct.

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

Post by gr7070 » Sat Oct 26, 2019 7:05 am

wyoming82240 wrote:
Fri Oct 25, 2019 3:14 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 would not consider, home is worth what the buyer willing to pay.
Just like stocks.

And cash, even - in the inverse. Buying is a two way street.

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

Post by chevca » Sat Oct 26, 2019 8:12 am

These always make me think of the cash buyer. Say someone actually did SAVE up $300k over years and then spent it on a $300k house. Did they just save $300k twice? :happy

No, right? They saved up and then they spent the money.

I guess those saying paying down a mortgage is savings mean it's reverse savings? Instead of saving up for years beforehand, they save up after the purchase?... only it's paying back money you borrowed and paying interest for having borrowed. To me that is far from saving.

We can never pay cash for anything again, put it on credit or take out loans, and all our savings rates can be through the roof! Awesome!! :D

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

Post by dbr » Sat Oct 26, 2019 8:23 am

BergeronsBuddies wrote:
Wed Oct 23, 2019 11:50 am
Personal decision.

Absolutely right. It depends on what you want to know. Or, if there are different ideas you have to use the same definition if you want to compare.


I calculate an investing rate and a savings rate. In my mind savings is anything which increases your net worth, or basically not spending.

Most people would not count an increase in market value of an asset as savings while increasing market value may well be the biggest driver of increasing net worth. Of course you hit on one thing here that is really correct, which is that it is the achieved net worth which is actually the goal.

I calculate it this way to account for paying down student loans as a motivational tool mostly.

Reducing debt, at least as long as that debt charges interest and will be collected eventually would be a worthy motivation in any case.

So investing rate for me is simply how much money as a % of my income I am placing into index funds, and savings rate adds pay down of principal of
both mortgage and student loans.

I think distinguishing investing rate from savings rate helps clarify a lot of the differences in this thread.

But like I said, it's a personal decision for you.

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

Post by Ron Ronnerson » Sat Oct 26, 2019 8:56 am

chevca wrote:
Sat Oct 26, 2019 8:12 am
These always make me think of the cash buyer. Say someone actually did SAVE up $300k over years and then spent it on a $300k house. Did they just save $300k twice? :happy

No, right? They saved up and then they spent the money.
I don't see it that way. They transferred the money from cash to real estate, not spent it. The following year, they could sell the house and get the $300k back (more or less). If they spent the money, rather than transferred it, where would the $300k suddenly come from?

Similarly, if someone saved $300k and then, all at once, bought stocks with that money, they didn't spend money, they transferred from cash to stocks. A year later, they sell the stocks and get the $300k back (more or less)

If someone saves $300k and then buys cars with that money, they transferred the money from cash to vehicles. However, the cars will depreciate fairly quickly. A year later, they sell the cars and get, say, $150k back. They have spent $150k.

If someone saves $300k and then buys items that are discarded or used up (groceries, paper that's been written on, etc.), that money has been spent.

Anyway, that's how I see it.

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

Post by MathIsMyWayr » Sat Oct 26, 2019 9:31 am

Ron Ronnerson wrote:
Sat Oct 26, 2019 8:56 am
chevca wrote:
Sat Oct 26, 2019 8:12 am
These always make me think of the cash buyer. Say someone actually did SAVE up $300k over years and then spent it on a $300k house. Did they just save $300k twice? :happy

No, right? They saved up and then they spent the money.
I don't see it that way. They transferred the money from cash to real estate, not spent it. The following year, they could sell the house and get the $300k back (more or less). If they spent the money, rather than transferred it, where would the $300k suddenly come from?

Similarly, if someone saved $300k and then, all at once, bought stocks with that money, they didn't spend money, they transferred from cash to stocks. A year later, they sell the stocks and get the $300k back (more or less)

If someone saves $300k and then buys cars with that money, they transferred the money from cash to vehicles. However, the cars will depreciate fairly quickly. A year later, they sell the cars and get, say, $150k back. They have spent $150k.

If someone saves $300k and then buys items that are discarded or used up (groceries, paper that's been written on, etc.), that money has been spent.

Anyway, that's how I see it.
If your action increases your total net worth, then you are saving. It is about cash flow. Withdrawing money from your bank account to pay the mortgage principal does not change your net worth and it is not saving. If you direct a portion of your earnings or cash inflow to add to your account or to pay the mortgage principal instead of spending, you are saving.

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

Post by EddyB » Sat Oct 26, 2019 9:47 am

basspond wrote:
Fri Oct 25, 2019 11:34 pm
I am going to buy everything on my credit card and when I pay it off I will call it savings. Just a point to show that this logic is not correct.
Like chevca, below, you’re making the mistake of treating all spending as if it is consumption. They’re different. If a buy dinner on a credit card, and consume it, then paying off the credit card isn’t saving, I agree. If I buy a bond ETF on margin, is paying off the margin loan not saving?

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

Post by Ron Ronnerson » Sat Oct 26, 2019 10:11 am

MathIsMyWayr wrote:
Sat Oct 26, 2019 9:31 am
Ron Ronnerson wrote:
Sat Oct 26, 2019 8:56 am
chevca wrote:
Sat Oct 26, 2019 8:12 am
These always make me think of the cash buyer. Say someone actually did SAVE up $300k over years and then spent it on a $300k house. Did they just save $300k twice? :happy

No, right? They saved up and then they spent the money.
I don't see it that way. They transferred the money from cash to real estate, not spent it. The following year, they could sell the house and get the $300k back (more or less). If they spent the money, rather than transferred it, where would the $300k suddenly come from?

Similarly, if someone saved $300k and then, all at once, bought stocks with that money, they didn't spend money, they transferred from cash to stocks. A year later, they sell the stocks and get the $300k back (more or less)

If someone saves $300k and then buys cars with that money, they transferred the money from cash to vehicles. However, the cars will depreciate fairly quickly. A year later, they sell the cars and get, say, $150k back. They have spent $150k.

If someone saves $300k and then buys items that are discarded or used up (groceries, paper that's been written on, etc.), that money has been spent.

Anyway, that's how I see it.
If your action increases your total net worth, then you are saving. It is about cash flow. Withdrawing money from your bank account to pay the mortgage principal does not change your net worth and it is not saving. If you direct a portion of your earnings or cash inflow to add to your account or to pay the mortgage principal instead of spending, you are saving.
The savings would occur when the money is deposited into a bank account. Once it is taken out and directed toward the mortgage, the portion of the payment going toward interest is spent while the portion going to the principal is a transfer. If you could have your paycheck directly sent to your mortgage company, you would skip the step of having it first deposited into a bank account but the result would be the same - net worth would be increased as principal is paid down. In practical terms, it doesn't matter all that much that the money that would eventually go toward the mortgage payment sat in a bank account for a couple of days first. However, you don't want to double-count the savings. So, it is savings when it is deposited into the bank and it is neither saving nor spending once it is directed toward paying down principal - it is a transfer. Another transfer can be made again later by selling the house and getting that money back to put into the bank account. The part of the payment going toward mortgage interest or toward buying groceries is gone forever.

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

Post by randomguy » Sat Oct 26, 2019 10:13 am

basspond wrote:
Fri Oct 25, 2019 11:34 pm
I am going to buy everything on my credit card and when I pay it off I will call it savings. Just a point to show that this logic is not correct.
No the logic is right. What is the difference between
a) buying 100k of stocks, watching them drop and selling. You have 50k
b) buying 100k of beanie babies on credit card, watching them drop. Paying off the credit card, And you have 50k

Why is the first case savings and the second one isn't? At a high level savings is
savings = money in-money out

You can debate what exactly each term is but as long as you don't count the money twice, your math will work out.

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

Post by chevca » Sat Oct 26, 2019 10:51 am

I guess this would all lead into the next argument people see two sides of... is a house an investment or consumption item? I see it as a consumption item. Hence, why I feel one spends money on a house.

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

Post by EddyB » Sat Oct 26, 2019 10:56 am

chevca wrote:
Sat Oct 26, 2019 10:51 am
I guess this would all lead into the next argument people see two sides of... is a house an investment or consumption item? I see it as a consumption item. Hence, why I feel one spends money on a house.
While the maintenance expenses are consumption, the properties I’ve owned have held or increased their value in real terms over any significant period of time, as has been true for real estate in the great majority of cases in the US. What’s been consumed?

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

Post by scubadiver » Sat Oct 26, 2019 10:58 am

chevca wrote:
Sat Oct 26, 2019 10:51 am
I guess this would all lead into the next argument people see two sides of... is a house an investment or consumption item? I see it as a consumption item. Hence, why I feel one spends money on a house.
Why does it have to be either/or? Is a mutual fund with 2% annual fees an asset because you can sell the shares or a consumption item because it has high annual maintenance costs?

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

Post by dbr » Sat Oct 26, 2019 11:01 am

chevca wrote:
Sat Oct 26, 2019 10:51 am
I guess this would all lead into the next argument people see two sides of... is a house an investment or consumption item? I see it as a consumption item. Hence, why I feel one spends money on a house.
Good grief. An item you own can both have a value that increases or decreases on a market and that imposes costs to own and maintain. It isn't either or.

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

Post by EddyB » Sat Oct 26, 2019 11:02 am

scubadiver wrote:
Sat Oct 26, 2019 10:58 am
chevca wrote:
Sat Oct 26, 2019 10:51 am
I guess this would all lead into the next argument people see two sides of... is a house an investment or consumption item? I see it as a consumption item. Hence, why I feel one spends money on a house.
Why does it have to be either/or? Is a mutual fund with 2% annual fees an asset because you can sell the shares or a consumption item because it has high annual maintenance costs?
Right—owning a home likely creates spending obligations, but they can be disaggregated from the value of the asset.

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

Post by Jags4186 » Sat Oct 26, 2019 11:05 am

aristotelian wrote:
Fri Oct 25, 2019 3:29 pm
Artsdoctor wrote:
Thu Oct 24, 2019 3:43 pm

No one would argue that any equity you have in your house(s) would be included in your net worth calculations. But so would yours cars, your art, your wine cellar, your clothing, and anything else you can conceivably sell.

Your house is nothing more than an item which you've purchased, just like all of the other objects in your life. For most people, it's the largest purchase they make, but it's a purchase nonetheless. I don't think there's anything to be gained by including the principal of your mortgage payment in your savings rate.
Paying off car loans are also savings! If you could mortgage your art and wine collection, so would paying down those debts.
It’s only savings if you count the initial purchase in its entirety as an expense.

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

Post by Pepper11 » Sat Oct 26, 2019 11:48 am

I have seen this discussed a few times on this board, and I cant wrap my head around how putting money into something that increases your net worth by decreasing a liability (such as principle in the mortage or a student loan) would not be considered savings. If this is true, there should never be a thread on investing vs paying down loans, as only one of these would be saving money. If a guy makes 100k take home and invests 10k in a savings account, spends 40k on living expenses and takes a 50k vacation to Tahiti, does he really have a higher savings rate than the guy who makes 100k take home, invests 5k in a savings account, spends 45k on living expenses, and puts 50k to student loans.

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

Post by JoeRetire » Sat Oct 26, 2019 12:06 pm

aristotelian wrote:
Fri Oct 25, 2019 3:29 pm
Artsdoctor wrote:
Thu Oct 24, 2019 3:43 pm

No one would argue that any equity you have in your house(s) would be included in your net worth calculations. But so would yours cars, your art, your wine cellar, your clothing, and anything else you can conceivably sell.

Your house is nothing more than an item which you've purchased, just like all of the other objects in your life. For most people, it's the largest purchase they make, but it's a purchase nonetheless. I don't think there's anything to be gained by including the principal of your mortgage payment in your savings rate.
Paying off car loans are also savings! If you could mortgage your art and wine collection, so would paying down those debts.
Apparently I saved a bunch of money today when I paid off the monthly credit card balance. I save repeatedly every month.
I'm such a saver!

Is there such a thing as "negative savings"? The only way I have found to be this kind of saver is to spend, so that I can have potential savings.

How would negative savings affect my "savings rate"?
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.

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