Can a <median household save 1 year of expenses every year?

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terran
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Re: Can a <median household save 1 year of expenses every year?

Post by terran » Wed May 16, 2018 2:55 pm

chevca wrote:
Wed May 16, 2018 1:30 pm
So, if I'm following this correctly, paying cash for things is an expense, but taking loans out for things and paying back the loans is "saving"?

If that's the case, that makes no sense to me.
No, taking out loans for things is spending (usually because you want to spend more than you have and/or earn). To be more accurate, taking out the loan is not spending, it's the spending implied by "for things" that makes it spending. Paying loans back is saving (in that it increases your net worth).

A person who is now paying back a loan (positive savings rate) at one point must have spent more than they earned (negative savings rate), that doesn't change the fact that they currently have a certain savings rate. If I had a 50% savings rate last year, that doesn't change the fact that I have a 70% savings rate this year and that it's therefore possible to save that much on my income. Just the same, the fact that I had a -50% savings rate last year (took out a loan and spent it) doesn't change the fact that I have a +50% savings rate this year (paid the loan back).

Now, of course, you need to look at someone's lifetime or average savings rate to know whether they'll be able to retire or not, but that's a different question. It doesn't change the fact that someone paying back a loan is spending less than they earn thereby increasing their net worth and proving that it's possible to save a given amount on a given income.
Jags4186 wrote:
Wed May 16, 2018 1:47 pm
Person A borrows $96,000 to go earn a Bachelors Degree. Upon graduating from college Person A makes $4000/mo, spends $2000 to live and pays the $2000/mo for 4 years clearing the loan. After 4 years he has $0.

Person B works throughout college and pays as he goes. Or, alternatively, Person B’s parents pay for college. He graduates with no debt. Person B also makes $4000/mo and puts $2000/mo into his savings account. After 4 years he has $96,000.
Here's a question for you: has Person A or Person B earned more money over this period of time? Here's a hint for you "Person B works throughout college and pays as he goes. Or, alternatively, Person B’s parents pay for college." So one way or another Person B had an extra $96,000 inflow of cash that Person A didn't have. You should expect Person B to have (at least) an extra $96,000 at the end of the time frame.

Person A borrows $96,000 (neither spending nor saving) to go earn a Bachelors Degree (spends the money on a degree). Upon graduating from college Person A makes $4000/mo (earns money), spends $2000 (spends money) to live and pays the $2000/mo for 4 years clearing the loan (saves money). After 4 years he has $0 (has no savings). Total Earning: $192,000, total spending: $192,000, total saving: $0. Person A had an average 0% savings rate on $192,000 total income.

Person B works throughout college (earns money) and pays as he goes (spends money). Or, alternatively, Person B’s parents pay for college ("earns" money). He graduates with no debt. Person B also makes $4000/mo (earns money) and puts $2000/mo into his savings account (saves money). After 4 years he has $96,000 (has savings). Total earning: $288,000, total spending: $192,000, total saving: $96,000. Person B has an average 33.33% savings rate on $288,000 total income.

If you want to compare savings rates you need to compare earnings, not just spending.

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triceratop
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Re: On the topic of Saving vs Savings

Post by triceratop » Wed May 16, 2018 2:59 pm

Jags4186 wrote:
Wed May 16, 2018 2:53 pm
triceratop wrote:
Wed May 16, 2018 2:51 pm
Jags4186 wrote:
Wed May 16, 2018 2:45 pm
raven15 wrote:
Wed May 16, 2018 2:30 pm
So somebody with $95,000 of student loans and $90,000 home equity is not saving by paying off the loans, but someone with $95,000 of student loans and $100,000 home equity is?
1) You can't save if you have a negative net worth. All you can do is dig yourself out of a hole.

2) You can only say you're saving by paying down the student loan if you counted taking the loan out and using it for tuition/whatever else as an expense. Since most people look at spending/savings on a yearly basis, and most loans are taken out over a multi year period, it's disingenuous to say your saving by making student loan payments.
1) Yes, you can save with a negative net worth. Digging yourself out of a hole is saving. As someone wisely pointed out, there is saving vs. spending and then there is asset allocation. The two are distinct.

2) Yes, that is the appropriate way of looking at it: of course tuition/living expenses while in school are an expense.
Using your definition:
triceratop wrote:
Wed May 16, 2018 2:51 pm
Savings is a stock, an accumulated surplus of wealth.
If you have a negative net worth you have no stock, no accumulated surplus of wealth. Therefore if you have a negative net worth you cannot be saving because you have accumulated no stock, no surplus of wealth. Only once you have accumulated a surplus can you be saving. Using an "instantaneous rate" might be good for an academic exercise, but for a course in practicality it is worthless.
One can save while having negative stock of wealth. One can rise in elevation while below 0 elevation (see: submarines). One can fall in elevation while above 0 elevation (see: skydiving).
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

KlangFool
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Re: On the topic of Saving vs Savings

Post by KlangFool » Wed May 16, 2018 3:01 pm

triceratop wrote:
Wed May 16, 2018 1:19 pm
Bogleheads:

We seem to be getting tripped up on a semantic point: not all saving results in an increase in savings. In fact they even have different units, as expected befitting their different parts of speech. Savings is a stock, an accumulated surplus of wealth. Saving is a rate, a flow, of excess income over consumption. Thus one can have a high saving rate without much of that going to direct savings (for example, by paying down a loan). This should be familiar to anyone who has used a double-entry accounting system. Not treating the payment of past debt via cash flow as saving appears to me like a variant of the sunk cost fallacy.

KlangFool's definition of saving being only that excess cash flow directed towards productive investment is incongruous with the meaning of words. It leads to all kinds of funky results, like, the required retirement assets falling off a cliff once one's primary residence is paid off since a supposed "expense" drops to zero; this should be a red flag that there is a problem with their logic system.
triceratop,

1) I am aiming for FI. Not retirement.

2) If the current annual expense drop because the mortgage is paid off, the FI number needed will be lowered.

KlangFool

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triceratop
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Re: On the topic of Saving vs Savings

Post by triceratop » Wed May 16, 2018 3:02 pm

KlangFool wrote:
Wed May 16, 2018 3:01 pm
triceratop wrote:
Wed May 16, 2018 1:19 pm
Bogleheads:

We seem to be getting tripped up on a semantic point: not all saving results in an increase in savings. In fact they even have different units, as expected befitting their different parts of speech. Savings is a stock, an accumulated surplus of wealth. Saving is a rate, a flow, of excess income over consumption. Thus one can have a high saving rate without much of that going to direct savings (for example, by paying down a loan). This should be familiar to anyone who has used a double-entry accounting system. Not treating the payment of past debt via cash flow as saving appears to me like a variant of the sunk cost fallacy.

KlangFool's definition of saving being only that excess cash flow directed towards productive investment is incongruous with the meaning of words. It leads to all kinds of funky results, like, the required retirement assets falling off a cliff once one's primary residence is paid off since a supposed "expense" drops to zero; this should be a red flag that there is a problem with their logic system.
triceratop,

1) I am aiming for FI. Not retirement.

2) If the current annual expense drop because the mortgage is paid off, the FI number needed will be lowered.

KlangFool
My point remains unchanged.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

Jags4186
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Re: Can a <median household save 1 year of expenses every year?

Post by Jags4186 » Wed May 16, 2018 3:09 pm

terran wrote:
Wed May 16, 2018 2:55 pm
Here's a question for you: has Person A or Person B earned more money over this period of time? Here's a hint for you "Person B works throughout college and pays as he goes. Or, alternatively, Person B’s parents pay for college." So one way or another Person B had an extra $96,000 inflow of cash that Person A didn't have. You should expect Person B to have (at least) an extra $96,000 at the end of the time frame.

Person A borrows $96,000 (moving future earnings into the present) to go earn a Bachelors Degree (spends the money on a degree). Upon graduating from college Person A makes $4000/mo (earns money), spends $2000 (spends money) to live and pays the $2000/mo for 4 years clearing the loan (repays past self). After 4 years he has $0 (has no savings). Total Earning: $192,000, total spending: $192,000, total saving: $0. Person A had an average 0% savings rate on $192,000 total income.

Person B works throughout college (earns money) and pays as he goes (spends money). Or, alternatively, Person B’s parents pay for college ("earns" money). He graduates with no debt. Person B also makes $4000/mo (earns money) and puts $2000/mo into his savings account (saves money). After 4 years he has $96,000 (has savings). Total earning: $288,000, total spending: $192,000, total saving: $96,000. Person B has an average 33.33% savings rate on $288,000 total income.

If you want to compare savings rates you need to compare earnings, not just spending.
Of course Person B earned more money and I agree with everything you said except the changes in bold.

Jags4186
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Re: On the topic of Saving vs Savings

Post by Jags4186 » Wed May 16, 2018 3:19 pm

triceratop wrote:
Wed May 16, 2018 2:59 pm
Jags4186 wrote:
Wed May 16, 2018 2:53 pm
triceratop wrote:
Wed May 16, 2018 2:51 pm
Jags4186 wrote:
Wed May 16, 2018 2:45 pm
raven15 wrote:
Wed May 16, 2018 2:30 pm
So somebody with $95,000 of student loans and $90,000 home equity is not saving by paying off the loans, but someone with $95,000 of student loans and $100,000 home equity is?
1) You can't save if you have a negative net worth. All you can do is dig yourself out of a hole.

2) You can only say you're saving by paying down the student loan if you counted taking the loan out and using it for tuition/whatever else as an expense. Since most people look at spending/savings on a yearly basis, and most loans are taken out over a multi year period, it's disingenuous to say your saving by making student loan payments.
1) Yes, you can save with a negative net worth. Digging yourself out of a hole is saving. As someone wisely pointed out, there is saving vs. spending and then there is asset allocation. The two are distinct.

2) Yes, that is the appropriate way of looking at it: of course tuition/living expenses while in school are an expense.
Using your definition:
triceratop wrote:
Wed May 16, 2018 2:51 pm
Savings is a stock, an accumulated surplus of wealth.
If you have a negative net worth you have no stock, no accumulated surplus of wealth. Therefore if you have a negative net worth you cannot be saving because you have accumulated no stock, no surplus of wealth. Only once you have accumulated a surplus can you be saving. Using an "instantaneous rate" might be good for an academic exercise, but for a course in practicality it is worthless.
One can save while having negative stock of wealth. One can rise in elevation while below 0 elevation (see: submarines). One can fall in elevation while above 0 elevation (see: skydiving).
Ok my turn for metaphors! A thirsty person can increase the temperature of ice from -50 to -5 degrees celsius but he still can't drink until ice is melted.

stoptothink
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Re: Can a <median household save 1 year of expenses every year?

Post by stoptothink » Wed May 16, 2018 3:19 pm

KlangFool wrote:
Tue May 15, 2018 6:04 pm
alfaspider wrote:
Tue May 15, 2018 1:00 pm
Of course it's possible. The question is whether the household is willing to cut spending far below the median to get there. Depending on one's location, that may involve sacrifices few are willing to make.
+1.

KlangFool
This thread got ridiculous really fast with semantics and moving of the goalposts. This is the answer. A few are hellbent on telling everybody it is not possible; it is, most people in the U.S. simply aren't willing to live the type of lifestyle that it takes...and there is nothing wrong with that. It's all about choices and what you prioritize.

Jags4186
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Re: Can a <median household save 1 year of expenses every year?

Post by Jags4186 » Wed May 16, 2018 3:23 pm

stoptothink wrote:
Wed May 16, 2018 3:19 pm
KlangFool wrote:
Tue May 15, 2018 6:04 pm
alfaspider wrote:
Tue May 15, 2018 1:00 pm
Of course it's possible. The question is whether the household is willing to cut spending far below the median to get there. Depending on one's location, that may involve sacrifices few are willing to make.
+1.

KlangFool
This thread got ridiculous really fast with semantics and moving of the goalposts. This is the answer. A few are hellbent on telling everybody it is not possible; it is, most people in the U.S. simply aren't willing to live the type of lifestyle that it takes...and there is nothing wrong with that. It's all about choices and what you prioritize.
Yes I agree it is 100% possible but other factors are at play. Some people may have a paid for house and live on $29,500. Some people have to pay rent and live on $29,500. Different situations. I agree, it would be a spartan life to raise a family on $29,500 including rent but plenty of people do it so it can be done.

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Re: Can a <median household save 1 year of expenses every year?

Post by LadyGeek » Wed May 16, 2018 3:33 pm

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