Debt

Do Debt Payments Count As Savings?

I think your Savings Rate is the most important financial metric you can use.  I love a good net worth graph too, but Savings Rate is pure.  It’s how much money comes in every month vs. how much you spend every month.  The flip side is your Spending/Savings Rate, or basically how much of your income you need to fund your lifestyle.

The Savings Rate is not like Net Worth, where a good or bad month in the stock market can change your financial picture or you realize your house is worth more than you owe but how easy is it to turn that into a liquid asset?

But is it really so pure?

Do you use pre-tax or post-tax income?  You’ll find different opinions on that one.  A good calculator (like this one) will figure in your 401k contributions AND employer match.

But What About Debt?

According to the Financial Snowball logic, debt payments should be included.  The reason is that once you pay off that debt you’ll snowball what would be that monthly payment towards savings instead of inflating your lifestyle.

If you’re simply interested in how much of your income you spend, you might not want to count debt payments as savings because it’s a monthly expense.  For example, if you’re spending 90% of your income, it might be helpful to see that your debt payments make up half of that.

And does the type of debt matter?  Cars and credit card debt are simply debt with no assets behind them.  (I know cars are assets but I don’t think they should count in your Net Worth – how easily can you sell your car or would you even be willing to?).  Student loans technically don’t have an asset behind them either if you think about it.  Houses are similar to cars – yes there’s an asset behind it, but how easy is it to turn the gap between what it’s worth and what you owe into a useable resource.  And are you willing to?

Ask Yourself Why?

I personally count debt payments as part of my savings rate for a couple reasons:

  • Savings are a tool for building wealth.  The most common way to measure wealth is Net Worth.  Thus anything contributing towards increasing Net Worth counts as savings.
  • I want to see how much of my income I use to fund my lifestyle.  While it’s true that debt is part of my lifestyle at the moment, when that debt is gone I have no plans to use that free cash flow to inflate my lifestyle.

Dos And Don’ts

Do count debt payments as savings:

  • If you approach debt reduction as a way to build wealth and are using Savings Rate as a metric of what resources you’re contributing to increasing your Net Worth every month.
  • After the debt is gone you plan to re-allocate those payments towards savings goals.

Don’t count debt payments as savings:

  • You view Savings Rate more as a Spending Rate – ie. how much of your income do you need to support your lifestyle.
  • Your debt is preventing you from improving your current lifestyle – it’s reducing your desired “spendable” income.

Summed up, I think Spending Rate focuses on liabilities, while Savings Rate focuses on assets.  What do you think?

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Comments

5 comments so far.

  • mrspickypincher Reply

    Right now we count our debt payments as “savings.” We spend all of our extra savings each month on debt, so that technically is where our savings goes each month. But since we’re overpaying on the loans and eliminating them, we’re getting a better return than if we just put the funds in a savings account (paying down interest).

    • Matt Reply

      I like that you look at the return you’re getting as well by putting that extra cash towards debt, especially compared to just sitting in a savings account – I hadn’t thought about that angle. It makes sense though especially if the end goal is building wealth, you’re saving more money by “paying” off debt (and reducing interest) than if you stuck it in a bank account, even with something like a fancy 1% Ally savings account!

  • FairlyFrugalFella Reply

    I definitely consider anything beyond the minimum debt payment as savings. I think getting in the habit of over paying does two great things when it’s gone: Minimizing your spending and increasing your saving. I’ll just be glad when it’s gone and I can start investing the savings to make me some more money

    • Matt Reply

      I daydream about the extra few hundred dollars a month in positive cashflow I’ll have when my student loans are paid off – I could up my payments now and pay them off sooner but I think investing is fun and I gotta have a little fun today too!

      • FairlyFrugalFella Reply

        I can’t wait for that day either haha. You’re definitely right about that! That’s the hardest balance sometimes with PF is remembering that you still gotta have fun some now while you’re planning for the future

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