Calculating Your Savings Rate

[Singuy]

That's the same bone-headed logic that women use when there's a "sale" at the Mall.

LoL, there's a HUGE difference though.

Shelter is mandatory, a purse that went on sale is not. Sure the logic is similiar because one is trying to convert a "want" into a "need" by justifying the item onsale. A mortgage(or rent) is pretty much mandatory unless you consider that a "want" and living under a bridge is all that's "needed".

So since you are paying a mortgage that yields you equity anyways, paying it faster is pratically what Disneysteve is saying.

I'm curious, what are "savings" if one don't consider paying into a mortgage "savings"? If I go out and max out 20 credit cards, paying min payments on every one of them for the next 30 years but "saves" 20% of my income/month..am I really saving?

If we are only talking about math here, technically..savings are only considered if it's NET POSITIVE.
If you bought something that is -300k, still haven't paid for it all..and consider yourself having any type of "savings" is an oxymoron to me.

[corn18]

Agree with everyone. I guess it doesn't really matter other than as a thought exercise, though. I track many numbers in many ways and look at them 9 ways to Sunday. None of it matters unless I have sufficient income to cover my expenses both now and in retirement. That is the only reason I save right now. I guess if I save enough for that, I might start saving so my kids can have some of it.

Housing is a necessary expense and I am trying to figure out how to minimize that expense. To be honest, as I run all the numbers, renting looks more and more appealing from a total expense perspective. Owning a home outright is not cheap.

Tom

[Nutria]

LoL, there's a HUGE difference though.

Shelter is mandatory, a purse that went on sale is not. Sure the logic is similiar because one is trying to convert a "want" into a "need" by justifying the item onsale. A mortgage(or rent) is pretty much mandatory unless you consider that a "want" and living under a bridge is all that's "needed".

So since you are paying a mortgage that yields you equity anyways, paying it faster is pratically what Disneysteve is saying.

I'm curious, what are "savings" if one don't consider paying into a mortgage "savings"?

Savings are money put aside for future spending.

If I go out and max out 20 credit cards, paying min payments on every one of them for the next 30 years but "saves" 20% of my income/month..am I really saving?

Depends on what you do with that money. If you put it into your 401(k), then paradoxically you're increasing your savings while at the same time decreasing your net worth.

Whether or not that's a wise decision is a different discussion. (For the record, I think it's pretty stupid.)

If we are only talking about math here, technically..savings are only considered if it's NET POSITIVE.

I completely disagree.

You (and Steve) are conflating two different concepts:

• saving (putting money aside for future spending), and
• increasing net worth (growth in the difference between assets and liabilities).

[disneysteve]

You (and Steve) are conflating two different concepts:

• saving (putting money aside for future spending), and
• increasing net worth (growth in the difference between assets and liabilities).

Exactly. Nutria, I wasn't saying I consider those loan payments to be part of savings. I was explaining why I think others do.

I agree with you. Saving means putting money aside for future needs. Prepaying my mortgage, which I do every month, does not contribute to me building up a stash of money that can be used for future spending. I do not count our extra mortgage payments as part of our savings rate.

[Nutria]

Exactly. Nutria, I wasn't saying I consider those loan payments to be part of savings. I was explaining why I think others do.

Sorry. When I saw Singuy write paying it faster is pratically what Disneysteve is saying, I assumed.

[Singuy]

Savings are money put aside for future spending.



Depends on what you do with that money. If you put it into your 401(k), then paradoxically you're increasing your savings while at the same time decreasing your net worth.

Whether or not that's a wise decision is a different discussion. (For the record, I think it's pretty stupid.)



I completely disagree.

You (and Steve) are conflating two different concepts:

• saving (putting money aside for future spending), and
• increasing net worth (growth in the difference between assets and liabilities).

I really don't understand the concept of "money put aside for future spending" when you technically already spend this money from the future during the present in a form of a loan(mortgage, credit cards, etc).

I really think it's a way of lying to yourself that what you have in your "savings stash" is something for "future spending".

I don't think paying off a mortgage early is consider as savings. It's only savings to me when AFTER all future debts are paid off..because only this type of money is truely considered as "money used for future spending". Future spending = spending on the unknown (meaning a possible choice can still be made..like NOT having your kid go to college (or pay for their college) or NOT buying that new car..it's still a choice..vs mortgage debt which are KNOWN spending..you already bought it..you can't un-buy it).

[Nutria]

I really don't understand the concept of "money put aside for future spending" when you technically already spend this money from the future during the present in a form of a loan(mortgage, credit cards, etc).

Morally, you've already spent the money, but not in fact. That's because you spent the bank's money.

I really think it's a way of lying to yourself that what you have in your "savings stash" is something for "future spending".

It seems that you don't understand that there are different classes of assets, all of which serve different purposes.

It's only savings to me when AFTER all future debts are paid off..because only this type of money is truely considered as "money used for future spending".

I acknowledge that you believe what you say, but it's grossly sub-optimal.

For example, if I've got a 4% mortgage and a 2% car loan, but earn 8% in the stock market, then I'm damned well going to pay off those loans as slowly as possible while putting as much into the stock market as possible. That's because I'll earn (that's "earn", not "save") a net 5% through arbitrage.

The same goes for credit cards, but in the reverse. Paying the minimum on a 12% CC while pumping lots of cash into an 8% is as stupid as forgoing 8% to pay off 4% and 2% loans.

[disneysteve]

The same goes for credit cards, but in the reverse. Paying the minimum on a 12% CC while pumping lots of cash into an 8% is as stupid as forgoing 8% to pay off 4% and 2% loans.

Conversely, pouring your money into that 12% credit card rather than getting the 50% match on your company's 401k makes no sense, which is one area where I disagree with Dave Ramsey. (Yes, I understand his system is not about what makes the most sense financially.)

[Singuy]

Morally, you've already spent the money, but not in fact. That's because you spent the bank's money.



It seems that you don't understand that there are different classes of assets, all of which serve different purposes.



I acknowledge that you believe what you say, but it's grossly sub-optimal.

For example, if I've got a 4% mortgage and a 2% car loan, but earn 8% in the stock market, then I'm damned well going to pay off those loans as slowly as possible while putting as much into the stock market as possible. That's because I'll earn (that's "earn", not "save") a net 5% through arbitrage.

The same goes for credit cards, but in the reverse. Paying the minimum on a 12% CC while pumping lots of cash into an 8% is as stupid as forgoing 8% to pay off 4% and 2% loans.

Pumping money into the stock market is not your general definition of "savings". It's closer to gambling than savings. Not everyone is a stock guru or good at making investments(which has a certain type of risks involved..again..opposite of saving). Everyone loves to make up numbers like "12% return on investment(dave ramsey)" or "8% returns on stocks". These are NOT guarantee rate of returns! The guy who bought a bunch of stocks in 2006 probably already committed suicide, while the guy who bought a bunch of stocks in 2008 is laughing himself to the bank and telling everyone how awesome stocks are.

[corn18]

For example, if I've got a 4% mortgage and a 2% car loan, but earn 8% in the stock market, then I'm damned well going to pay off those loans as slowly as possible while putting as much into the stock market as possible. That's because I'll earn (that's "earn", not "save") a net 5% through arbitrage.

There is a different amount of risk associated with paying a mortgage vs. investing in the stock market. You may "earn" negative 40% in the stock market. You will only pay principal + interest on a loan.

It is fun watching you and Singly talk past each other, though.



Tom

[Nutria]

You may "earn" negative 40% in the stock market.

In the short term.

[Singuy]

In the short term.

Again, not guaranteed! People purchase and bet on companies that close down all the time.

I agree with Steve, you shouldn't give away company matching to save or pay off your mortgage because that's a guaranteed free rate of return..but everything else with risks are just not on the same level..apples to oranges.

Next thing I know, you'll start talking like my co-worker..start investing into Draft Kings because he has very good basketball knowledge instead of paying off his student loans faster.

[disneysteve]

Pumping money into the stock market is not your general definition of "savings". It's closer to gambling than savings.

If this is truly what you believe then there is really no point to continuing this conversation. We will all have to agree to disagree.

Over time, no investment outperforms the stock market. Sure there are ups and downs but the long term trend has always been up. If the guy who bought stocks in 2006 killed himself, he didn't know what the heck he was doing. Had he continued to invest and held on, he'd be sitting pretty today as the market has regained all that it lost and more. Without investing in stocks, it is almost impossible for anyone to achieve their financial goals or ever be able to retire.

I agree with you on one point - Dave Ramsey claiming you can expect a 12% return is overly optimistic but a 6-8% return is certainly realistic.

I own several stock mutual funds that I have owned for as long as 23 years. Here are the 10-year average annual returns on those funds. There are actual numbers, not predictions or projections. These are 10-year numbers so this includes the 2008 recession.

VFIAX 7.88%
VWIGX 7.03
VGHCX 13.56
HRTVX 7.09
JANSX 7.86

[disneysteve]

Next thing I know, you'll start talking like my co-worker..start investing into Draft Kings because he has very good basketball knowledge instead of paying off his student loans faster.

There is a HUGE difference between investing and speculating.

[Nutria]

Pumping money into the stock market is not your general definition of "savings".

Sure it is, for everyone else besides you and my father.

It's closer to gambling than savings.

Only if you pick your own stocks and try to time the market.

Not everyone is a stock guru or good at making investments(which has a certain type of risks involved..again..opposite of saving).

Which is why day trading is so imprudent.

OTOH, picking broad market no-load mutual funds (S&P 500, Wiltshire 5000, All Market) and leaving it there is pretty darned safe.

Everyone loves to make up numbers like "12% return on investment(dave ramsey)" or "8% returns on stocks". These are NOT guarantee rate of returns!

There's no guarantee that I won't die of a heart attack this afternoon.

The guy who bought a bunch of stocks in 2006 probably already committed suicide,

I dunno about that... Since June of 2006, the S&P 500 is up 64%. That's an... 8% APR (with dividend reinvestment).

Exactly what I said it would be.

while the guy who bought a bunch of stocks in 2008 is laughing himself to the bank and telling everyone how awesome stocks are.

From June 2008 to June 2015, the S&P 500 grew at... 8.7% APR (with dividend reinvestment).

Bottom line: your assertions have no basis in fact.