What do you count as savings?

[KTP]

I think you are the first person to say retirement accounts don't count as savings. So what do they count as?

Well that is just plain silly. The best savings you have are those growing tax deferred like 401K balances, or tax free like Roth balances.

[PMMM]

Steve, it is in the technical sense savings. But I don't view it in my mind as savings because I cannot access it and use it in the present. I view that as my retirement money.

I accrue each month unused dollars which I consider savings. I would like to keep growing that savings so that one day it will be added to my retirement (401K) and thus make it even easier to live a retired life. As my savings gets larger I want to try and move that to other savings instruments besides a CD. I had my EF in the market but moved it to a CD on advice from folks from this forum. (I didn't want to risk losing the principal.)

I keep hearing that the ROTH is the way to go but have not executed on that yet.

Pat

[disneysteve]

Pat, I wasn't criticizing. It just stood out to me that nobody else had expressed a similar point of view.

Certainly retirement savings are just that - savings. But I understand your point that you compartmentalize that money differently since it isn't actively available to you.

I think I said earlier that my 22% savings rate is for retirement, 529 plan and some general investments not earmarked for any particular purpose. That isn't all the money I put aside each month. That is just the "budgeted" savings. When I go out to buy a car, the cash will come from money not included in that 22%. When we go on vacation, the bills will be paid with money not included in that 22%. I still count that money as savings, though, as it is money not being spent close to the time it is earned and it isn't really needed for any particular purpose. If something more urgent came along, we would skip or scale back a vacation or delay buying a car or buy a cheaper one. So it is liquid savings until the moment it gets spent.

[KTP]

Well technically you *could* pull money out of your 401K, either with the 72T provision or just by paying the 10% penalty tax in addition to income tax.

And it might not be worse than saving the same money in a taxable account and paying tax on the gains every year.

An extreme example:

$100,000 401K, increasing 20% per year tax deferred.
$100.000 taxable savings, increasing 20% per year, paying 25% in federal tax.

After 10 years the 401K would have $620,000 and the taxable account $405,000. If you only needed to withdraw $100,000, doing so from the 401K and paying $50,000 in taxes and penalties would still leave you with $470,000, which is far more than the $305,000 you would have left in your taxable account after withdrawing $100,000.

[Brandan]

Well if you are going to purchase any product of 5$ and the same product is available in other shop with price of 3$ then i will buy that product and save 2$ after it.I thnink its all savings which we save by wasting money ..

[jIM_Ohio]

I'd say no. Just because their existing savings/net worth increases in value isn't the same thing as adding new money from income to the savings.

Personal finance mixes lots of topics, and one usually needs knowledge of 3-4 topics to make decisions and communicate effectively. This situation, and your response is not different.

The best arguments I saw "against" my point of view were the 529 logic and that a comment similar to if retirement accounts are not spent, then that was only way they met my "strict" definition of savings.


My summary as I read responses would focus on savings rate...

Issue #1 is that savings rate is only possible when EARNING money. If a person is not earning money they spend savings or use savings to live on. That is the primary purpose of savings IMO- live on the money when earnings are not high enough.

Issue #2 Net worth is generally Assets-Liabilities. As JPG pointed out a 529 plan can "save" people money over a 1-15 year period (savings comes from tax deductions, less interest paid on borrowed monies and lower investment needed to reach goal), however seeing a 529 plan added to assets on a net worth statement would probably not be a good idea- it is an asset for the child, not an asset for the parent.

Issue #3 is spend less than you earn. If the difference between what is earned and what is spent is set aside for future use, that can be savings, but not all methods of saving are created equal (I liked the response about setting aside the money for the mercedes).

[disneysteve]

seeing a 529 plan added to assets on a net worth statement would probably not be a good idea- it is an asset for the child, not an asset for the parent.

What if I had $30,000 saved in a CD in my name right now? Would you count that in my net worth? If I told you it was earmarked for college costs, then would you count it? How do you decide what does and doesn't count when calculating net worth? If something catastrophic were to happen and we needed that 529 money, we could take it out and pay the penalty, so it is technically still our money.

[jpg7n16]

Issue #1 is that savings rate is only possible when EARNING money. If a person is not earning money they spend savings or use savings to live on. That is the primary purpose of savings IMO- live on the money when earnings are not high enough.

Totally agreed. If there is no new money, it's impossible to set aside new money for later.

Issue #2 Net worth is generally Assets-Liabilities. As JPG pointed out a 529 plan can "save" people money over a 1-15 year period (savings comes from tax deductions, less interest paid on borrowed monies and lower investment needed to reach goal), however seeing a 529 plan added to assets on a net worth statement would probably not be a good idea- it is an asset for the child, not an asset for the parent.

Kinda true.

The main effect to the parent's net worth is when the cash asset comes out for school. So you either lower the parent's cash assets by $54,541 (using monthly payments to 529 plan), or you lower parent's assets by $100k at time school begins.

In either case, the parent's net worth is higher by saving in advance. (either case meaning: if the 529 is considered either the parent's or child's assets)

Issue #3 is spend less than you earn. If the difference between what is earned and what is spent is set aside for future use, that can be savings, but not all methods of saving are created equal (I liked the response about setting aside the money for the mercedes).

I'm more with DS on this one. The method of savings are always equal. The method of spending on the other hand, that's not the same.



If someone properly put away 15% into a 401k, but chose at retirement to purchase a brand new Mercedes, would that have been considered 'retirement savings'?

Well yes. It was saved in a tax deferred retirement account, and for all we knew - was going towards expected costs of living in retirement. The person just chose to spend it in a way that may not be the most beneficial.

Likewise, if someone sets aside a bunch of money today - they could change their mind about the new car and use it for something more worthwhile.


So I'm still more in line with the 'if you're putting money away for something, you're saving' mentality.

[cypher1]

So I'm still more in line with the 'if you're putting money away for something, you're saving' mentality.

I agree with that line. I don' think it matters the time frame of when you actually spend it. Just as long as it's outside of spend less than what you earn formula.

[bjl584]

The easy answer for me would be, any money that I don't spend on daily expenses or on bills would be savings.

I've debated with myself as to whether a mortgage payment could be considered saving. I don't consider it saving per say, but it is a payment in a house that I live in. An asset of sorts I suppose.

So, Car payments, utilities, fuel, food, fun money, would all be a "no" for saving.

Everything else, mortgage, retirement, EF, various funds for future purchases, would be a "yes."

[disneysteve]

I've debated with myself as to whether a mortgage payment could be considered saving.

I don't think the regular payment counts as savings. I do think extra money paid to principal counts as savings since it reduces the interest you will pay over the life of the loan. If your loan is at 5%, every $100 extra you pay on principal saves you $5 in interest (ignoring the tax deduction).

[bjl584]

I don't think the regular payment counts as savings. I do think extra money paid to principal counts as savings since it reduces the interest you will pay over the life of the loan. If your loan is at 5%, every $100 extra you pay on principal saves you $5 in interest (ignoring the tax deduction).

But part of the regular payment does go toward principal, so could one consider that part as savings? Making the regular payment won't reduce the amount of interest that you pay over time, but it does increase your equity in the property.

[cypher1]

But part of the regular payment does go toward principal, so could one consider that part as savings? Making the regular payment won't reduce the amount of interest that you pay over time, but it does increase your equity in the property.

I look at a house as a want, not a need like renting. And since we don't own our homes until mortgage is completely paid off, I would argue that it wouldn't be savings, unless its extra payments for principle, or a separate property. I guess its hard for me to understand counting your home not fully owned, as an asset, instead of debt. Whereas if it was for a business/self employment, I see it as an asset for overhead, or collateral.

[disneysteve]

But part of the regular payment does go toward principal, so could one consider that part as savings? Making the regular payment won't reduce the amount of interest that you pay over time, but it does increase your equity in the property.

That's true, but I count the scheduled payment as part of my regular monthly expenses. I count the extra payments as savings.

I think all savings is discretionary money. My mortgage payment isn't discretionary. I don't get to decide whether or not to make it each month or how much to pay. That is predetermined. I do get to decide how much extra principal to pay, how much to put in our Roths, how much to add to the 529, etc.

Savings is money set aside in addition to your monthly expenses.

It is true that building equity increases your net worth, so from that standpoint, the portion of your mortgage payment kind of counts as savings. I just don't think of it that way. On a related note, the government also doesn't count increases in home equity when calculating the national savings rate.

[bjl584]

So then, a mortgage payment goes into the catagory of expense, and anything that is paid toward extra principal is considered saving.

That's a good rule of thumb to follow.

I've never really considered my mortgage as saving, just an increase in net worth as you said.