[cableshaft]

"Some of these payments are applied to the principal on their loans, which increases the couple’s net worth by either building their home equity or by reducing their student debt. So that’s also savings."

I don't count paying down a debt as "savings". It might be an increase in net worth but not savings.

If paying down debt is considered "savings" now, then the entire USA is "saving money". But I think that not only goes against the definition, but the spirit of the idea.

[ChuckMcM]

It sounds like you missed the key point "some of that money is going to principal".

Let's say you bought a house for $100K and for this argument it can always sell for $100K. And you have a 30 year fixed mortgage on it (debt for 30 years). After paying on that debt for 10 years, the principal remaining on the loan is down by about 20%. Now if you sell the house for $100K, you get back in cash $20K.

See how that works? You "saved" $20K over 10 years by making mortgage payments.

It is a little trickier with student loans because really what it means as you pay down your student loans is that you "owe less". Conceptually, if you decided to zero out your accounts, pay all your debts, sell all your assets. Then the amount of money left over would be "more" if you had spent 10 years paying down your student debt than if you had not. That difference is calculable and adds to your "net worth" (your cash value after zeroing everything out).

[war1025]

Anything that increases net worth, by definition, increases your net worth. That means you are using a currently surplus to pay down previous deficit.

The issue most "common people" have is they increase their debt load rather than paying it down.

[RyanCavanaugh]

Income - Spending = Savings. It's an accounting identity.

A common trick people pull in the shitty version of these articles is counting savings as "spending" and then declaring that "At the end of the month, there's $0 left!", because by definition if you count savings as spending, then you never "save" anything.

Let's say I have a $100k mortgage, take in $1000 a month, and spend (in the true sense of the word) $500. Whether I apply the remaining $500 to my mortgage balance or put it in my savings account has no material bearing on my net worth. The unspent money is "saved" whether it goes into cash reserves or debt reduction.

[Areading314]

This doesn't make any sense -- paying down debt instead of SPENDING the money increases net worth and is ultimately the same as socking money into a savings account if you're debt-free.

[michaelmrose]

If your car dies and you can't get to work you can use your savings to fix your car so you can keep earning money.

Paying down your debt MAY increase the likelihood that you can borrow again. In the long term not paying interest on it will increase your income over time certainly but in the short term decreased debt and increased savings aren't interchangeable.

[imtringued]

If they are truly strapped for cash because their house burned down but they don't have insurance they can still try to do without expensive vacations and other non obligatory expenses. If you can afford to keep paying $60k a year for 30 years for something that does no longer exist then there is no short term risk that is meaningfully destructive to your life.

[Areading314]

Not if they pay for the car repair with debt, i.e. with a credit card. Not saying this is a good idea, but it makes more sense to pay down existing CC debt than to put money into a 2% savings account in case your car breaks down..

[menzoic]

All debt isn't the same. I see it as savings when the debt is backed by an asset like a a mortgage is, then paying it down gives you more equity in the asset. If you sell the home, this equity converts into cash. You could also get another low interest loan with the equity. It's just as much savings as a 401k which can go up or down but generally up in value over long periods of time. Paying off another type of debt like student loan debt doesn't have the same benefits.

[deathanatos]

First, I totally agree that that argument is terribly worded. Nonetheless:

a. against that median $30k income, you're building equity, which is net worth. Someone on $30k might be paying rent (and they're not able to afford a mortgage), and thus, that money is just a flat expense.¹

b. w.r.t. student loans, someone making $500k/yr is going to be able to pay vastly more into that loan, and pay down the principal a lot quicker, which will translate to lower interest costs, vs. someone making $30k/yr. (Depending on whether this is parents or the student, if that rate could be refinanced or not, etc., I would also think a $500k/yr might also net you a lot lower interest rate due to the risk of your inability to pay being significantly less.)

¹and yes, houses have their own issues, such as maintenance, and some of that mortgage is going to interest.

[ralph84]

It absolutely is savings. Compare two people:

Person #1 - Makes $6000/month

- Has an interest-only mortgage payment of $1000/month (yes it's still possible to get interest-only mortgages)

- All other expenses are $4000/month

- Puts $1000/month in a savings account

Person #2 - Makes $6000/month

- Has a mortgage payment of $1000 interest + $1000 principal = $2000/month

- All other expenses are $4000/month

Person #1 and #2 are saving the exact same amount of money. Over time if nothing changes Person #2 will actually be saving more, because the interest portion of the mortgage payment will decrease and the principal portion will increase.

[bluGill]

This isn't right. Over time Person #1 should have more savings. Loan interest rates are very low, person #1 shouldn't be putting the money into a savings account, he should be using a better investment. Person #2 is now forgoing the higher return of stocks to pay off the mortgage.

It gets worse for person #2. The house is probably changing in value. If the house goes up in value person #1 is ahead because that money is all his, on the $10k investment, person #2 has a much larger investment to get the same return. If the house goes down person #1 has at most $10k to lose, while person #2 can lose the entire value he has paid in so far.

Of course eventually person #2 has the house paid off and has $2000 to work with.

[ralph84]

What does any of what you wrote have to do with whether or not it's savings. You're just saying you think some forms of savings are better than others.

[bluGill]

I'm responding to the last sentience where you says person #2 was better because he was paying off the mortgage.

[ralph84]

I didn't say #2 was better, I said he was saving more. It's certainly possible to design any number of scenarios where someone who saves more ends up with less in the end.

[dagw]

The caviates here are a finite time horizon, whether or not you ever plan on selling your house and whether or not you care about what sort of inheritance you want to leave. If person #1 and #2 both live in their houses until they die and don't have anybody they want to leave their money to then it depends on how many years there are between #2 pays off his loan and when he dies (since from your perspective all your loans are cancelled when you die)

[imtringued]

They still benefit from fixed prices while rent can keep going up.

[IanCal]

I think people are really missing their point.

You show the change in net worth, but they're saying that they see savings as different and I get what they mean.

Person 2 in your example has the same net worth but not the same access to the money. If a sudden bill comes in then being $2k lower in my debt vs $2k in a savings account are functionally very different.

That's not to say one is right or wrong, but they are different.

[shiftpgdn]

Can you give more details on the interest only mortgages? I haven't seen that offered anywhere.

[ralph84]

You need a portfolio lender since the GSEs won't buy an interest-only mortgage. Union Bank, Navy Federal, and SoFi are some examples.

[MuffinFlavored]

> interest-only mortgage

Why would anybody ever do this?

[dagw]

If your interest is 2% and you believe you can get 4% from some other investment, then some people might ask themselves why 'invest' in paying off your mortgage?

[jayd16]

Its considered a savings because you're increasing equity in the house, which you can later resell. Its not a general statement about debt.

[bumby]

My guess is the author considers it savings because you are contributing to net worth presumably by:

1) increasing home equity, which increases your net assets 2) increasing earning potential via education, which increases your ability to acquire future assets

Both come with assumptions of course (like the home value stability/appreciation or the education actually resulting in higher earnings).

[gwbas1c]

It all depends on the interest rates.

If I can invest with a 10% return, and can borrow at 0%, I'm better off borrowing as much as I can to invest.

But if I have to borrow at 10% and can only invest at 0%, paying off debt is better than saving.

[sys_64738]

Paying off debt is always better than investing the money. Nothing beats being debt free.

[IanCal]

There is not a simple answer to this, because it depends on your attitude to risk.

> Nothing beats being debt free.

Depending on your risk appetite, being debt free can come more quickly by investing than by paying off debt.

Your suggestion would mean nobody saves for retirement while they have a mortgage, for example. Fine if you are happy with very little risk, but for many that would be a bad option (waiting until you are 50 to start paying into a pension).

[ajross]

Paying down debt against an appreciating asset absolutely "counts as savings". Every dollar applied against the mortgage principle is an extra dollar of net worth.

[IanCal]

There's a significant difference in liquidity though.

Savings, net worth and other similar things should always be worked out in context.

[wilg]

Can you explain in more detail why you don't consider it savings? Maybe it is obvious but I am curious.

[bunderbunder]

At least to me, it's about how things are ordered in time.

Paying down debt is setting money aside to pay for something you bought at some point in the past.

Saving is setting money aside to pay for something you might buy at some point in the future.

[NortySpock]

Think of debt simplisticly, as negative savings. If you have debt, your net worth is "below zero". If you have 10k debt and 10k savings, your net worth is still (simplisticly) zero.

So, far from thinking about credit availability or credit worthiness, if you just think of debt as negative savings, you can see debt and savings mutually annihilate (like matter and antimatter), and sum to zero.

Debt is a wonderful, powerful invention -- but for many people who are unaware that debt costs interest, this simple model can help them reason about debt and decide to pay it off rather than letting it linger or taking out more debt.

[perfmode]

If I have a personal savings goal, and on a particular month I miss it, do I suffer the same consequences if I instead owed the bank?

Debt is tied to enforcement, often punitive enforcement.

There is an element of freedom buried in these that I am trying to suss out. I am reluctant to use evocative words to describe what lies beneath the obligations of debt, but I sense there is a qualitative difference under the surface.

[nopriorarrests]

If you have used debt to buy a deprecating asset (car or almost anything you can buy with credit card, like iphone) you are not saving. In a long run, your asset will cost 0, and you haven't saved a penny.

[dagw]

Let's say that instead of paying down $100 dollars a month on the principal of the loan they'd only paid the interest and stuck the $100 in a savings account. Would you consider that savings? Would you consider it better to have $0 in debt and $0 in your savings account than being $1000 dollars in debt and having $1000 in your savings account.

[lutorm]

I thought they were referring to principal payments on a house mortgage.

[nopriorarrests]

Even in this case, your house value can take a sudden plunge. Savings are savings, they are not going anywhere. It's money that sits in your bank account and you always know how many years without work you can afford.

[dagw]

So when I put money every month into an index fund, that doesn't count as savings?

[imtringued]

Yes it boils down to this. People don't count things that increase your networth as savings (or in other words: nothing counts as savings). Therefore everyone's savings is somewhere around $0.

[nopriorarrests]

With index fund you can at least have stop-loss order in place. It's hard to set stop-loss order for house.

[cableshaft]

House mortgage wasn't what I was referring to specifically. I meant more the paying down student loan debt.

[rohit2412]

I guess then net worth should be seen as savings