Can Paying Off Debt Be Considered Personal Savings

Can Paying Off Debt Be Considered Personal Savings

So there are all kinds of rules of thumb for saving for retirement. Some experts say you should put in 10%, 15% or 20% so that you can have an adequate sum of money at your retirement age of 65. Then there are others who advocate for a savings rate of 50% or more. Now some of you who are reading this are thinking to yourself that is crazy how can anyone save 50% of their income and survive in today’s America. Mr. Money Mustache has a great post and formula about your savings rate and how one can reach financial independence quickly. J. Money also has a great post on living on just 50% of your income. This might not convince some of you out there, but it can be done.

Now I fully admit that I love the idea of a 50% or more savings rate because that will get me to financial independence much quicker. However, I also think sometimes it is impossible because of how much personal and mortgage debt that I have. Then I got to thinking, inspired partly by Financial Samurai’s excellent podcast, what if debt payments can be considered part of your savings rate? I mean why couldn’t it? In my opinion to be truly financially independent you have to be totally debt free. Each debt payment I make and then some gets me to that goal. So the question is can paying off your debt be considered part of your savings rate?

Intellectually, I like the idea that it does because it means my savings rate is much higher than I think. I mean each month I spend probably over 50% of my take-home pay to debt of some kind (mortgage, student loan, personal debt). On top of that, I save another 20% or so in retirement accounts of some kind. So that would give me a savings rate of almost 70%. Yay for me!

Considering the average personal savings rate in the United States is a measly 5% saving that much money is pretty good. Now of course that 5% doesn’t include debt payments of any kind so it would probably be much higher among many Americans.

Here are a few reasons why I think it can be part of how I define my savings rate.

  • That money, as I mentioned, is being used to bring me closer to financial independence so every bit helps.
  • I am paying off my mortgage faster and that is considered part of my overall assets. The more mortgage debt I pay down the less money I will need in my retirement accounts to be truly financially independent.
  • Once monies have been used to pay off debt I plan to use those monies to increase paying off my mortgage and/or increase savings to accelerate financial independence.

There are a couple of caveats to this idea though. If we include debt payments in our personal savings rates it might encourage people to take out more debt and buy stuff they don’t need. Perhaps, that is why some people I have read only consider mortgage payments to be part of their savings rate because at least with that asset it will eventually appreciate (not withstanding 2007-2011) in some value. Depreciating assets like cars, clothing and others don’t help reach larger savings goals.

Moreover, if debt payments are included in their savings rate then they might not consider putting more of their money into retirement plans, 401ks, etc, which are absolutely to a healthy financial life in the future.

Finally, including debt payments and personal savings rates really only works if/when you pay off that debt and you continue to save that money. If you just go out and spend it well then you really weren’t saving to begin with.

Ultimately, this is nothing more than an intellectual exercise and I don’t have a definitive answer. I struggle with it because I know that if I paid off my debts tomorrow I might be tempted to use some of that money to inflate my lifestyle, which is fine on some levels, but not necessarily for accelerating larger financial goals.

So I guess I will pose this question to others: Can debt payments be part of your overall savings rate? Why?


4 thoughts on “Can Paying Off Debt Be Considered Personal Savings

  1. I think paying off debt can definitely count as savings, since it’s increasing your net worth. I’m definitely counting it for me. I could save more and get .5% interest on it in the bank, or put it towards loans that I’m paying 6.5% on. Obviously paying the loans makes more sense, raises my net worth, and saves even more money in future interest!

    1. Hi Daniel, thanks for stopping by. I definitely think it can. i guess of course it is what is going too….i personally like to think that my savings rate is extremely high because of all of the debt i am paying off, but at the same time I struggle with it. however, it does increase my net worth, which gets me closer to financial independence.

    2. Thoughts and plans for what my life will be like without debt are what keeps me going every day! My whole adult life has been lived anruod keeping up with student loan debt payments (I was a sadly ignorant teen who never questioned the agreements I was signing in college). I feel like I’ve been waiting 12+ years already just to start my life (with another 3 or so to go!). I will travel I can’t wait to see the world. I will also likely change my career path to something non-profit working with animals, as the corporate office work I’ve done for the past decade is because of salary and job security (to keep up with the debt payments), and is not at all fulfilling. I’ll definitely be saving more in general, and saving more for retirement too. I’m just looking forward to not worrying so much about money and payments all the time!!

Comments are closed.

Comments are closed.