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?