Calculated Saving Percentage Include Chunks of Debt Repayment?

 Golfer68 

Participant

Status: Physician

Posts: 38

Joined: 02/08/2017

Earnest refinancing bonus

First year as attending about to be completed and wanted to calculate saving percentage rate to see how we were doing.  Over the year we maxed out 401k, 401a, gov457, HSA, 529, back door and did some taxable account . . . we then were deciding between more taxable account or paying off $30,000k to kill our private student loans (have additional 225k in PSLF, 6/10 years) . . . we opted loan repayment because they were at 6.8% . . . do we get to count the 30,000k towards saving percentage?

CordMcNally CordMcNally 

Participant

Status: Physician

Posts: 407

Joined: 01/03/2017

There’s no hard and fast rule. Some people include debt pay down, some people don’t. In the end it doesn’t really matter. While paying off debt isn’t technically savings, it does increase your net worth.

“But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
― Benjamin Graham, The Intelligent Investor

 Peds 

Participant

Status: Physician

Posts: 926

Joined: 01/08/2016

Nope.

Good thing you can do whatever you want though.

 ajm184 

Participant

Status: Other Professional

Posts: 365

Joined: 07/14/2017

While paying off debt isn’t technically savings, it does increase your net worth.

Click to expand…

Paying off debt does not do anything toward increasing NW short term.  When you pay any debt, you reduce both the debt (a liability) and cash (an asset).  Paying off debt while contributing to other savings (and future avoidance of interest) over the long term should increase a person’s NW (under the assumption there is not substantial unrealized losses in your investments.

The OP needs to determine if paying the opportunity cost of paying off 30K in debt and the associated interest versus the potential reward of investing that 30K for an expected return.

IMO, I would pay down debt based on our President’s fascination with tariffs.  Equities would be have to be a component on the investing side to potentially generate a return greater than the ongoing interest expense.

CordMcNally CordMcNally 

Participant

Status: Physician

Posts: 407

Joined: 01/03/2017

While paying off debt isn’t technically savings, it does increase your net worth. 

Click to expand…

Paying off debt does not do anything toward increasing NW short term.  When you pay any debt, you reduce both the debt (a liability) and cash (an asset).  Paying off debt while contributing to other savings (and future avoidance of interest) over the long term should increase a person’s NW (under the assumption there is not substantial unrealized losses in your investments.

The OP needs to determine if paying the opportunity cost of paying off 30K in debt and the associated interest versus the potential reward of investing that 30K for an expected return.

IMO, I would pay down debt based on our President’s fascination with tariffs.  Equities would be have to be a component on the investing side to potentially generate a return greater than the ongoing interest expense.

Click to expand…

While not technically true, I think people get what I mean. It’s a guaranteed return (savings) which will increase your net worth in the long run, just like investing should increase your net worth in the long run.

“But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
― Benjamin Graham, The Intelligent Investor

 hightower 

Participant

Status: Physician

Posts: 1076

Joined: 12/07/2016

Earning money is what increases your net worth as long as you dont spend it. Not spending it can be either because you saved it or paid off debt. Both of those scenarios result in a higher net worth.

MPMD MPMD 

Participant

Status: Physician

Posts: 999

Joined: 05/01/2017

I’ve always thought that calling debt payment part of your savings rate was kind of gimmicky, but ultimately you are in this battle with yourself and not other people.

Think about it if the debt was a $100k vehicle that you financed last year, it would be pretty weird to call extra payments on that part of your savings rate.

 Anne 

Participant

Status: Physician

Posts: 261

Joined: 11/07/2017

Personally, I wouldn’t. Paying down debt is just paying back money you’ve already spent, so it doesn’t count as saving in my mind. But I also don’t think it matters too much–savings rate is just another number that can be manipulated a variety of ways to make yourself feel better. Given that you are making good decisions already, whatever you do to motivate yourself is great.

Dr. Mom Dr. Mom 

Participant

Status: Physician

Posts: 470

Joined: 02/27/2017

I never bothered with calculating a savings percentage.  I follow net worth annually and paying down debt shows up there.  It really only matters what you decide to do for yourself and to stay consistent with it over time.  Congrats on taking control of your finances.

 saildawg 

Participant

Status: Physician

Posts: 117

Joined: 01/24/2016

I count principal paid as savings, and interest paid as expense.  I do the same for the mortgage.  Either way you are increasing your networth, so congrats on paying off the loan.

jfoxcpacfp jfoxcpacfp 

Moderator

Status: Financial Advisor, Accountant, Small Business Owner

Posts: 5104

Joined: 01/09/2016

The main point is that you are consistent with calculating your savings rate. Don’t measure it against anyone else’s definition but against your own. That will give you a benchmark going forward.

In one of the rare instances I disagree with @cordmcnally (hurts to admit it  😥 ), paying down debt does not increase net worth. It only turns an asset into a reduction of a liability. The net effect is zero, no matter what the future effect is. Otherwise, you could be excused for saying that borrowing money increases your net worth.

Regardless, it sounds like you (OP) have a good head on your shoulders and, if you continue on this path, you will do well.

Johanna Fox Turner, CPA, CFP | 270-247-0555
FoxWealthMgmt.com/for-doctors-only | Fox-CPAs.com/for-doctors-only

ENT Doc ENT Doc 

Participant

Status: Physician

Posts: 1336

Joined: 01/14/2017

I think a merger of philosophies is in order. Technically, shifting cash (asset) to pay off debt (liability) has a net effect of zero on your immediate net worth. However, and I believe this is Cord McNally’s point, the manner in which you move things around on a balance sheet, while perhaps neutral now, has a meaningful long term effect.

You always want to do things that optimize your future self. Don’t be fooled into thinking that two decisions that both have a net zero effect on your current net worth are equivalent. Cash is waiting to become something (opportunity cost, as ajm184 alluded to). A simple example that illustrates this is shifting $100k into TSM or into a Tesla. The latter was a bad decision on multiple levels 😉 as the TSM index will become something of greater value.

So forget about what a decision has on your immediately current net worth. Look to what effect that decision will have on your future net worth and if that optimizes your future self for when you actually care about what that net worth is (draw down in retirement). Calculating that as savings or not is less meaningful than the fact that you positively affected your future self. As for the optimal decision, this has to do with assumed returns on your asset allocation (which should be assessed absent trade policy imo) and the known negative effects of the alternative (debt) over multiple periods. I would pay down the debt before any taxable because of the interest rate, guaranteed return, avoidance of fixed costs, and future (assumed) leverage with a mortgage.

CordMcNally CordMcNally 

Participant

Status: Physician

Posts: 407

Joined: 01/03/2017

I do agree that what I wrote is wrong (although it sounded right in my head!  😉 ). @ENT Doc put it much more eloquently than I did. Whether you take that asset and convert it to liability reduction (pay off debt) or convert it to another asset (invest), those both have a meaningful long term effect that tends to increase net worth in the long run.

“But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
― Benjamin Graham, The Intelligent Investor

 Sneezy 

Participant

Status: Physician

Posts: 86

Joined: 01/11/2016

I count any “extra” I pay toward my mortgage as savings but not the monthly payment.  You could argue this a million ways but that seems most logical to me (either investing or paying down debt is preferable to spending)

Also, isn’t it true that taking cash and investing it doesn’t change your net worth short term?  If I have 10k in my bank account and I buy a mutual fund with it, my net worth hasn’t changed, right?

 

 Ryan 

Participant

Status: Physician

Posts: 164

Joined: 01/08/2016

The main point is that you are consistent with calculating your savings rate. Don’t measure it against anyone else’s definition but against your own. That will give you a benchmark going forward.

In one of the rare instances I disagree with @cordmcnally (hurts to admit it   ), paying down debt does not increase net worth. It only turns an asset into a reduction of a liability. The net effect is zero, no matter what the future effect is. Otherwise, you could be excused for saying that borrowing money increases your net worth.

Regardless, it sounds like you (OP) have a good head on your shoulders and, if you continue on this path, you will do well.

Click to expand…

This may be all relative to how you keep track of net worth, but in general Assets = Liabilities + Net Worth. Paying down liabilities with new cashflow has the same effect of increasing net worth as putting it into new investments or keeping it in cash (assets) does. Toward your borrowing example, borrowing increases assets and liabilities equally and is net worth neutral.

Paying debt reduces future interest charges, which are not deductible in the case of student loans for op’s income level. In fact, paying down a fixed rate 6.8% loan is probably better financially then any thing else right now outside of tax-advantaged or matched accounts and emergency-fund building, assuming those loans can’t be refinanced.

To the op, you have a significant debt load. How you track your “savings percentage” depends on the context. But, 6.8% student loans represent a 6.8% guaranteed after-tax return, which is not really possible in today’s market. So, if calculating your savings percentage including loan payments makes you more likely to take advantage of the 6.8% return– do it that way.

I’m a physician. I also write software and build websites as a side-gig.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.