The Financial Samurai Podcast Episode 2: Is Paying Down Debt Considered Savings?

Financial Samurai PodcastA reader asked on my post, The Average Savings Rates By Income, whether I consider paying down debt part of my personal savings rate calculation. My immediate thought was yes, but I realized I haven’t been including debt pay down at all when I discuss my after-tax savings rate of 50%+ in various posts on Financial Samurai.

Here is the outline of today’s 17 minute podcast.

Why I Don’t Include Paying Down Debt In My Personal Savings Rate

1) Be conservative. Don’t rely on anybody or any organization to survive. There are a lot of broken promises out there.

2) You don’t reward yourself for doing something bad. Punish yourself instead.

3) Compartmentalize your money. No co-mingling of funds.

By the time you retire, if your property is paid off and you get social security and your 401k then fantastic. If not, then you’re still OK, because you never expected anything from anyone in the first place.

The only time I would consider including paying down debt as part of my personal savings rate is when I pay extra principal down on my primary mortgage. The extra principal pay down could have been used for other wealth-building activities, so including it should be OK. The thing you want to be careful about is being house rich, and cash poor. There’s a balance you’ve got to carefully work out over the years.

Readers, Do you include paying down debt in your personal savings rate? If so, what are the reasons why?

Speaking notes: I appreciate everybody’s feedback from my first podcast entitled, Genesis. About 60% of you seem to want shorter podcasts, so I’ve decided to produce a much shorter 12 minute podcast and see how it goes. In terms of speed, pitch, and tone it doesn’t look like I have a problem based on your comments. But I’ve sped up my speaking speed in this podcast to test. A couple of you mentioned I should be more enthusiastic in delivery and not be afraid of laughing at my jokes. The style I’d like to emulate are the shows from NPR where no matter how crazy the subject, the speaker stays within his zone. I like NPR’s style, so that’s what I plan to go with for now.

To listen to the podcast, click Play to have it play within the post. You can also download the podcast onto your computer or phone by clicking Download. If you don’t see the options in e-mail, click the title of this post to come to my site. 

Related posts:

Use FS-DAIR To Decide On How To Pay Down Debt Or Invest

The Recommended Net Worth Allocation By Age And Work Experience

Pay Down Debt Or Invest? Implement FS-DAIR

Financial Freedom In AmericaThe decision to pay off debt or invest is a personal one that depends on a lot of factors: risk tolerance, your number of income streams, liquidity needs, family expenses, job security, investing acumen, retirement age, inflation forecasts, and bullishness about your future in general. I’ve had hundreds of people ask me this question over the years, and I’ve also struggled to figure out a good guideline for myself.  As a result, I’ve been racking my brain to figure out a viable solution that can be used by many.

The solution I’ve come up with is called, “Financial Samurai’s DAIR” or “FS DAIR” for short. The idea is to come up with something easy to remember, challenging, logical, and effective, much like the 1/10th rule for car buying to help folks maximize their wealth. Even though plenty of people have objected to my 1/10th rule for being too restrictive, I strongly believe the rule has helped people minimize financial regret and boost the incredible feeling of progress and financial security.

Since we are all CFOs of our finances, we need to figure out the most efficient use of capital. My goal is to make personal finance simple so ACTION can be taken. All talk and no action leads to nothing. I’d like to “DAIR” you to follow my debt pay down rule to achieve financial freedom sooner, rather than later.

Steps To Get Out Of MASSIVE Credit Card Debt Due To Lifestyle Inflation

Lifestyle inflation and a mega yachtI don’t discuss too much about credit cards on Financial Samurai because I’ve only got three (a travel rewards card, a generic rewards card, and a corporate card) and nothing much happens except for racking up rewards points. Definitely use a credit card for convenience, safety, rewards points, and insurance protection if you can control yourself. But if you’re not careful, thanks to the ease of use and absurdly high interest rates, problems may ensue.

The following is a guest post by Debs, a middle income earning new grandmother who was able to amass over $140,000 in credit card debt! I asked her to share her story on how she did it, and how she is getting herself out of debt. Kudos to Debs for having the courage to share her story.

It’s embarrassing to admit, but I tell this tale as a warning to all people like me who are on the bandwagon of lifestyle inflation, “I deserve” and family struggles that may cause you to take your eyes off the ball and wake up one day to say “How did I get here?”.

We weren’t addicted gamblers or smokers. We didn’t have a lot of fancy toys. We drank moderately and yes, we had four kids and a large home to boot (purchased in 1991). Maybe a few travels thrown in here and there, but not excessive. There was some shopping for work clothes and things for our home. Maybe a bit of stress relief shopping, but nothing extravagant. That is my first message.

Our debt crept up on us without even realizing it. At least I didn’t realize the size it had grown to. I wasn’t watching the finances. I was only working hard to contribute to the family income. That was enough, or so I thought.

How Much Is The Average Credit Card Debt Per Household?

Average Credit Card Debt Per Household

How many times have you withdrawn a wad of cash only to see it disappear a few days later with little idea where it all went? By putting as much expenditure on my credit cards as possible I get a handy dandy pie chart and expense line breakdown at the end of every month to see where my money is going. Furthermore, I get all those juicy rewards points that really begin to rack up over time.

The average household owes $15,191 based on data from the Federal Reserve and Nerd Wallet, a credit card lead generator. They also throw out a $7,191 number for average credit card debt for “non-indebted households.” According to the Experian Intelliview tool, the average credit card balance per consumer was $3,779 in 1Q2013. However, consumers with low credit scores – like a “D” in the VantageScore range – had average credit card debt of $5,965. Finally, according to CreditCards.com the average credit card debt per U.S. adult, excluding zero-balance cards and store cards is $4,878. The average debt per credit card that usually carries a balance is $8,220. And the average debt per credit card that doesn’t usually carry a balance is $1,037 (must equal spend).

It’s hard to figure out what’s the right number because they seem way too high and all over the place given the median household income is around $51,000. One way to finding a better average credit card debt and spend number is to simply get more datapoints with a short four question survey below.

The impact on the amount of average revolving credit card debt per household is largely determined by income. You might have an astounding $15,000 in revolving credit card debt, but if you are making $1 million a year, who cares? The more pertinent measure is average revolving monthly credit card debt to average monthly gross income.

What’s confusing is that it’s unclear whether people who pay off their credit card bills every month are also included in the average credit card debt per household. After all, when I charge something on my card, I have interest free debt for 28-31 days, depending on the month, until I pay the bill off in full. The solution is to simply calculate the average credit card spend a month to the average monthly gross income, and calculate the average revolving credit card debt a month to the average monthly gross income to get a more thorough picture.

From Debtor To Millionaire: How A Windfall Changed My Life

This is a guest post from J.D. Roth, who founded the blog Get Rich Slowly in 2006 and is the author of Your Money: The Missing Manual. I first met JD four years ago for lunch up in Portland when I was still working. By that time, J.D. was already a mini-celebrity in the personal finance world through his story telling abilities and topical focus of paying down debt and living a more frugal lifestyle. We came from opposite ends of the financial and topical spectrum, but as fate would have it, we’re in pretty similar boats now.

I admire J.D. because he is a “blogging purist” – someone who writes for the love of writing first, community second, and income a distant third. Instead of an interview, I asked J.D. to share his story of how he went from debtor living paycheck-to-paycheck to financially free in just a few short years. His latest project is a year-long course on how to master your money, which explains how to slash costs, properly budget, and boost income so that you can pursue early retirement and other goals. Please enjoy this great post about struggle, loss, change, and love. 

In The Beginning

My parents

I’m a lucky man, and I know it. But for a long time, it sure didn’t seem that way.

When I was a boy, my family was poor. We lived in a single-wide trailer house in rural Oregon. My father was often out of work. When he was unemployed, things were rough. We never went hungry, but sometimes we came close. More than once, we were bailed out by the kindness of other families in our church.

We didn’t always struggle. Sometimes my parents had money, at least for a little while. You see, my father was a serial entrepreneur. He was always starting businesses. Even when he had a job selling boxes or staplers or candy bars, he had something going on the side. Most of his businesses failed, but some succeeded.

In 1977, my father sold one business for $300,000. He was supposed to receive $5000 per month for fifteen years, which seemed like a lot of money at the time. To celebrate, he went out and bought an airplane, a sailboat, and a Kenwood stereo. Life was good — until the buyer went bankrupt. Because he hadn’t saved anything from the few payments, Dad was broke again. And unemployed. We were right back where we’d started.

This “famine or feast” pattern continued throughout my entire childhood. Most of the time, it was famine — not feast.

In the late 1980s, I went away to college. Because I knew my parents couldn’t help me pay for school, I took care of things myself. I was a good student with a lot of extracurricular activities: president of the computer club, national competitor in Future Business Leaders of America, editor of the school literary magazine, and so on. Plus I had terrific scores on the the PSAT and SAT. As a result, I earned a full-ride scholarship. I worked two or three or five jobs to pay for housing and to earn spending money.

During college, I developed a spending habit. In order to keep up with my friends, many of whom seemed to be rich (as I defined it at the time), I used credit cards. I began to carry debt. At first, I only owed a few hundred dollars, but by the time I graduated with a psychology degree, I had a few thousand dollars in credit-card debt.

After college, my debts continued to mount. I bought a new car. When I had money, I spent it. When I didn’t have money, I still spent it. By the middle of 1995, just four years after I’d graduated, I’d accumulated over $20,000 in credit-card debt. It got worse. In 2004, my consumer debt topped $35,000. I felt like I was drowning. (See: How Many Credit Cards Should I Have Until It’s Too Many?)