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

Financial Samurai Podcast

The Financial Samurai podcast episode 2: is paying down debt considered savings?

A 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. 

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I've created a Financial Samurai iTunes channel to subscribe to. This way, if you prefer listening, you can always get the latest audio version delivered directly to your iPhone. As of now, the channel can only carry the latest five podcasts.

Further, I've created a Financial Samurai Podcast Page that has every single podcast I've published, including the links to the respective posts. Bookmark it or search for it in my search box. I'll be updating this page once a week. It is the best personal finance podcast today.

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

Recommendation To Build Wealth

Manage Your Finances In One Place: One of the best way to become financially independent and protect yourself is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize your money.

Before Personal Capital, I had to log into eight different systems to track 25+ difference accounts (brokerage, multiple banks, 401K, etc) to manage my finances on an Excel spreadsheet. Now, I can just log into Personal Capital to see how all my accounts are doing, including my net worth. I can also see how much I’m spending and saving every month through their cash flow tool.

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The Financial Samurai podcast continues to go strong in 2021+. I plan to continue releasing one Financial Samurai podcast episode a month forever.

37 thoughts on “The Financial Samurai Podcast Episode 2: Is Paying Down Debt Considered Savings?”

  1. I definitely consider paying off my debt as part of my savings rate. When “saving,” I’m usually thinking about increasing my net worth. Whether that’s done through paying off debt or through investing doesn’t make a whole lot of a difference – the real difference has to do with the interest rates. Paying off my student loans at 6.55% makes sense when the market is returning 4%. Paying extra on my student loans makes less sense when the market is returning 8%. It’s hard to play the market, so I even it out and put some towards both. I overpay my student loans so that I’ll have them paid off within five years of graduation instead of ten, and I also max out my Roth IRA and contribute to a 401k.

    A lot of this discussion is psychological. If thinking of paying debt as savings leads you to incur more debt instead of paying off your debt and moving into more real savings, then yeah, that’s problematic. If you are lowering your spending in the short-term (but not in the long-term) in order to make payments on your debt, then that’s not saving.

    But if you have debt that’s in the past that you are trying to pay it off so that you can contribute more to your retirement afterward, then I think it’s completely valid to consider that part of your savings. Financially, a $50,000 net worth is a $50,000 net worth – whether that means $100,000 in a 401k and $50,000 in debt or $50,000 in a 401k and $0 in debt (ignoring things like taxes, for the moment). Maybe you’re closer to retirement in the first case, but you’re further from financial freedom. And in the second case, you’ve probably saved a bunch of interest.

    When I don’t have monthly loan payments, I’m not planning on using that extra cash to splurge on clothes and TVs and whatever. I’ve established a lifestyle where I spend x% of money each month and I’m comfortable with it, and I would expect approximately that spending rate to continue after my debt is paid off, going to additional savings instead.

  2. I consider anything that increase your NW to be savings. However, I do not consider paying off credit card debt as savings.

    As for paying down mortgage, if it’s investment property that generate cash flow, then it’s savings because the money you put in will still be there when you sell the house and may appreciate as well. If it’s your primary residence then it’s not.

    That’s just my personal opinion.

    As for your podcast, it’s great. However, I do like longer podcast, since I listen to podcast during workout and my long commute, both last over an hour. I listen to Suze Orman, Rich dad and other personal finance podcast as well. All of them are an hour long.

    1. A lot of times, making principal payments on a mortgage is not a good idea. If your mortgage is at 3% or something, you can expect better returns in the market.

      Think of it like, if you can take a loan out at a low rate and use the funds to invest at a high rate, is that a good decision? Yes, if it’s guaranteed. In the long-term (and most mortgages are long-term loans), greater than 3% is fairly likely in the market, so if you have extra cash, it would probably make more sense to contribute toward investments than toward extra payments on your house.

  3. Sam,
    I prefer the shorter podcasts (30min or less) as they are more succinct and I am able to fit that in much easier. I must admit that I enjoy your blog posts the most because of your style of writing, content quality and I also have the ability to save them and refer to specific portions if needed. (Just like I prefer paper books than Kindle).

    Great job regardless.
    PS: a question of mine regarding Forex and foreign savings accounts didn’t get published or responded to? Hopefully you can reply soon.

  4. Julien @cashsnail

    For now, we don’t have debt at all, but we plan to buy a flat in a couple years (with over 10% interest rate here, a major down payment is required not to be stuck with an illiquid asset)
    So I would consider mortgage principal as savings. Lodging is around 40% of fixed costs, decreasing it is definitely an investment.

    PS : I like the short podcast, I can listen to it when I have a bit of spare time or to change my mind between projects.
    PS-bis : I was a bit surprised when hearing the voice at first. I was expecting some strong accent like in samurai movies ;)
    In fact, some youtube video, with shuriken & sword slashes as overlay would be pretty cool ! :p (slash this debt !)

  5. Lance @ HWI

    I have never even thought about it being savings before so I guess I would say no. If you are in the hole and pay a little bit off you are still in the hole…just not as deep. If you consider paying it off as savings do you count the compounding debt interest as a loss as well?

  6. I don’t consider debt payments as savings.

    I do track my net-debt payments monthly so I can see how well I’m paying off what I have. The net part is net of interest accrued.

    I believe considering debt payments as savings is supporting a false reality in ones financial performance. When you make that payment you’re catching up for spending you did in the past (even if it’s a property), you’re not setting aside those funds for availability to be used at any point in the future. That’s the test for me.

  7. “Uppercut your face!” I love it. Excellent advice you are providing on this site and now branching out to the podcast. Keep up the work, it is appreciated and enjoyable to read.

  8. I don’t include paying off a personal debt in my savings rate. I do however include any principal that is paid off on our primary(also acts as a rental) or rental mortgage. In many ways I think it would be silly if you would not, because you are creating equity in an investment with these payments along with the possibility of the home increasing in value. Those sound very similar to investments to me, so they are included in our savings rate. These investments can be sold for a return, unlike your personal debt which can only be brought to $0 value.

    1. How about trying not to though? The mortgage should be on autopilot, so to actually save money takes more effort. As a result, I think you’ll end up saving much more.

  9. Sam,

    I think paying off a mortgage is a form of savings. Certainly better than paying rent. The reality is that the average American just lacks the discipline to save and making mortgage payments is kind of a forced savings plan.

    As long as folks maintain good liquidity (as you mentioned), paying down liabilities improves your personal balance sheet. It’s hard to call this a bad thing.

    It’s interesting to compare Europeans with Americans. Most Europeans rent but tend to be better savers, whereas owning your own home is more common in the USA but savings rates are lower. Perhaps Americans blow their budgets on home improvements/remodeling?

    1. I hope more folks remove the mindset of making mortgage payments equal forced savings. I think it’s a dangerous way to manage your finances.

      Savings is savings. Paying down the mortgage is paying down the mortgage.

      Europeans seem more frugal, and they’ve got great government support.

  10. rob in munich

    OK pardon any thpos doing this on my ipad. First off listened to it on my iphone, started on wifi and it continued through 2 phone calls while on 3G Very nice not having to fire up the PC to get it.

    1. these podcasts are really adding depth to the blog posts, get better of an understanding of your thinking behind your comments.

    2. loved the story about the 50 something – so true where did the years go!

    3. don’t know why but almost no frugal living blogger talks about savings, it’s all about either paying debt off or not spending money, but absolutely none of them ever mention their savings rate.

    4. I used to dismiss comments from people regardimg pensions, but your approach makes sense, it means saving more and of course retiring earlier.

    maybe this is too far off topic but I’d like your thoughts on why some bloggers succeed in making money while others don’t. Blue Collar Workman, great writer but stopped updating about a year ago, commented elsewhere he couldn’t get above Alexa 200,000

    1. Oh yeah, to answer your question, if like the couple I read about yesterday in the National Post who ran up 108,000 dollars in CC debt and then paid it all off, than no.

      but if you like the single guy profiled the previous week, bought a $400,000 house and is on track to pay it off it in 5 years than yes!

    2. Don’t know what happened to Blue Collar Man. He was a good commenter and blogger.

      It is VERY hard to consistently produce content. I’m finding it very hard to publish decent podcasts as well, especially since I’m just starting. I worked on this podcast from 5am-7:20am after it was published b/c I found things I didn’t like and kept trying over and over again.

      I’ve also had MANY people say they wanted to write a post, but never follow through. People are always busy, and I understand. Folks just need to prioritize and make time for what they want to do.

      I didn’t start FS with the goal of trying to make money. I just wanted to connect with others. Maybe that might be a key ingredient to making money online, by not trying?

      1. Sam – I think that is right. I may suggest a blog post for you here soon. I would love to write a guest blog post for you. I don’t have my own blog, but love connecting with like-minded people. Maybe even a counter point as to why you should include debt pay down as part of your personal savings rate.

  11. I am starting to burn out on my weekly playlist like it’s a chore or something. So, I do appreciate shorter content.

    Also like NPR’s style. I would suggest picking up a royalty free loop or two from audioblocks that you can use as a subtle intro and outro similar to NPR’s Planet Money style.

  12. Sam – Since it was my question that was the genesis for the podcast, I’ll weigh in with a few comments.

    I don’t think it really matters so much whether you include it in your personal savings rate or not so long as you are consistent (be that internally for measuring yourself over a period of time and externally for measuring against other people and suggested savings rates).

    But I agree with you that, in general, it is better to be conservative when it comes to our personal finances and how we calculate our savings rate. Nor should we rewared ourselves for paying down debt we probably never should have taken on (e.g., credit card debt, auto debt).

    However, from a balance sheet perspective, it doesn’t really matter whether you are paying down consumer debt or property-debt (or any other).

    As I tell my spouse, there are three ways to increase our net worth: 1) contribute to savings/investments, 2) appreciation, and 3) pay down debt. The first two affect the asset side while the last one affects the liability side. And we can only directly control the 1st and 3rd options. The 2nd is dependent on external factors, though we can control the type of assets that may appreciate.

    So from a simple balance sheet perspective, debt is debt. And as you pay off debt, you can then use those amounts to contribute to savings/investments. But from the emotional side, I would agree that if you set a goal of a 30% savings rate (or whatever one chooses), you probably shouldn’t include paying down debt in that rate. The debt pay down should probably be on top of the savings rate (at least for assets that do not appreciate).

    The real reason for my question to you was because I wanted to see if I was measuring up to your suggested savings rates – and you have answered that.

    Thank you for turning it into a podcast – a good one.

    1. Sounds good S. Thanks for sharing.

      From an accounting and balance sheet perspective perspective, it’s all the same. But liquidity needs are different, and I do believe it’s better to be conservative and not include any type of debt pay down as part of one’s personal savings rate.

  13. I just paid off 80K student loans (most at 6.8% interest rate) this past week. I consider that part of my after-tax savings because I was paying approximately 3-4K in interest every year. As a result of paying off my student loans 6 years early, that’s thousands of dollars of less interest I had to pay. This money is now part of my savings instead! The extra money can now be invested in the stock market.

    BTW, I really enjoy your podcasts. I think a length of 30 minutes is perfect. This one is a little too short but it could have just been because of the subject matter. The sound was also a lot clearer on this one then your first. I also think the addition of humor was also a nice touch!

    1. Congrats on paying off your 80K in loans! Hope you continue to allocate what you were paying to loans to investing and savings!

      Thanks for the feedback on the sound quality. I think the first one was in a room where an industrial air conditioner was running. I think you’ll enjoy the upcoming podcast maybe a week from today.

  14. What about the principal paid on rental property? Should it not be considered as part of income to calculate ROI on ur property

    1. As part of my income? No. I just include my principal pay down and all expenses as a cashflow expense to be conservative.

      But, it’s all accounting and what you are comfortable with at the end of the day.

  15. Zee @ Work To Not Work

    I’m curious as to what you think of pre-tax versus after tax savings. I’ve never known how to determine what my savings percentage actually is. For example if I save 20% pre-tax and then 50% of my after tax income what is my true savings rate? Would you consider it to be closer to just saying 60% since eventually we will pay tax on the pre-tax savings? or would you consider it to be somewhere like 80% since we’ve already paid tax on a large chunk of it.

    This is something I’ve never been able to come to a good conclusion on, I see arguments on it for both sides.

    Anyways, I’ve never considered my principle payments on my mortgage as savings, if I did then my savings rate would get another extra bump. But like you, I’m usually conservative with my estimates so that I end up ahead of where I plan to be rather than behind. I guess I may have just found my answer there and would say that my savings should be about 60-70% (since the pre-tax savings will grow before I can touch it) rather than the over-estimation of 80% since I’d rather not end up needing to go back to work.

  16. Great post! Definitely appreciate the shorter podcast.

    I do consider paying down debt as part of my savings rate but it’s for largely intellectual and philosophical reasons. I’m carrying a large amount of student debt and to combat lifestyle inflation in my head, I consider every dollar that goes towards that debt as what my savings/investment rate will be once the debt is gone.

    I realize it doesn’t go into actual savings or passive income from a return perspective, but I think it’s a useful habit and mindset to consider that payment of debt to be analogous to savings from a lifestyle perspective.

    Consumer debt I avoid like the plague and would consider it to be an entirely different beast than corporate debt, real estate, or student debt. Especially given the rates on consumer debt.

    1. Hope you can continue that savings rate once your debt is paid off. I think you’ve got the right mindset, otherwise, it might be frustrating to not develop actual savings during the loan repayment process. I guess it’s like savings training before you actually really start saving.

      Are you trying to pay down the student loan debt quicker with extra principal payments?

      1. Yes, definitely using savings to pay down extra principal, though also have enough left over to actually invest as well. That may have been unclear in my first comment, but I consider every dollar toward this debt as part of my savings/investment rate, not the entirety of it. The highest rates are still around 7%, so I feel pretty justified doing that.

        I do like the idea of ‘training’ though, as it’s training myself to avoid unnecessary lifestyle creep.

  17. I include extra mortgage payments in my personal savings rate because, if I pay off my mortgage, in a monthly net sense, it’s like having an investment with my home’s value returning the P&I portion each month. For example, if I have an $80,000 home with a $500/mo P&I payment, but I pay it off, it’s like having an $80,000 investment paying a $500/mo dividend. My monthly net living expenses are reduced by that amount. So, looking at it yearly:
    ($500 x 12)/$80,000 = 7.5% guaranteed return.

    I tend to distrust the government’s future behavior and intent (like your example of raising the distribution age from 62 to 65), so I want to be as rock solid on reducing expenses as I can so I won’t need as much to live on.

    Feel free to shoot holes in that approach. I’d value your input.

    1. Or a $100,000 nut producing a 6% return. It’s pretty objective and I like your thinking.

      The risk is a liquidity one between the time you pay it off completely and the time you are still paying it off since the payment is still the same, just the percentage to principal and interest differ.

      All depends on your income stream.

  18. I enjoyed this podcast too. I seem to prefer podcasts that are 30 minutes or less. I’ve found that when they are 45-60 minutes, I usually don’t listen to them.

    1. Good to know. For some reason the podcast player didn’t publish again in the post, so I had to relink it. And once it was published, I wasn’t happy with it, so I spent from 5am-7:20am re-recording a 17:26 minute version that’s now live instead! So much practice needed. One day, it’ll get easier, but not today.

      I’m going to shoot for under 30 minutes because it’s hard for me to stay focused longer than 45 minutes and others. 30 minutes or less forces me to focus and say things more succinctly.

  19. I would depend that question on the reason, why the debt exists. For me, i have 5k debt, because i used it partly to pay for my wedding. The bigger part (about 3k) I did not use. Instead, i put it on my stock account and bought dividend paying stocks from it.

    I would not consider paying down consumer debt as saving. But paying down debt for assets is part of the saving budget.

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