“Must be nice,” I thought, when I read about someone who suggested saving more than half your income as a way to take control of your money.
Oh, sure, I’ll save half my income.
I thought, “maybe, once I’m completely out of debt I’ll be able to save half my income.”
But then I talked with a friend, who said, “Guess what? Your debt repayment counts as savings. So, take another look, and see how you’ve done.”
I really had to wrap my mind around this. Paying off debt counts? Even though I’m not actually saving any money?
Of course it does, and here’s why:
Let’s say you owe 10,000 on a credit card, 7,000 in student loans, and 5,000 on a car loan. Okay? So that’s 22,000 in money owed. Now, let’s say your car is worth exactly what you owe and you have no other assets to speak of.
You’re in negative net worth territory. I’ve been there, too. It’s not fun, is it?
Now, let’s say you’ve found room in your paycheck this month to throw $1,000 into the equation.
Where should you put it?
- Your savings account, which is earning .01% interest
- Your credit card
- Your student loan
- Your car loan
In terms of net worth math, it’s a zero sum game, and the extra $1,000, as long as it doesn’t go toward something that increases your debt, is good.
But let’s talk about interest for a minute.
Let’s say, in the thought experiment, that your debts are charging more than your savings account is earning. It’s a real leap, I know. :) So, you put your $1,000 toward your credit card (because that’s either the most interest or the most pain). Since they’re charging you more than 10% interest, you’re essentially earning that money back.
Because each month, the interest is being charged on a smaller and smaller amount, until, one day, you can put that $1,000 directly into savings.
The Case Against “Paying Debt Is Saving”
Paying toward your debt is not saving if you’re still using your credit card. We’re talking about this in terms of a life strategy.
To get to the point where you’re in control of your money, you must be out of credit card debt. So, don’t go reading the first part of this article and pat yourself on the back because you paid $1,000 on your credit card after spending $1,000 on your credit card. That’s not how this works.
If the goal is to save as much money as you can (and I’d argue that it should be), start counting your debt repayment as savings.
I was shocked to find that when I added those to the equation, I was saving nearly half my income, even when I made $33,000.
Debt Repayment Counts as Savings — So Does Mortgage Principal
So, if you want to save more than half your income, step one is to count debt toward that number.
In fact, you should be counting mortgage principal toward that as well. Why? Because principal is the piece of the mortgage puzzle that turns into equity. It’s the one piece that makes the case for owning versus renting, because at the end of 30 years, the person paying toward principal is working toward owning their home free and clear, while the person paying rent is … still paying someone else’s principal.
Now that we’ve gotten the “loopholes” out of the way (quotes here because they really aren’t loopholes, they’re just saving in vehicles we can’t see as well as the bags of cash laying around), how do you save more than half your income?
You start automating things.
Pay Your Future (Wrinkly) Self
Start with maxing out your IRA (either traditional or Roth, whichever you prefer). That’s $5,500 right off the bat.
Does your company have any sort of 401(K)? Do they match? Contribute at least as much as your company will match. More, if you have any leftover.
Get Creative
If you’re having a hard time getting to half simply by counting debt, mortgage principal, and IRA/401(K), it’s time to get creative. You may need to downgrade your home or your car, or you may need to pick up extra work.
Because if it’s hard to save half, you either have a lifestyle problem or an income problem (as in, there’s not enough of it). It’s a bit simplistic to say “the best way to save half your income is to make more money,” because seriously, you can save more than half at just about any income level (unless you’re a single mom who has to work retail or something, then holy smokes it is difficult to get ahead). It’s just a matter of creativity.
Can you sell some of your stuff? We’re talking books, jewelry, extra things you have laying around the house.
Can you sell some of your skills? Maybe work on the side as a {insert the thing you’re great at here} consultant.
Are you saving half? How are you doing it? I’d love to feature you in an upcoming post!
Oh, and also, I would be remiss to post on Veteran’s Day without acknowledging that part of the reason we are free to discuss anything is because we stand on the backs of those who fought for our freedom. Thank you to everyone who served.
