quote from Justin:
Financially, what is the difference between paying $15000 on a mortgage and buying $15000 worth of bonds at the same interest rate and maturity/payoff date as your mortgage?
azanon said:
One pays you interest every month, and the other doesn't. One is immediately liquid and one isnt. One is meant specifically to fund something, and the other is meant to live in. I bet you can guess which is which.
Azanon,
Prepaying $15000 on my mortgage will reduce the amount I have to pay by about $50 monthly (adjustable rate mortgage). Instead of paying down the mortgage, I could buy $15000 of bonds, and get $50 monthly in interest. Which I would then have to use to pay down the mortgage. Financially, I would be in the same position each month if I paid down the mortgage, or if I bought the bonds.
Bonds may be immediately liquid, but the value fluctuates with changes in interest rates. My $15000 prepayment of the mortgage can also be immediately liquid - apply for a free no closing cost HELOC in the amount of $15000 - my newly created equity. Alternatively, I can refinance into a new ARM at the same market rates as my existing ARM and get at the $15000 that way. I concede the mortgage prepayment introduces some illiquidity.
"One is meant specifically to fund something, and the other is meant to live in."
This is a riddle to me. I don't live in my mortgage. Do you? I live in my house. It happens to secure payment of my mortgage note. The house and any debt secured by said house can be looked at as two separate entities.
I'm in agreement with you on your desire not to include the interest portion of mortgage payments. However, repayment of principal amounts of debt increases net worth, and in my opinion should be included in the definition of "savings" as Maddy did. Any amounts added to the principal balance of a debt should be subtracted from what you saved.
Lets look at the typical American living paycheck to paycheck on credit cards. He charges $1200/month for personal living expenses. This is $1200 spent because the principal balance on his credit card increases by $1200. Assuming he doesn't pay down this credit card, and then saves $1200 in his 401k, his net savings for the month would be zero. The $1200 of 401k contributions would be savings and the increase in the principal balance owed on the credit card ($1200) would offset the savings, making the net savings amount zero for the month.
When I say I'm counting payment toward debt principal as savings, I would also count new debt incurred as a reduction in savings. You may not like my system, but I think it makes sense if you count the debt you incur and the debt you repay. I also don't think it overstates your savings rate on a long term basis.