How To Define ‘Savings’

The issue of the declining savings rate in America has been mentioned as one of the ways in which the younger generations are falling behind economically. The credit crisis caused massive deleveraging in America which increased the savings rate, but most of it was due to consumers reducing debts and liabilities as opposed to building assets. There could be many causes of this, but to name one: in times of uncertainty, consumer tend to brace themselves for a more hazy future by building net worth as quickly as possible.  A decrease in stock prices and home prices eliminated much of the buildup of household assets which needed to be counteracted by an increase in savings.  Also, credit standards have tightened, which has further compounded the problem and increased the deleveraging among American households.

The Difference Between Stock and Flow

A picture of change on stock charts

What exactly is 'savings'?

The point of this article, however, is to argue how one should calculate the savings rate.  The difference between a stock and a flow is important to understand to determine your savings rate.  A ‘stock’ is an amount at a given point in time; think of terms such as net worth, assets, liabilities, debts.  A ‘flow’ is a time-sensitive change; think of terms such as income, expenses, appreciation, cash flow.  Savings to me (similar to PK’s definition) are meant to maintain principal and (hopefully) appreciate over time. In this way, saving is an attempt to help future cash flows.  Appreciation of assets is not considered savings, since, in the opposite example, you can put away $50k in a year and have your stocks decrease by $50k.  Did you save $0 that year?

Savings is any way in which you increase your net worth.  Since your net worth is simply the difference between your assets and liabilities, there is no difference in this definition between paying down debt and building up assets.  When you make a mortgage payment your ‘expenses’ are the mortgage interest, insurance and property taxes.  The principal payment are instead considered ‘savings’, since it goes directly toward increasing your net worth (less debt). As mentioned above, saving should help increase future cash flows. Buying an asset which appreciates in value positively affects those future cash flows.  Paying down debt decreases future interest payments which also helps cash flow!

Savings and Net Worth Increases

So, does paying down $3,000 in credit card debt count as saving?  Yes, of course.  When the balance was first built up, the card’s user was effectively using a negative savings rate.  If in 2011 you added $10,000 to a retirement account, paid down $10,000 on your mortgage and saved $10,000 in mortgage bonds… congratulations, you saved $30,000 last year.

Compare your savings rate when calculated using PK’s definition versus mine.  Which do you feel is more accurate?


  1. says

    OK, so you’re talking about savings as in a savings rate as it relates to the big picture.  I can’t say I disagree with your take, Cameron, but I agree with PK when it comes to how an individual thinks about savings.  Liquidity seems to be the major factor in the difference of opinions.  I think most people view savings as something they can get their hands on in order to make a purchase.

  2. says

    I mean, technically (by the strict definition), you’re right, but I still don’t like it… I think of an example of someone ringing up $15,000 in credit card debt, then paying down $10,000 and saying they saved $10,000… doesn’t cut it with my definition, although it flies with the definition the Fed uses (for what it’s worth!)

    I think of savings as something that you can get at easily in the future – so even though I expand it to investments, I wouldn’t take it as far as you’re definition.

    • Anonymous says

      The paying down of the credit card should be savings. The ringing up of $15,000 in debt is thus negative savings.

      Look at it conversely: If you ring up $15,000 in debt and then put $10,000 in an IRA instead of paying it down, do you have a positive or negative savings rate? Is there a difference in where you put it?

      • says

        Well, I think most PF bloggers would say pay off the highest interest rate debt before the IRA, but they usually break it down into “paying off debt” and “saving”. Outside of a 401(k) match and perhaps a moderately sized emergency fund, I don’t really see investing at the expense of debt repayments as a good idea.

        Of course, I understand your argument. I just like the nuance of mine.

  3. says

    I’m slightly more inclined to go with PK’s version, but I can see truth in both. I’m a little hesitant to call an investment “savings” since it only has a definitely value when you first invest it. After that, you “savings” could quickly disappear if you investment declines. To me, savings means has a more stable meaning (as in, it probably just sits in a savings account), and isn’t susceptible to this kind of fluctuation in value.

  4. Andy Hough says

    I consider paying down debt to be separate from savings since you can’t spend money you used to pay down debt. I can see how paying down debt could be part of your savings rate since it is money you’re not spending.

  5. says

    I think that paying down debt counts as savings because it increases your overall networth at the end of the day. I know there a million other ways of looking at it, but thats the one I go with.

  6. says

    Debt repayment as savings?  Requires a mental switch, but if it works for you…
    I like to think as savings as something along the line of “They invested their life savings to start this fill-in-the-blank business”

  7. says

    Definitely a matter of how you look at it, but repaying debt is a great way to ‘save’.  no point having money sitting in an account earning less interest than you are being charged on your debts!

  8. says

    Paying down debt is really a great way to save.  Usually it gives a higher interest rate than what ever one could find in any modern savings account. 

  9. says

    I think PK’s definition is more accurate, but yours is more appealing because it makes debt repayment that much more attractive-sounding.

  10. Bret @ Hope to Prosper says

    I agree with PK, Jackie, Andy and Jeffrey.

    Paying down debt is a great thing and it does increase your net worth.  It also saves on future interest.  But, it’s not the same as saving.  To some people, paying less for an item is saving.  To others, watching their home equity grow is saving.  Saving to me means taking money out of my bank account and putting it into an investment every payday.

    I am impressed that the personal savings rate is still up.  When I started blogging five years ago, it was -1%.  Disaster wasn’t far behind for millions of people.  I hope people keep saving their money because it improves opportunities and reduces their financial risk.

    • Anonymous says

      For this, I am arguing for a definition of savings rate, as opposed to a way to build a ‘savings account’ or an emergency fund. Thus, all it comes down to is a difference between income and spending. Spending would be racking up the credit card debt in the first place and saving would be paying it down later (without racking it up again the next month).

      In other words, I wouldn’t consider a good savings strategy to be to rack up a ton of debt and then pay it down later counting it as ‘savings’. Instead, if today you have a lot of debt, paying it down is part of the savings strategy (without equivalently adding a ton more)

  11. says

    I agree that paying down debt could be considered savings.  When you have cash on hand you make a decision on how to use it, invest in the stock market, improve your home, or spend on discretionary items.  Deploying cash to make the best return sometimes ends up being your high interest debt.  This is no different than if you deployed your cash in the stock market, it’s all savings.