Get Rich Slowly has a review today of the book All Your Worth, and there's a point made that really jumped out at me. The target budget allocation recommended in this book is 50% for "needs", 30% for "wants", and 20% for savings. The big eye opener for me is that they include debt repayment in the savings category.
This concept of debt-reduction-as-savings isn't exactly a new idea to me, but it doesn't seem to have sunk in, because I list my debt repayment under my "needs" category. If I look at it as part of my savings, then I am actually saving 22.3% of my gross income (9.4% actual savings; 12.9% debt reduction). I think it's fair to look at it this way, for a few reasons:
- These debts represent money that I've already spent, so I'm really saving up for these purchases retroactively
- Every dollar that I pay toward debt reduction is a dollar that my future self won't have to pay (actually, it's more than a dollar that my future self won't have to pay, because every dollar that I don't pay now will accrue interest over time)
- Once the debts are fully paid off, this is money that can be redirected toward "real" savings