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Old 01-14-2015, 11:11 AM
 
8,729 posts, read 5,084,221 times
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Quote:
Originally Posted by Modification Specialist View Post
Above good illustration of paying extra towards principle!!!

Another example is paying extra towards principle on a mortgage.
  • Starting out term 30 years
  • One extra (13th) payment a year knocks (reduces) 7 years off term
  • The best is taken one payment dividing by 12, adding that 1/12th in with normal monthly payment.
  • The borrower gets reports as being more responsible to the Credit Bureaus and is rewarded with a high credit score
OP stressing the importance of the on time house payment's, because it is a secured loan. Not paying can result in foreclosure. Leading to damaged credit, leading to high bills, leading to getting one self deep into a hole it is very hard to get out of....

My $00.02

This cannot possibly be determined without knowing the interest rate.
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Old 01-14-2015, 11:28 AM
 
18,788 posts, read 13,539,377 times
Reputation: 14152
Quote:
Originally Posted by Modification Specialist View Post
Above good illustration of paying extra towards principle!!!

Another example is paying extra towards principle on a mortgage.
  • Starting out term 30 years
  • One extra (13th) payment a year knocks (reduces) 7 years off term
  • The best is taken one payment dividing by 12, adding that 1/12th in with normal monthly payment.
  • The borrower gets reports as being more responsible to the Credit Bureaus and is rewarded with a high credit score
OP stressing the importance of the on time house payment's, because it is a secured loan. Not paying can result in foreclosure. Leading to damaged credit, leading to high bills, leading to getting one self deep into a hole it is very hard to get out of....

My $00.02


With rates as low as they are it's not 7 years you cutoff 3-5 depending on the rate
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Old 01-14-2015, 11:43 AM
 
734 posts, read 1,730,512 times
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Quote:
Originally Posted by ncole1 View Post
Why do so many people treat car payments and house payments as a "monthly cost", when principal repayment causes a corresponding decrease in liability?
Theoretically, this could be applied to many monthly expenses. For instance, when you buy groceries at the store, you have not incurred any expense (other than possibly sales tax). After all, the can in your pantry has value until you actually open it and eat the contents. Similarly, buying a pair of jeans would involve no expense, except for some depreciation as they are worn, which is a separate event.

However, most people operate on a more or less cash basis, not an accrual basis. Accrual basis matters more when someone is facing bankruptcy. With a mortgage or car payment, one is trading a liquid asset (cash) for an illiquid asset to the degree that principal is repaid. While illiquid assets may eventually get cashed out (not always the case for a car), there are also frequently transaction costs that reduce the realizable value of the assets. You also run the risk of an impairment to the asset (vehicle accident, house fire, housing market crash) that wipes away any stored wealth.

All of these reasons are why most people operate on a cash (or near-cash) basis and consider mortgage payments to be expenses.
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Old 01-14-2015, 11:54 AM
 
2,303 posts, read 2,252,514 times
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Quote:
Originally Posted by Mike From NIU View Post
Theoretically, this could be applied to many monthly expenses. For instance, when you buy groceries at the store, you have not incurred any expense (other than possibly sales tax). After all, the can in your pantry has value until you actually open it and eat the contents. Similarly, buying a pair of jeans would involve no expense, except for some depreciation as they are worn, which is a separate event.

However, most people operate on a more or less cash basis, not an accrual basis. Accrual basis matters more when someone is facing bankruptcy. With a mortgage or car payment, one is trading a liquid asset (cash) for an illiquid asset to the degree that principal is repaid. While illiquid assets may eventually get cashed out (not always the case for a car), there are also frequently transaction costs that reduce the realizable value of the assets. You also run the risk of an impairment to the asset (vehicle accident, house fire, housing market crash) that wipes away any stored wealth.

All of these reasons are why most people operate on a cash (or near-cash) basis and consider mortgage payments to be expenses.
Well, that's actually similar to how most businesses just immediately expense office supplies. They don't record the expense as each paper clip is used. It basically comes down to materiality. For most people, it's not worth it for the smaller things, but yes, technically you could do that if you wanted. For someone who loads up on tons of canned goods once a year, it might help them have a better picture of their overall finances if they treated the food as an asset and only noted the expense when they ate. Ultimately it comes down to the individual though.

Every person has to deal with two goals. Making sure they have enough money to cover immediate expenses(cash flow) and trying to increase how much they have(net worth). Cash flow is short term, Net Worth is long term.

Once people find their short term goals are safely met, then they can start focusing on the bigger picture, but having an increasing net worth and negative cash flow is going to be a problem if you don't have liquid savings to cover the short fall.

Most people are pay check to pay check or just slightly above that. I think that's the real reason most people operate on a cash flow. That and it's definitely simpler to understand.
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Old 01-14-2015, 12:16 PM
 
Location: NJ
24,053 posts, read 30,157,348 times
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Quote:
Originally Posted by Blondy View Post
Because no one will be auditing my budget to determine if I am following generally accepted accounting standards and all I need to know is how much I am spending each month.
im pretty sure that even when looking at financial statements debt payments are an expense.

the OP has just developed his financial expertise by listening to people like dave ramsey and then filling in the gaps on his own.
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Old 01-14-2015, 12:22 PM
 
6,431 posts, read 3,055,762 times
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Originally Posted by CaptainNJ View Post
im pretty sure that even when looking at financial statements debt payments are an expense.

the OP has just developed his financial expertise by listening to people like dave ramsey and then filling in the gaps on his own.
You could be right, not an accountant so I don't know without researching it. Point being most people dealing with a household budget have no need/desire to know or care.
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Old 01-14-2015, 12:57 PM
 
Location: NJ
24,053 posts, read 30,157,348 times
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Quote:
Originally Posted by Blondy View Post
You could be right, not an accountant so I don't know without researching it. Point being most people dealing with a household budget have no need/desire to know or care.
they would be in the cash flow statement, not income statement. income statement would just be interest expense.

but you are right, most people dont see themselves as businesses and are more interested in their cash flow on a month to month basis. then, when they think about their assets and liabilities; they are aware that a portion of their debt payments impacts that also.
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Old 01-14-2015, 01:13 PM
 
18,228 posts, read 19,977,701 times
Reputation: 26695
Quote:
Originally Posted by ncole1 View Post
Why do so many people treat car payments and house payments as a "monthly cost", when principal repayment causes a corresponding decrease in liability?


Because people dont dissect the payment to that extent. I believe a lot of peoplr equate any outgoing payment as a cost. Probably the same reason people shop by monthly payment to allocate the "cost" against their income. That's just how some people are mentally trained/taught/think how to " afford" something.

Last edited by Electrician4you; 01-14-2015 at 01:49 PM..
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Old 01-14-2015, 02:08 PM
 
2,303 posts, read 2,252,514 times
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Quote:
Originally Posted by Electrician4you View Post
Because people dont dissect the payment to that extent. I believe a lot of peoplr equate any outgoing payment as a cost. Probably the same reason people shop by monthly payment to allocate the "cost" against their income. That's just how some people are mentally trained/taught/think how to " afford" something.
That same reasoning is also why some people have a harder time saving though. They view the money sent to a 401(k) as an Expense just like the taxes. Once you realize it's just left pocket/right pocket movement, paying off debt and saving become easier to do.

I don't think anyone would consider taking out a loan to be income, so it doesn't make sense to me to consider paying it off an expense, but I'm probably more accounting focused than most.
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Old 01-14-2015, 02:12 PM
 
18,788 posts, read 13,539,377 times
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Quote:
Originally Posted by Jeo123 View Post
That same reasoning is also why some people have a harder time saving though. They view the money sent to a 401(k) as an Expense just like the taxes. Once you realize it's just left pocket/right pocket movement, paying off debt and saving become easier to do.

I don't think anyone would consider taking out a loan to be income, so it doesn't make sense to me to consider paying it off an expense, but I'm probably more accounting focused than most.


Changing how I view things doesn't make it easier to save and payoff debt. If I view my retirement as an expense it's actually easier for me to plan around and accomplish
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