U.S. CitiesCity-Data Forum Index
Go Back   City-Data Forum > General Forums > Economics > Personal Finance
 [Register]
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
View detailed profile (Advanced) or search
site with Google Custom Search

Search Forums  (Advanced)
Reply Start New Thread
 
Old 01-15-2015, 07:45 AM
 
3,943 posts, read 4,036,149 times
Reputation: 4358

Advertisements

Quote:
If you want to count principal payment as an expense, then you need some way of distinguishing between "true" expenses such as going to a concert, versus "pseudo-" expenses such as principal payments. In the former case your net worth goes down, in the latter case it doesn't.
Again, net worth calculations to a household are mostly irrelvant. A concert is a completely legitimate expenditure of money when compared against buying a house or getting a degree because people are not businesses, and intellectual and entertainment have to be accounted for human sanity.

And only an accountant would say your 'net worth' goes down when you go to a concert. A normal human would say say their human net worth went up. And again, it only matters that their net worth or expenses went down if they are on the brink of being unable to pay them.

Also, your average person doesn't get to take advantage of the depreciation expenses and such so asset prices are not accounted for the same between a business and a person either. Funny none of the corporate accountants are pointing that out but rather admonishing individuals for using accounting terms incorrectly even though its been pointed out they have multiple meanings.
Reply With Quote Quick reply to this message

 
Old 01-15-2015, 08:19 AM
 
12,705 posts, read 9,961,918 times
Reputation: 9515
Quote:
Originally Posted by TheOverdog View Post
Again, net worth calculations to a household are mostly irrelvant [sic].
No, they are not. If I'm struggling financially and spending $1500/month on takeout food, my monthly food cost can be lowered by putting it on a credit card and paying only the minimum, right? If you look at cash flow then clearly you must accept this (admittedly absurd) conclusion.

The only way to explain why that is not a method of reducing cost is to say that going into debt is not income, nor is it cost-cutting.

Once you admit this, then you have another problem - suppose you put all your expenses on a credit card and pay the whole thing off every month. Since the usage of credit is not income or cost reduction, then treating the principal payment as an expense would lead to double-counting your food cost!

The only consistent method of avoiding these absurdities is to say principal payment is not an expense.

Quote:
Originally Posted by TheOverdog View Post
A concert is a completely legitimate expenditure of money when compared against buying a house or getting a degree because people are not businesses, and intellectual and entertainment have to be accounted for human sanity.
Just because you need something to stay sane doesn't mean it's free.

Quote:
Originally Posted by TheOverdog View Post
And only an accountant would say your 'net worth' goes down when you go to a concert. A normal human would say say their human net worth went up. And again, it only matters that their net worth or expenses went down if they are on the brink of being unable to pay them.

Also, your average person doesn't get to take advantage of the depreciation expenses and such so asset prices are not accounted for the same between a business and a person either. Funny none of the corporate accountants are pointing that out but rather admonishing individuals for using accounting terms incorrectly even though its been pointed out they have multiple meanings.
Then we need some new words to fill the gaps in...
Reply With Quote Quick reply to this message
 
Old 01-15-2015, 08:38 AM
 
12,705 posts, read 9,961,918 times
Reputation: 9515
Quote:
Originally Posted by Pitt Chick View Post
Not for most households.
And even if we are doing it 'wrong' in your eyes, we still know the financial impact. And we are reminded every month when we make that payment.
Actually the whole point of the user cost formula is to make the calculation simpler, not more complex.

If you want to do it the hard way, go ahead.
Reply With Quote Quick reply to this message
 
Old 01-15-2015, 09:20 AM
 
Location: Florida -
8,760 posts, read 10,832,098 times
Reputation: 16632
Quote:
Originally Posted by Jeo123 View Post
Actually, in your pure cash example, the only cost is depreciation. If you can turn around and sell the car back for the exact same price, there hasn't been a loss. Over time, the depreciation reduces the value of the car, and that's the expense. After you've driven the car into the ground, you've realized the full cost, but until you drive it off the lot and depreciation starts to kick in, there is no cost incurred(fees/taxes aside).
Good point. Of course, nobody sells a car for the same price they paid for it, thus, the monthly expense/cost of depreciation always starts WHEN one drives it off the lot. Since a house is likely to appreciate, it seems like more of an investment than rent receipts. Of course, there are monthly maintenance, upkeep and even gas/ electric costs that one will incur when they buy/sell (or probably rent/lease).

Also, until such time as one actually sells their car/house, the "monthly cost/expense" must be paid ... regardless of how much one recaptures from the sale. Thus, there is a significant ongoing monthly cost associated with owning a car/house ... part of which may/may not ultimately be recovered.

Most think about the 'monthly cost' of buying vs renting/leasing, because that is how they earn/spend their liquid/cash resources. The ultimate sale/recovery of some of the monthly costs only serves to reduce the actual overall 'monthly cost.' Although a house will (hopefully) sell for more than the buyer paid, the other houses in the area will have likewise appreciated. Since one must live somewhere, the amount that one recaptured from the sale of one house, will then be proportionately spent on another 'appreciated' house, so the buyer/owner hasn't really recaptured/reduced their monthly expenses, but, transferred them to equity in another property.
Reply With Quote Quick reply to this message
 
Old 01-15-2015, 09:32 AM
 
12,705 posts, read 9,961,918 times
Reputation: 9515
Quote:
Originally Posted by jghorton View Post
Good point. Of course, nobody sells a car for the same price they paid for it, thus, the monthly expense/cost of depreciation always starts WHEN one drives it off the lot. Since a house is likely to appreciate, it seems like more of an investment than rent receipts. Of course, there are monthly maintenance, upkeep and even gas/ electric costs that one will incur when they buy/sell (or probably rent/lease).

Also, until such time as one actually sells their car/house, the "monthly cost/expense" must be paid ... regardless of how much one recaptures from the sale. Thus, there is a significant ongoing monthly cost associated with owning a car/house ... part of which may/may not ultimately be recovered.

Most think about the 'monthly cost' of buying vs renting/leasing, because that is how they earn/spend their liquid/cash resources. The ultimate sale/recovery of some of the monthly costs only serves to reduce the actual overall 'monthly cost.' Although a house will (hopefully) sell for more than the buyer paid, the other houses in the area will have likewise appreciated. Since one must live somewhere, the amount that one recaptured from the sale of one house, will then be proportionately spent on another 'appreciated' house, so the buyer/owner hasn't really recaptured/reduced their monthly expenses, but, transferred them to equity in another property.
Actually they DO recapture the expenses in the form of a lower mortgage payment on the new house than they would have if they had rented the first house rather than owned it.
Reply With Quote Quick reply to this message
 
Old 01-15-2015, 09:43 AM
 
Location: Mount Laurel
4,165 posts, read 9,095,216 times
Reputation: 3460
Quote:
Originally Posted by ncole1 View Post
Actually they DO recapture the expenses in the form of a lower mortgage payment on the new house than they would have if they had rented the first house rather than owned it.
You are assuming the rent and mortgage amount are equal. The lower monthly expense from renting mean one could use the difference elsewhere.
Reply With Quote Quick reply to this message
 
Old 01-15-2015, 10:01 AM
 
12,705 posts, read 9,961,918 times
Reputation: 9515
Quote:
Originally Posted by sj08054 View Post
You are assuming the rent and mortgage amount are equal. The lower monthly expense from renting mean one could use the difference elsewhere.
Yes. The point was to illustrate that mortgage plus other ownership costs is equivalent to a lower rent, not the same rent, in a situation where the house goes up in value. The rental equivalent is just that where as you say, you can invest elsewhere and have the same final net wealth.

Of course I am assuming a very small down payment on the first home; if this is not so, one must account for that opportunity cost as well.
Reply With Quote Quick reply to this message
 
Old 01-15-2015, 10:39 AM
 
18,848 posts, read 13,592,109 times
Reputation: 14263
I'm not sure why this is still being argued other than to win some fake academia created issue. Here is the definition for expense

Quote:
1ex·pense
\ik-ˈspen(t)s\
noun
: the amount of money that is needed to pay for or buy something
: an amount of money that must be spent especially regularly to pay for something
: something on which money is spent
Full Definition
Reply With Quote Quick reply to this message
 
Old 01-15-2015, 10:47 AM
 
Location: Mount Laurel
4,165 posts, read 9,095,216 times
Reputation: 3460
Quote:
Originally Posted by Lowexpectations View Post
I'm not sure why this is still being argued other than to win some fake academia created issue. Here is the definition for expense

Maybe because there are those who feel that taking out a loan to buy a car or house, they have not "spend" anything yet. They are just borrowing money and paying it back over time. The reality is that you really did "spent" the money. You own it.. just not the title.
Reply With Quote Quick reply to this message
 
Old 01-15-2015, 10:51 AM
 
18,848 posts, read 13,592,109 times
Reputation: 14263
Quote:
Originally Posted by sj08054 View Post
Maybe because there are those who feel that taking out a loan to buy a car or house, they have not "spend" anything yet. They are just borrowing money and paying it back over time. The reality is that you really did "spent" the money. You own it.. just not the title.

Which is a silly and why I said it's an academia exercise in arguing financial account for a business vs home budgets. If I bought a house for 1mm, I spent 1mm no matter if it came from cash or I took out a loan for the purchase.
Reply With Quote Quick reply to this message
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.

Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.


Reply
Please update this thread with any new information or opinions. This open thread is still read by thousands of people, so we encourage all additional points of view.

Quick Reply
Message:

Over $104,000 in prizes was already given out to active posters on our forum and additional giveaways are planned!

Go Back   City-Data Forum > General Forums > Economics > Personal Finance
Follow City-Data.com founder on our Forum or

All times are GMT -6.

© 2005-2019, Advameg, Inc. · Please obey Forum Rules · Terms of Use and Privacy Policy · Bug Bounty

City-Data.com - Archive 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35 - Top