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Nothing you posted makes you look like you are making less money. Viewing things as an expense or not doesn't change the impact on your net worth. Regardless of you you view princ payments and expense or not the impact on net worth is the same. Your logic isn't connecting
If you consider paying down debt/contributing to savings to be an expense, then you have a disconnect.
Normally, [Last month's Net Worth] + [This Months's Income] - [This Month's Expense] = [New Net Worth]
If you consider a contribution to a savings account to be an expense, then it's reducing your Net Income for the month.
From the "it's an expense" perspective, increasing contributions to your savings and paying down debt faster are increasing expenses in the month. That means it looks like you're making less per month under scenario 2 compared to the baseline of scenario 1.
When you remove the things that aren't expenses, you get the true net income, which is also the true change in net worth.
Scenario 2 contributes more to your net worth per month. The "expense" perspective makes it appear as if it doesn't.
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You are also misusing the term net income in how you are applying it to personal net income
Net Income is the difference between Income and Expenses. What other definition do you have?
Beyond that this thread is silly. #1 why would you care if people called princ payments an expense #2 they are expenses per multiple definitions of the word
If you consider paying down debt/contributing to savings to be an expense, then you have a disconnect.
Normally, [Last month's Net Worth] + [This Months's Income] - [This Month's Expense] = [New Net Worth]
If you consider a contribution to a savings account to be an expense, then it's reducing your Net Income for the month.
From the "it's an expense" perspective, increasing contributions to your savings and paying down debt faster are increasing expenses in the month. That means it looks like you're making less per month under scenario 2 compared to the baseline of scenario 1.
When you remove the things that aren't expenses, you get the true net income, which is also the true change in net worth.
Scenario 2 contributes more to your net worth per month. The "expense" perspective makes it appear as if it doesn't.
You are miscalculating net worth now. Assets - liabilities = net worth
Other than the fact you are completely wrong you don't even account for asset value fluctuation in your net worth calc
You are disconnected
Last edited by Lowexpectations; 01-14-2015 at 04:31 PM..
Unless you are simply playing with words -- I fail to understand your point? A house/car payment simply reflects the financing method one uses to pay for the ongoing 'cost' of shelter and transportation ... via a house/car. Would you, for example, claim that someone who paid cash for a house/car actually got them at 'no cost', because they wiped-out their financial liability in a single transaction?
The point is, I have seen people on C-D who make a decision to buy a house or car based on the monthly payment. In the car case, many on the Automotive forum seem to think the question of whether to keep an old car with high gas or repair bills vs. financing a new one should be based on monthly payment, rather than interest and depreciation. I have tried to explain over and over why this thinking is flawed, and it simply refuses to die. It is a simple exercise in finance to show that your ending wealth is independent of monthly payment amount, but instead affected by user cost (i.e. interest plus depreciation plus opportunity cost of equity).
Similarly, on these forums and elsewhere people looking at rental property view the cost of the property itself in terms of their monthly payment and then calculate a cash flow. Strictly speaking of course, this is irrational, unless liquidity is tight. This 'monthly payment mentality' is irrational, and this is easy to see if you do a simple calculation of ending wealth.
In any of the cases, absent liquidity problems or crunches, there is no situation in which you get a better answer treating principal payment as an expense than you do if you simply see it as it is - an internal transfer that is incidentally also required.
The point is, I have seen people on C-D who make a decision to buy a house or car based on the monthly payment. In the car case, many on the Automotive forum seem to think the question of whether to keep an old car with high gas or repair bills vs. financing a new one should be based on monthly payment, rather than interest and depreciation. I have tried to explain over and over why this thinking is flawed, and it simply refuses to die. It is a simple exercise in finance to show that your ending wealth is independent of monthly payment amount, but instead affected by user cost (i.e. interest plus depreciation plus opportunity cost of equity).
Similarly, on these forums and elsewhere people looking at rental property view the cost of the property itself in terms of their monthly payment and then calculate a cash flow. Strictly speaking of course, this is irrational, unless liquidity is tight. This 'monthly payment mentality' is irrational, and this is easy to see if you do a simple calculation of ending wealth.
In any of the cases, absent liquidity problems or crunches, there is no situation in which you get a better answer treating principal payment as an expense than you do if you simply see it as it is - an internal transfer that is incidentally also required.
Shopping for a car by payment is stupid because you will get screwed. That aside you must account for the total monthly expense because it typically gets paid from current cash flow. If you pay your bills from current cash flow not accounting for the entire payment is stupid just because you are using corp accounting and applying it to personal finance
This thread reminds me of when I was 18 or 19 and I worked side by side with a guy who had just completed his MBA. He was terminated within a year because he never got any work done. He sat there most of everyday breaking down the most mundane task and trying to create better ways to do things, better processes and new ideas yet he never really did anything
It is a "monthly cost" and expense. The car and mortgage payment you make each month reduces the amount you have to spend each month.
Superficially, it seems this to be the case. However, ultimately unless you are highly constrained by liquidity, the amount you have to spend each month is determined by what you think you need to save in order to achieve future goals. If future wealth enters how you make your decision on what you may spend now, however indirectly, then ultimately your budgetary constraint is not one of current cash flow but one of future wealth.
To the degree that this is in fact the case, cash flow is not what you should look at, rather, foregone future wealth is.
And the easy way of measuring the impact of a capital good you own such as a car or house on your future wealth, and thus on your current budgetary constraint, is the user cost, not the monthly payment.
Interest, opportunity cost, and depreciation (which is often negative for houses) form the basis of the user cost, along with other ownership costs. The monthly payment ultimately has nothing to do with it.
This thread reminds me of when I was 18 or 19 and I worked side by side with a guy who had just completed his MBA. He was terminated within a year because he never got any work done. He sat there most of everyday breaking down the most mundane task and trying to create better ways to do things, better processes and new ideas yet he never really did anything
I write these posts as my programs have been debugged and are running merrily in the background.
Superficially, it seems this to be the case. However, ultimately unless you are highly constrained by liquidity, the amount you have to spend each month is determined by what you think you need to save in order to achieve future goals. If future wealth enters how you make your decision on what you may spend now, however indirectly, then ultimately your budgetary constraint is not one of current cash flow but one of future wealth.
To the degree that this is in fact the case, cash flow is not what you should look at, rather, foregone future wealth is.
And the easy way of measuring the impact of a capital good you own such as a car or house on your future wealth, and thus on your current budgetary constraint, is the user cost, not the monthly payment.
Interest, opportunity cost, and depreciation (which is often negative for houses) form the basis of the user cost, along with other ownership costs. The monthly payment ultimately has nothing to do with it.
So if someone offered you a interest free mortgage 100k for a year your take it right? The 8333.00 a month it would require from your cash flow should be any issue since there is no expense
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.
Uh, no, they are not.
Loan proceeds are not income, and principal payments are not an expense - unless you are deviating from GAAP.
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