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Why do so many people treat car payments and house payments as a "monthly cost", when principal repayment causes a corresponding decrease in liability?
Are you confusing budgeting and net worth calculations? Try NOT paying your house payment and just explaining to the bank that youre merely deferring your payoff period....
Why do so many people treat car payments and house payments as a "monthly cost", when principal repayment causes a corresponding decrease in liability?
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?
Technically it is not really an expense...it is debt to the bank....so yes its a liability.
The payment isn't either. It's a transaction that reduces your assets and your liabilities. Networth remains unchanged.
Most people who call it a monthly expense operate on a cash flow basis though, not net worth. The terminology may be incorrect(A true cash flow doesn't have "Expenses") but the effect is the same as an Expense would be on a P&L.
From a net worth/P&L Accounting perspective ncole is right though. Only the interest portion of the payment is a true Expense.
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?
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).
I think most people aren't in the process of earning PhDs and don't overly complicate their expenses by qualifying them My house payment is absolutely a "monthly cost" as in, I'm expected to pay on it every. single. month. It's money that needs to come out of my account and that's that.
Rarely do I sit around and consider it beyond that.
I think most people aren't in the process of earning PhDs and don't overly complicate their expenses by qualifying them My house payment is absolutely a "monthly cost" as in, I'm expected to pay on it every. single. month. It's money that needs to come out of my account and that's that.
Rarely do I sit around and consider it beyond that.
It doesn't really require PhD level thought though, and it is something you should consider.
People understand the concept at a high level, but many don't think about why.
Simple example, if you were to borrow $10,000 and pay it back over 3 years instead of 5 years, your payment would be higher per month. But, you would be paying less in interest because even though your "Payment" is higher, your "Expense" is lower because the expense is only the interest portion. Paying down the principal faster means less interest per month.
The people who don't understand this concept are the fools who think they got a good deal when the car dealership raised their interest rate but pushed the payment out over 5 years instead. They only look at the monthly payment as the "Expense." It's not until you break it down that you see which option is really better.
It doesn't really require PhD level thought though, and it is something you should consider.
People understand the concept at a high level, but many don't think about why.
Simple example, if you were to borrow $10,000 and pay it back over 3 years instead of 5 years, your payment would be higher per month. But, you would be paying less in interest because even though your "Payment" is higher, your "Expense" is lower because the expense is only the interest portion. Paying down the principal faster means less interest per month.
The people who don't understand this concept are the fools who think they got a good deal when the car dealership raised their interest rate but pushed the payment out over 5 years instead. They only look at the monthly payment as the "Expense." It's not until you break it down that you see which option is really better.
It's something everyone should be aware of.
Oh, cut the drama....
The comment about the PhD was particularly focused at the individual in this forum currently working on her PhD. It was playful banter...
And YES it was absolutely something I was aware of when we bought the condo. We consciously bought when inventory was high and values and rates were low (spring 2012).
But do I need to think about it on a monthly basis?
No, I don't.
I could pay extra a month and bring down interest I'm paying, I could refinance perhaps for a 15 year note (higher interest rate)... or I could do what I am doing: filling up my 401k, tax managed accounts and my other investment vehicles. When your paying 3.8% interest I don't see any point really in thinking about it. As far as I know, I'm not a "fool" and I did get a "good deal". Our condo was bought at $350k and now they go for about $440k.
Explain why *I* need to think about it differently.
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My house payment is absolutely a "monthly cost" as in, I'm expected to pay on it every. single. month. It's money that needs to come out of my account and that's that.
