Cars: Expense or Asset?

Questions on how we spend our money and our time - consumer goods and services, home and vehicle, leisure and recreational activities
cjking
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Re: Cars: Expense or Asset?

Postby cjking » Sun May 14, 2017 12:53 pm

The value of a new car may be an insignificant part of net worth, but the depreciation on it a significant part of annual expenditure. You can only record depreciation if you've treated it as an asset in the first place. For me the motivation to treat a new car as an asset is not to make net worth more accurate, but to make annual expenditure reporting more accurate.

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Earl Lemongrab
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Re: Cars: Expense or Asset?

Postby Earl Lemongrab » Sun May 14, 2017 12:57 pm

I really don't know what the purpose of net worth calculation is. For me the only useful thing is the amount of investable assets that I have. Those are what retirement is based on, and what need to be maintained according to asset allocation. Trying to lump in shelter and transportation just confuses things.
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ImUrHuckleberry
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Re: Cars: Expense or Asset?

Postby ImUrHuckleberry » Sun May 14, 2017 1:03 pm

Earl Lemongrab wrote:I really don't know what the purpose of net worth calculation is. For me the only useful thing is the amount of investable assets that I have. Those are what retirement is based on, and what need to be maintained according to asset allocation. Trying to lump in shelter and transportation just confuses things.


Back when I had a lot of debt and finally realized things had to change, it was very helpful to track net worth because you can see you're making a ton of positive "big picture" progress paying down debt even if your savings and investments are not growing very much.

The Wizard
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Re: Cars: Expense or Asset?

Postby The Wizard » Sun May 14, 2017 1:15 pm

cjking wrote:The value of a new car may be an insignificant part of net worth, but the depreciation on it a significant part of annual expenditure. You can only record depreciation if you've treated it as an asset in the first place. For me the motivation to treat a new car as an asset is not to make net worth more accurate, but to make annual expenditure reporting more accurate.

This is misleading.
There is no need to "report" annual expenditure as a private citizen.
Depreciation in this context is primarily for businesses, especially with multiple vehicles.

I spent over $40,000 for my new truck in late 2015, for personal use. This vehicle will continue to have significant utility and value to me over the next decade. But I feel no need to be concerned about the current market value of this vehicle since I have no intention of selling it anytime soon...
Attempted new signature...

The Wizard
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Re: Cars: Expense or Asset?

Postby The Wizard » Sun May 14, 2017 1:17 pm

Earl Lemongrab wrote:I really don't know what the purpose of net worth calculation is. For me the only useful thing is the amount of investable assets that I have. Those are what retirement is based on, and what need to be maintained according to asset allocation. Trying to lump in shelter and transportation just confuses things.

Checko.
Net worth = estate value at death.
I have more vibrant things to be concerned about...
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Dottie57
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Re: Cars: Expense or Asset?

Postby Dottie57 » Sun May 14, 2017 1:21 pm

For me a car is a pure expense. I keep them for 10-15 years and then trade.

cjking
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Re: Cars: Expense or Asset?

Postby cjking » Sun May 14, 2017 1:32 pm

The Wizard wrote:There is no need to "report" annual expenditure as a private citizen.


Legal requirements are not the only reason anyone ever does accounting. (i.e. you have interpreted "report" in some narrow sense I didn't intend.)

EnjoyIt
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Re: Cars: Expense or Asset?

Postby EnjoyIt » Sun May 14, 2017 1:37 pm

avalpert wrote:
EnjoyIt wrote:I don't fully understand the purpose of this exercise. Does it really matter?

Unless you have a classic car, that car probably shouldn't be in your net worth calculation as it dubiously inflates it.

On the contrary, taking the cash outlay for the purchase and not recognizing that you have an asset that will be used over the next decade+ dubiously deflates your net worth.


I think we are both right. The value of newer cars decrease dramatically making you think you have a higher net worth today as compared to just a few months later.

Ignoring the fact that you need to buy another car every x years effectively decreases your net worth. I guess it is somewhere in between.

For me, and this is for me only, I see a car as an expense. When I buy it I picture the money gone. Although I could sell it for some value, that value will almost instantly be traded towards another car. I will then have to spend more money on top of that value for the next purchase. That money will also be gone and therefor in my eyes it is just an expense. This works well for me because my finances do not need to be compliant with SEC regulation or corporate accounting practices.

If I was a corporation requiring a balance sheet, then I would have no choice but to put the car in as an asset allowing for depreciation. Luckily I can keep things simple.

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Pajamas
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Re: Cars: Expense or Asset?

Postby Pajamas » Sun May 14, 2017 1:49 pm

MindBogler wrote:
Pajamas wrote: You can easily choose to live some place where cars are not needed.

While moving is possible, calling it easy is ignorant of most people's reality.


Yes, I agree, it certainly is difficult if you start out with your viewpoint. You proved my point, thank you! :beer

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Hawaiishrimp
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Re: Cars: Expense or Asset?

Postby Hawaiishrimp » Sun May 14, 2017 2:03 pm

Depreciating assets most of the time. Except some rare classic cars.
I save and invest my money, so money can make money for me, so I don't have to make money eventually.

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Phineas J. Whoopee
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Re: Cars: Expense or Asset?

Postby Phineas J. Whoopee » Sun May 14, 2017 2:07 pm

If the fact one has to pay money to buy a car makes the car an expense, does the fact one has to pay money to buy mutual fund shares make the shares an expense? Even if there's a load echoing initial depreciation of a vehicle? Of course not.

I think what we're seeing in this thread is the flip side of supposing a bond's market value and YTM don't fluctuate if one intends to hold it to maturity. Here, I think some of us are supposing the car, once purchased, has no value. One can do that if one likes, but it's a distortion of reality.

We may even be seeing the same supposition here in this thread about the value of owned dwellings, where a house one owns has value if one doesn't live in it, but the very same house one owns immediately loses all value if one later moves into it.

Naturally assets cost money to acquire. It doesn't stop them from being assets.

It also doesn't stop any non-GAAP individual from thinking of some of their assets as expenses if they please.

PJW

killjoy2012
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Re: Cars: Expense or Asset?

Postby killjoy2012 » Sun May 14, 2017 3:55 pm

I think you guys over analyzing the OP's post/point. This isn't a debate on GAAP and defining terms. This is the realization by the OP that car ownership generally has a monthly operating cost regardless if you purchase new with a 4-7 year financing + start incurring more maint cost as the warranty ends.... vs. just leasing a new vehicle and assuming a monthly "vehicle use" expense ongoing forever w/ no intention of ever owning a vehicle outright. And I think, generally speaking, he's right... although the leasing scenario is usually slightly more expensive (and doesn't work for high mileage drivers), but also allows for consistently driving new vehicles.

Many on this forum endorse purchasing a vehicle & driving it into the ground, vs. leasing, as the most financially prudent approach - and I think that's generally correct financially. However, outside of people on this forum, including your family & friends, how many people do you know that buy and drive the same car for 15 years? Even 10 years? My guess is very few. Most people usually purchase with a 5-7 year loan, and then go buy a new car shortly after, even sometime before, the loan is paid off. Which makes what they're doing really not all that different from leasing to an extent.

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Re: Cars: Expense or Asset?

Postby sunny_socal » Mon May 15, 2017 1:23 pm

killjoy2012 wrote:I think you guys over analyzing the OP's post/point. This isn't a debate on GAAP and defining terms. This is the realization by the OP that car ownership generally has a monthly operating cost regardless if you purchase new with a 4-7 year financing + start incurring more maint cost as the warranty ends.... vs. just leasing a new vehicle and assuming a monthly "vehicle use" expense ongoing forever w/ no intention of ever owning a vehicle outright. And I think, generally speaking, he's right... although the leasing scenario is usually slightly more expensive (and doesn't work for high mileage drivers), but also allows for consistently driving new vehicles.

Many on this forum endorse purchasing a vehicle & driving it into the ground, vs. leasing, as the most financially prudent approach - and I think that's generally correct financially. However, outside of people on this forum, including your family & friends, how many people do you know that buy and drive the same car for 15 years? Even 10 years? My guess is very few. Most people usually purchase with a 5-7 year loan, and then go buy a new car shortly after, even sometime before, the loan is paid off. Which makes what they're doing really not all that different from leasing to an extent.


Exactly.

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Re: Cars: Expense or Asset?

Postby bloom2708 » Mon May 15, 2017 1:42 pm

What if you were reading this thread it had never even crossed your mind to drive a car for 10 or 15 years? Some people try to minimize the amount spent on their cars? Who would have thought that happens. :o

Everyone I see gets a new $60k car every 2 or 3 years. They must be "rich". That or they do very expensive leases every 2 or 3 years.

Value the differences in opinion and spend some time chewing on the various options.
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sco
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Re: Cars: Expense or Asset?

Postby sco » Mon May 15, 2017 11:22 pm

killjoy2012 wrote: However, outside of people on this forum, including your family & friends, how many people do you know that buy and drive the same car for 15 years?



I would say 1/3 buy and hold the cars. another 1/3 buy the cheapest POS they can find (that already has problems), and another 1/3 turn in a new car as soon as it one car routine maintenance bill matches their lease/loan payment...

To each their own. On our street, maybe 1 or 2 houses lease them and flip them a lot.. Most buy and hold, except for the teenager cars of course...

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Re: Cars: Expense or Asset?

Postby Alchemist » Tue May 16, 2017 12:13 am

I don't think there is a 'right' or wrong way to answer the question from a personal finance perspective. Obviously from an accuracy of terms perspective, yes, obviously a car is an asset just like the Mac Book pro I'm typing this on is an asset.

How you calculate that in your personal budgeting? Meh, whatever works for you so long as you do it consistently. I personally calculate my car's value as I find that helps me to make more rational choices on the purchase of it. When I was a college student I actually appraised used cars for a living, so I am very comfortable/confident in doing so atleast fairly accurately (I also find it fun). I am a 'pay cash for 2-3 year old used cars' type of Boglehead. That means I buy cars that have already hit the hardest part of their depreciation up front. The depreciation slide from that point is much more gradual. When I think of a car as an asset and therefore want to minimize the depreciation of it, it keeps me from tempting myself with spending significantly more for a slightly newer/better car. This is important in my case as I am a 'car guy', and if I do not put strict limits on my car buying behavior I could easily convince myself to spend more than I ought to. For others, viewing the car as a total expense upfront could be more helpful to them in making purchasing decisions. I think ultimately this is a question of angels and heads of pins.

wfrobinette
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Re: Cars: Expense or Asset?

Postby wfrobinette » Tue May 16, 2017 1:10 pm

celia wrote:You could say the same thing about a house. It is both an on-going expense as well as an asset. However, the house has the potential to be worth a lot more in the future whereas a car will usually be worth less.

For me, the biggest difference between the two is that the car is also a LIABILITY, much more so than a house. It can be in an accident and you can lose not only the car's value but also incur injuries/losses that are more than what your insurance(s) will cover.


Can't the same thing happen with a house? An item is either an asset or liability. They're mutually exclusive.

A house is an asset plain and simple. It may lose value, gain value or neither lose or gain value. The ongoing expense is either paying off interest on a liability / insurance or maintenance of some kind. Your house and everything in it depreciates as well. If you don't have replacement cost on your house and it's damaged, the insurance company will gladly tell you how much it has depreciated. Many of my neighbors found that out the hard way after a freak hail storm in PA in 2014. Roof and siding destroyed and they got about $0.30 on the dollar.

A car is an asset plain and simple. It may lose value, gain value or neither lose or gain value. The ongoing expense is either paying off interest on a liability, depreciation, insurance or maintenance of some kind. Don't believe it's an asset? Care to guess what happens in a divorce, law suit or bankruptcy?

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Re: Cars: Expense or Asset?

Postby wfrobinette » Tue May 16, 2017 1:16 pm

EnjoyIt wrote:
avalpert wrote:
EnjoyIt wrote:I don't fully understand the purpose of this exercise. Does it really matter?

Unless you have a classic car, that car probably shouldn't be in your net worth calculation as it dubiously inflates it.

On the contrary, taking the cash outlay for the purchase and not recognizing that you have an asset that will be used over the next decade+ dubiously deflates your net worth.


I think we are both right. The value of newer cars decrease dramatically making you think you have a higher net worth today as compared to just a few months later.

Ignoring the fact that you need to buy another car every x years effectively decreases your net worth. I guess it is somewhere in between.

For me, and this is for me only, I see a car as an expense. When I buy it I picture the money gone. Although I could sell it for some value, that value will almost instantly be traded towards another car. I will then have to spend more money on top of that value for the next purchase. That money will also be gone and therefor in my eyes it is just an expense. This works well for me because my finances do not need to be compliant with SEC regulation or corporate accounting practices.

If I was a corporation requiring a balance sheet, then I would have no choice but to put the car in as an asset allowing for depreciation. Luckily I can keep things simple.


You can keep it that simple until a lawsuit, divorce or bankruptcy.

wfrobinette
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Re: Cars: Expense or Asset?

Postby wfrobinette » Tue May 16, 2017 1:23 pm

6bquick wrote:I started my answer with my feeling towards kiyosaki. no need to prove anything to me. I realize it's not an infallible sentiment, but it does do a good job, IMO, of illustrating what is and isn't an "asset". That word is used far to loosely by most. a $10k Civic and $10k of vtsax are not the same.


Not so good at explaining. The house and car could be sold for cash right? Doesn't that generate money?

VTSAX may lose value, gain value or neither lose or gain value. You pay 0.04% expenses each year on it as well. In reality, VTSAX could go down 50% next year. Couldn't it be classified as a potential liability then?

In fact, VTSAX doesn't make you a dime until it's sold at a profit. Don't forget dividend/capital gains/income taxes as expenses.

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Phineas J. Whoopee
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Re: Cars: Expense or Asset?

Postby Phineas J. Whoopee » Tue May 16, 2017 4:30 pm

wfrobinette wrote:...
In fact, VTSAX doesn't make you a dime until it's sold at a profit. Don't forget dividend/capital gains/income taxes as expenses.

Only if one supposes the unit of account function of money doesn't exist.
PJW

slowbutsteady
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Re: Cars: Expense or Asset?

Postby slowbutsteady » Tue May 16, 2017 5:22 pm

daveydoo wrote:
sunny_socal wrote:
Which view is more accurate?


If you don't have much money, it's an "asset." Just like your flat-screen and your blender :D . If you feel compelled to include it as a line item on your net-worth spread sheet, you have too much car, imo.


Funny, but I kinda like your take. Gave it some thought, but could not fault it much.

But don't say it again, you'll make some of us unhappy :D

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Re: Cars: Expense or Asset?

Postby madbrain » Tue May 16, 2017 5:32 pm

sunny_socal wrote:Which view is more accurate?


Both are accurate.

I have several different reports in Quicken to account for both methods.

One is a "cash flow" report. All money spent towards car maintenance and car loan payments is recorded as an expense. Ie. this is a report that excludes the car loan accounts .

The other is a net worth report, which encompasses all my accounts, including the car loan payments, as well as car "asset" accounts. The trick is be able to estimate the depreciation of the car over time to update the value of these accounts.

I treat this exactly the same for the house (mortgage payment, and asset account with the value).
The main difference is that the car value depreciates towards zero over the long term, whereas the home value usually does not, if properly maintained.

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Re: Cars: Expense or Asset?

Postby madbrain » Tue May 16, 2017 5:39 pm

IMO wrote:And it can become a liability, for example, you bought too much car for your budget/income and you are upside down in the loan.


As long as you have a loan or lease payment, there is a fixed liability associated with the car - whether you are upside down on the loan or not. Usually, regardless of what car you buy, if you finance most of the car value, you are upside down on day 1, due to the fact that the car depreciates the moment you take it off the dealer's lot. Buying a new car and financing it in full is not necessarily a bad thing if the financing costs are sufficiently low, as they tend to be currently.

That said, I have a 9ft concert grand piano that is worth more than either of my cars, and probably worth more than both of the cars combined even if they were paid in full, actually. I don't include the piano as an asset in my net worth. Maybe I should. But I don't intend to ever sell the piano, so I don't. Whereas for the cars, it is a certainty that I will replace them at some point. For the house, even though I don't intend to move and sell it either, you never know what life has in store, and it is a very significant part of my net worth, so I do include it.
Last edited by madbrain on Tue May 16, 2017 5:45 pm, edited 1 time in total.

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Re: Cars: Expense or Asset?

Postby madbrain » Tue May 16, 2017 5:44 pm

celia wrote:For me, the biggest difference between the two is that the car is also a LIABILITY, much more so than a house. It can be in an accident and you can lose not only the car's value but also incur injuries/losses that are more than what your insurance(s) will cover.


A house also has very liability in terms of maintenance, utilities, property taxes, which are usually far higher than the ongoing registration, fuel and maintenance cost for a car. We have an extremely large house and 2 small economy cars, so the liability is far larger for the house than for the car.

As far as personal injury liability, accidents can happen to your guests in a house as well, though that's much less likely than in a car. But you need to be covered for both. The combined insurance costs for our 2 cars is about the same as the insurance cost for our home.

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Re: Cars: Expense or Asset?

Postby madbrain » Tue May 16, 2017 5:48 pm

cjking wrote:The value of a new car may be an insignificant part of net worth, but the depreciation on it a significant part of annual expenditure. You can only record depreciation if you've treated it as an asset in the first place. For me the motivation to treat a new car as an asset is not to make net worth more accurate, but to make annual expenditure reporting more accurate.


Yes, and you can record depreciation for a house as well, which can happen in a recession. I watched my Silicon valley townhouse value go from $230k in 1997 to $620k in 2006 to $450k in 2012 when it was ultimately sold. Even though it was sold for nearly double the purchase price in the end, it really wasn't a great rate of appreciation, especially not net of the ongoing maintenance and financing expenses - I would say about breakeven.

Of course, I also bought 2001 Prius and watched it go from $20k to $5k in 10 years too. That wasn't great either, but pretty good as far as cars go. Still very much negative net of all the ongoing expenses (insurance being the main one for a Prius).

EnjoyIt
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Re: Cars: Expense or Asset?

Postby EnjoyIt » Wed May 17, 2017 1:13 am

wfrobinette wrote:
EnjoyIt wrote:
avalpert wrote:
EnjoyIt wrote:I don't fully understand the purpose of this exercise. Does it really matter?

Unless you have a classic car, that car probably shouldn't be in your net worth calculation as it dubiously inflates it.

On the contrary, taking the cash outlay for the purchase and not recognizing that you have an asset that will be used over the next decade+ dubiously deflates your net worth.


I think we are both right. The value of newer cars decrease dramatically making you think you have a higher net worth today as compared to just a few months later.

Ignoring the fact that you need to buy another car every x years effectively decreases your net worth. I guess it is somewhere in between.

For me, and this is for me only, I see a car as an expense. When I buy it I picture the money gone. Although I could sell it for some value, that value will almost instantly be traded towards another car. I will then have to spend more money on top of that value for the next purchase. That money will also be gone and therefor in my eyes it is just an expense. This works well for me because my finances do not need to be compliant with SEC regulation or corporate accounting practices.

If I was a corporation requiring a balance sheet, then I would have no choice but to put the car in as an asset allowing for depreciation. Luckily I can keep things simple.


You can keep it that simple until a lawsuit, divorce or bankruptcy.


8-) Prenup 8-)

inbox788
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Re: Cars: Expense or Asset?

Postby inbox788 » Wed May 17, 2017 1:15 am

6bquick wrote:While he's no hero of mine, I like Robert Kiyosaki's take on asset/liability. Super simple. If it makes you money, it's an asset. if it costs you money, it's a liability. So, according to that, both your car, (save maybe uber drivers) and your primary residence are liabilities, not assets. as Mr. Whoopee mentioned, it can be more complex in real life, but i've found this an easy way to explain things to people.


IMO, it's a depreciating asset! The depreciation is the expense.

If I hammer nails for a living, my hammer is an asset, while the nails an expense? My car gets me to work so I can earn a living, so it's an asset?

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Re: Cars: Expense or Asset?

Postby wfrobinette » Wed May 17, 2017 12:54 pm

Phineas J. Whoopee wrote:
wfrobinette wrote:...
In fact, VTSAX doesn't make you a dime until it's sold at a profit. Don't forget dividend/capital gains/income taxes as expenses.

Only if one supposes the unit of account function of money doesn't exist.
PJW


Technically yes. However, unrealized gains are just that. While you've "made" money on paper, they truly aren't gains until the asset is sold.

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Re: Cars: Expense or Asset?

Postby Phineas J. Whoopee » Wed May 17, 2017 1:48 pm

wfrobinette wrote:...
Technically yes. However, unrealized gains are just that. While you've "made" money on paper, they truly aren't gains until the asset is sold.

But, isn't physical cash money on paper?
PJW

wfrobinette
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Re: Cars: Expense or Asset?

Postby wfrobinette » Thu May 18, 2017 7:29 am

Phineas J. Whoopee wrote:
wfrobinette wrote:...
Technically yes. However, unrealized gains are just that. While you've "made" money on paper, they truly aren't gains until the asset is sold.

But, isn't physical cash money on paper?
PJW


Yes it is. Inflation aside, $100 in cash will always be $100. Where as $100 in VTSAX today could be $80 tomorrow.

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Re: Cars: Expense or Asset?

Postby dbr » Thu May 18, 2017 7:48 am

wfrobinette wrote:
Phineas J. Whoopee wrote:
wfrobinette wrote:...
In fact, VTSAX doesn't make you a dime until it's sold at a profit. Don't forget dividend/capital gains/income taxes as expenses.

Only if one supposes the unit of account function of money doesn't exist.
PJW


Technically yes. However, unrealized gains are just that. While you've "made" money on paper, they truly aren't gains until the asset is sold.


They are gains and they are not money until the asset is sold. But the whole asset is not money until it is sold. Stocks aren't money or they are. But that is what that discussion about money that is money and money that is a unit of account is all about. The point is that you consistently apply one definition or the other.

CyclingDuo
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Re: Cars: Expense or Asset?

Postby CyclingDuo » Thu May 18, 2017 9:24 am

sunny_socal wrote:We have many car threads:
- Should I replace this car?
- Should I buy a NEW car?
- Should I buy a luxury car?
- How to shop for a car?

The responses seem to come from one of two perspectives:
1. The car is an expense (like rent, mortgage, utility bill...)
2. The car is a depreciating asset. (So don't dump money into it!)

I used to belong squarely in the second camp and I've always thought leasing is crazy (and for me it is, but I can see that for many people it could be a good deal.) Recently I've started to rethink my position.

Car as an expense
- Here in the USA a car is pretty much required. In my city it's definitely required, it would take 2-3 hours each way for my commute.
- You're paying for insurance, maintenance and gas no matter what
- The value of the car doesn't matter much, it's just transportation
- Newer cars cost more to acquire but maintenance is less

Car as an asset
- If you buy the car, it's worth something and can be sold if necessary
- The decision to buy new vs used has huge implications on how much value remains
- The ownership period also affects the value of the car. After 10 years any car is close to rock bottom, after 15 years it's definitely there.

I drive about 25k miles/year so I still think leasing isn't right for me although there are seemingly great deals out there. So while I always still think of buying a car, I'm now thinking over a 10-year period and cost per year. Ultimately then the car is still an expense because I'm left with nothing except the memories when I'm done with it.

Which view is more accurate?


Both are accurate if you combine them. :mrgreen:

Usually, the expenses over the years will dwarf the asset price itself as you figure the true cost of ownership.

The asset is purchased. The cost of ownership over time (be it one year, three years, five years, 10 years, 15 years ) is the price paid for the car - depreciation, plus tax/title/license, plus insurance, repairs, maintenance, tires, gas/oil/fluids/filters, parking, traffic tickets, (if you finance - then the financing costs, interest) etc... .

The asset portion (the actual car itself) can be sold at any time. The amount you receive for the asset (usually will be within the current going market price range for the vehicle, condition, mileage, supply/demand in your region) is usually applied to the purchase of the next asset (car).

With this method, the combination of the asset purchase price, plus all of the expenses combined, minus the resale amount when the car is sold or traded back in = total cost of ownership. You can break it down per month, per year, per life of car - however you want to do it.

If you keep all of your records (we have done this for some odd OCD reason in the filing cabinet in the basement), you can see the true cost of ownership for each vehicle over the years. It's eye opening, or can be for those who have never thought of it in that way. :shock: :shock:

Our strategy has been to maintain and drive our vehicles for a good number of years (we pay cash for the purchase) so that the cost of ownership hopefully averages out in our favor over time. Our goal has been, up to this point, to try to keep the monthly cost average over time at $350 per vehicle (that cost includes the car, taxes, and all expenses for insurance, repairs, maintenance, tires, etc...). Doing so, allows us to have two vehicles (one for each spouse) and keep monthly/annual costs for everything averaged out over time below the 1/10th of gross income threshold. Obviously, as our income has increased over the years, the $350 is sort of an arbitrary goal that we have surpassed. We are not high income earners, but we could goose that monthly goal to $500 per vehicle and still be within the 1/10th threshold. Or we could combine one older car with one newer (higher cost vehicle) to operate a mix within the threshold.

It always feels painful to pay repair expenses on older vehicles, but don't lose sight of the longer term total costs.

Example of one vehicle we own, a 2005 Honda Element.

New Purchase price was $20,299.
This car has now been in service for 144 months.
Resale value in our region is $3500 - $6K. (For various reasons there is a rather unique - nay, odd - supply/demand issue for the used Honda Elements since they no longer make them.)
No accidents and the car is in very good shape.

Insurance has cost $4752 for 12 years.
Fuel has cost $20,739.
21 oil changes of which 19 of them were DIY. The two at the shop cost a total of $72, the 19 DIY's cost $366 for oil/filter for a grand total to date of $438 ($21 an oil/filter change).
Tires = 4 sets for total of $2320.
Spark Plugs = DIY changed them once $35
Battery = 3 replacements for a total of $292.
One Alternator Replacement = $478
One Windshield Replacement = $223
Rotors/Pads/Calipers = $532 plus one replacement of calipers all around for $720

Other small things like bulbs, new floor mats, seat covers, rear differential fluid replacement (DIY for $18), a couple of DIY belt replacements, etc.. over the years total just a bit less than $500.

Original New Car Purchase = $20,299
Original Tax/Title/License = $1325
Recurring remaining 11 years of tax/title/license = $1149
Repair/Maintenance/Fuel Expenses to date = $31,039
Current Asset Value = $3500 - $6K

Asset: $20,299 - $15,799 depreciation = $4,500 (expected resale value in our region for the condition of the car)
Expenses: $33,513 + $15,799 depreciation = $49,312 (averages out to $342.44 per month to date figured at 144 months or $4109 per year)

Not included are the three traffic tickets over the 12 years (turned right on a red light where not allowed, 63 in a 60 mph zone, and 35 in a 30 mph zone) - but they totaled about $400. Parking lot/parking meters/valet over the 12 years are receipts I did not keep. However, it has not been much due to the location where we live and only having to pay for lots/meters on rare occasions (such as out of town vacation trips).

True cost of ownership, whether one calls it an asset, an expense, or a combination of the two to get the true cost (the method we prefer) - is always eye opening. Add in finance charges, more expensive vehicles (which equates to more expensive insurance), as well as a higher cost of true ownership can be a good way to gauge how long to keep a vehicle, how much it is going to cost you over the number of years you keep the vehicle so you can come up with a solution for transportation that meets your needs and budget.

The Element will continue to be driven and used in our household. One never knows what repairs are coming up, but the maintenance, fuel, insurance, tax/title/registration are all working in our favor to continue to lower the overall average cost of ownership even more as the months ahead unfold. We have discussed keeping or selling this particular vehicle, but for now the decision has been made to keep on running it since it works well, is in good shape, and does well for our needs (bikes, dogs, Winter snow, gravel roads, camping, hauling "stuff"). We could now have another vehicle to pair with it that had a true cost of ownership in the $650-$750 per month range, and remain within our 1/10th of gross income threshold.

Asset + expenses = true cost of ownership

wfrobinette
Posts: 433
Joined: Fri Feb 20, 2015 3:14 pm

Re: Cars: Expense or Asset?

Postby wfrobinette » Thu May 18, 2017 10:50 am

dbr wrote:
wfrobinette wrote:
Phineas J. Whoopee wrote:
wfrobinette wrote:...
In fact, VTSAX doesn't make you a dime until it's sold at a profit. Don't forget dividend/capital gains/income taxes as expenses.

Only if one supposes the unit of account function of money doesn't exist.
PJW


Technically yes. However, unrealized gains are just that. While you've "made" money on paper, they truly aren't gains until the asset is sold.


They are gains and they are not money until the asset is sold. But the whole asset is not money until it is sold. Stocks aren't money or they are. But that is what that discussion about money that is money and money that is a unit of account is all about. The point is that you consistently apply one definition or the other.


If you refer back to my original post, I was commenting on someone equating assets to those things that make money and liabilities to those things that cost money. The point I was trying to make was that while VTSAX can make money it also could lose money. I even said that.

It all depends on what definition of money you are using. M1, M2, M3. Sure I count my savings(M2) and other liquid investments(stock's, bonds, CD's)(M3) in assets as part of my money. However, I'm also realistic as to what money will actually pay my bills. At the end of the day, can I really exchange(M2/M3) for goods and services without first converting them to cash/checking(M1)? Nope.

The vast majority of my "money" is in M3. Some of it in tax deferred and some in taxable accounts each with their own tax rules and early withdrawal penalties. M3 is subject to high volatility. What I have today may be more or less tomorrow right?

In practical terms it's nice to say I have 100k(made up # with my contributions of 60k) in my 401k at age 46 but if I want to use it all now I'd only have (62k) of it to spend(thanks to my 28% tax bracket and 10% penalty). How much did I really make? 2k Is it really fair for you to say you've made 40k?

How about this one. I have 100k(60k contributions) in my deferred comp plan. I must take it in one lump sum upon termination. I only get 72k of it. How much did I make? 12k. Is it really fair for you to say you've made 40k today? To me it's not that's why I chop 28% of the balance when I sum my balances across accounts.

Now lets say I kept that 401k until 59.5 and contributed no more money. Unfortunately, the market crashed and the value is only 80k when I turn 59.5. Cash out and have 57.6k How much money did I really make? I lost 2.4k. Is it really fair for you to say you've made 40k today when you have no idea what you'll have in the future?

So why do we assume that we've made money on something it until we have cash in hand? All we have is principal and unrealized gains/losses. Again, I keep my total balance and I even like to say I "made" 15% on each $ last year or I lost 15% last year. But unless I lock in those gains/losses and settle with the IRS, I really haven't made/lost anything. I have something worth more or worth less.

Additional edits.

Your investments, cash, etc are assets. When we think about accounting principles these belong on a balance sheet(net worth statement). When we think of a business making money we never say a company made money because their balance sheet changed. We say their value/worth has increased/decreased. They often break out unrealized gains/losses to show potential income in future periods. Even their balance sheet breaks out cash vs other money.

For determining how much a company made, the income statement which includes the gain/loss on disposal of assets/investments and tax expenses is used. Why should that be any different for an individual? It's not. How much you made( less expenses) is listed on IRS form 1040 and your net income(what you truly make) is that value - tax incurred.

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Phineas J. Whoopee
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Re: Cars: Expense or Asset?

Postby Phineas J. Whoopee » Fri May 19, 2017 12:56 pm

It's the cash flow statement and the balance sheet. If you, wfrobinette, wish to ignore the latter, as an individual you are free to do so. There's nothing new about this misunderstanding of money. It trips people up.
PJW

SouthernCPA
Posts: 611
Joined: Wed Sep 23, 2015 10:20 am

Re: Cars: Expense or Asset?

Postby SouthernCPA » Fri May 19, 2017 2:19 pm

I know how to record a vehicle purchase and ongoing expenses based on GAAP or Tax rules. It's an asset on the balance sheet and it incurs ongoing expenses on the income statement. Going back and forth about each others own personal definitions doesn't really mean anything. Treat it how you want to treat it in your record keeping.

If you're not comparing it to other individuals financial statements (not sure why you'd need to) then it really doesn't matter how you classify it. Do what works best for you.

Being a CPA, I naturally think of everything in terms of GAAP. So that's what works best for me. To those who would criticize me and say "well it doesn't make sense because you can't pay your bills with the car!!", I would say, yes you are correct, but I can look at company financial statements, individual financial statements, etc and determine how we're looking as far as current assets, liquid assets vs upcoming obligations, etc. I don't have trouble reading financial statements based on GAAP and that's how my brain works, so that's how I keep track of everything. Obviously I know I can't pay my bills based on my car equity, but it does paint a complete picture of what all your money has gone into. Do what works best for you. Unless you're comparing two individuals for some reason, I don't see why classification consistency needs to be reached. That's what GAAP is for...


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