Author Topic: Pet peeve of mine, depreciation  (Read 3776 times)

Chris22

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Pet peeve of mine, depreciation
« on: August 25, 2015, 09:46:38 AM »
Not to clutter up the FB thread, but I've seen this in a bunch of spots:

Further conversation revealed that he spends $1000 on the family cars every month, not including gas or depreciation.

Guys, you can't count a car loan PLUS depreciation.  It doesn't work that way. 

Using simple math, let's say you buy a $24k car and have a 4-year, 0% loan on it.  You will pay $500/mo to service the loan.

After 48 months, what will you have spent?  $24k.  You can only ever spend $24k on the purchase of the car (outside taxes, fees, maintenance, etc).  You have effectively realized (paid for) ALL of the depreciation on the car, and anything you get back in resale is just mitigation of that expense.  If after 10 years your car is worth $5k and you sell it, your car cost you $24k - $5k = $19k, it did NOT cost you $24k + ($24k - 5K). 

Depreciation is not additive.  Depreciation is the loss of value of an asset, but given that we are people, not businesses, what our asset value is is relatively irrelevant.  You can be "upside down" on your car note (car is worth less than payoff on the loan) but that just means you haven't made enough payments yet, it doesn't mean there are additional costs above and beyond the servicing of the loan.


Sorry, just a big pet peeve of mine.

ender

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Re: Pet peeve of mine, depreciation
« Reply #1 on: August 25, 2015, 09:51:21 AM »
I'm sure some people spend $1k/month on cars excluding principle or depreciation.

Forcus

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Re: Pet peeve of mine, depreciation
« Reply #2 on: August 25, 2015, 11:00:08 AM »
I use depreciation in calculating car costs, but that's because I set a certain time frame where I am relatively sure a given situation won't change (I usually use 36 months), for instance, commuting distance, family size. The assumption is at the beginning of the period I acquire the assets and at the end, I dispose of them. It's very much like a corporation but it makes sense to me.

I missed out on a Cruze Eco that was priced about 4k under market for no apparent reason a couple weeks ago. Plugging the belief that it would be at least worth what I paid for it, even with miles added on, in 36 months, depreciation was effectively zero. If it had been priced at market, depreciation would have been about 4k. Of course as you said that is not on top of purchase price but depreciation is a factor when you aren't keeping an asset forever which applies in my case. Anyway, based on the zero depreciation, lower maintenance costs, and better mileage, it made more sense to buy that newer "fancy" Cruze than to keep my paid for, fully depreciated Focus going. The wife still doesn't get my maths on this.

But yes depreciation + payments assuming total payoff is wrong.

KittyCat

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Re: Pet peeve of mine, depreciation
« Reply #3 on: August 25, 2015, 11:07:01 AM »
I heard from an insurance commercial that stated that they would pay for the value of the car plus depreciation. I was pleased that it was used properly.

zephyr911

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Re: Pet peeve of mine, depreciation
« Reply #4 on: August 25, 2015, 12:51:14 PM »
Yes, you are correct. There are two ways to view this: from a cash-flow standpoint, you'd count the entire payment (P&I) but not depreciation; calculating total return, you'd add in depreciation but classify the principal payment as an internal transfer and only count the interest portion of the payment as a cost.
No reasonable analysis would count both as costs, or, as you've pointed out, the accounting would drastically overstate the total cost.

BlueMR2

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Re: Pet peeve of mine, depreciation
« Reply #5 on: August 26, 2015, 09:38:15 AM »
I don't figure depreciation at all since I don't consider them in net worth calculations at all.  They're bought, the money is gone.  I consider cars as having zero value, just like I do furniture, bicycles, etc.  The only physical object I do count towards NW is the house, and even then I don't count on it for future income purposes like some do.

music lover

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Re: Pet peeve of mine, depreciation
« Reply #6 on: August 26, 2015, 02:14:37 PM »
The person buying the car when it's new pays 100% of the depreciation up front. There is no additional depreciation cost as long as they own it. When they sell it, they are then able to recoup a portion of that upfront cost.

jinga nation

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Re: Pet peeve of mine, depreciation
« Reply #7 on: August 26, 2015, 02:22:19 PM »
I don't figure depreciation at all since I don't consider them in net worth calculations at all.  They're bought, the money is gone.  I consider cars as having zero value, just like I do furniture, bicycles, etc.  The only physical object I do count towards NW is the house, and even then I don't count on it for future income purposes like some do.

This. +1. You read my mind. There is theory, and there is reality.
« Last Edit: August 26, 2015, 02:25:20 PM by jinga nation »

Chris22

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Re: Pet peeve of mine, depreciation
« Reply #8 on: August 26, 2015, 02:36:44 PM »
I don't figure depreciation at all since I don't consider them in net worth calculations at all.  They're bought, the money is gone.  I consider cars as having zero value, just like I do furniture, bicycles, etc.  The only physical object I do count towards NW is the house, and even then I don't count on it for future income purposes like some do.

For my daily drivers, I agree; my hobby car is not depreciating, it's (very, very slowly) appreciating, and it represents a large amount of cash sitting in my garage.  I always mentally treat it as a SHTF asset, where if something catastrophic happened I could get $10k for it pretty much right now (probably worth closer to $15k) if I absolutely had to. 

HairyUpperLip

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Re: Pet peeve of mine, depreciation
« Reply #9 on: August 26, 2015, 04:09:40 PM »
Do people ever calculate speculation appreciation for their car if they are also doing depreciation speculation?

:-D