Author Topic: How to categorize a car purchase in the budget?  (Read 625 times)

ginjaninja

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How to categorize a car purchase in the budget?
« on: August 13, 2019, 10:11:33 AM »
I just bought a new car with cash.  How have you done similar larger purchases in your budget? 

I do not want to put it into my "auto and transport" section for 1 month it would be a huge spike and might make analysis of each category more difficult.  This is hopefully only a 1x/5-10 years type of purchase and I do not count the value of my car in my net worth. 

This seems like it would be easier if I had set up a car payment, but that is not the case. 


SimpleCycle

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Re: How to categorize a car purchase in the budget?
« Reply #1 on: August 13, 2019, 04:15:51 PM »
I just put it as “Car Purchase”, used only every 10 years or so.

Syonyk

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Re: How to categorize a car purchase in the budget?
« Reply #2 on: August 13, 2019, 05:14:21 PM »
I just put it as “Car Purchase”, used only every 10 years or so.

Seriously.  It's a car purchase.  It presumably comes out of some savings category.

I'm not one of those "every penny has to be allocated to a pre-designated category" types, so it's not a problem.

sailinlight

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Re: How to categorize a car purchase in the budget?
« Reply #3 on: August 13, 2019, 06:17:50 PM »
I transfer the money to an asset class but then depreciated it as expenses over the next three years, even though I plan to keep it for much longer. Like you, I don't like to see huge spikes in expenses.

jiimmy

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Re: How to categorize a car purchase in the budget?
« Reply #4 on: August 13, 2019, 07:24:02 PM »
I transfer the money to an asset class but then depreciated it as expenses over the next three years, even though I plan to keep it for much longer. Like you, I don't like to see huge spikes in expenses.

I do this too. OP traded one asset for another, although this new asset will depreciate. From an accounting perspective, the monthly depreciation is your expense, not the full amount of your purchase. I bought a used car a few years back for $3,800. I'm depreciating it down to a $300 scrap value over five years. Lots of people exclude certain assets (like cars) from NW, but since I'm an accountant I like to do things properly ;-)

reeshau

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Re: How to categorize a car purchase in the budget?
« Reply #5 on: August 14, 2019, 02:56:01 AM »
You could also have just directly budgeted for it, presumably when you sat down at the beginning of the year to set your budget.

If this makes your head spin, you should think through how you would handle less predictable large expenses, like replacing a roof or AC.

ginjaninja

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Re: How to categorize a car purchase in the budget?
« Reply #6 on: August 14, 2019, 07:21:20 AM »
@reeshau I am reading your comment as very condescending, so please correct me if I am wrong.  I had it set in my budget and savings plan to purchase a car (I paid cash that I have accumulated).  Of course I will have other expenses when I have a house purchase but I plan on categorizing housing expenses outside of discretionary spending.  I was curious as to how others categorize purchases on a monthly spend/budget statement.  I track every category to the penny monthly and like to compare year over year expenses to find room to optimize.  a $10K purchase is unusual and will throw off my pretty graphs.

@jiimmy and @sailinlight how do you do the depreciation calculations (I am an engineer not accountant so I have not seen this calculation before).  It actually makes much more sense to me to count a monthly depreciation cost rather than the whole purchase, this is how we calculate our equipment costs in my job, if we install a piece of equipment that will last 20 years we do not take the full hit in one year.

 

RWD

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Re: How to categorize a car purchase in the budget?
« Reply #7 on: August 14, 2019, 07:31:09 AM »
@jiimmy and @sailinlight how do you do the depreciation calculations (I am an engineer not accountant so I have not seen this calculation before).  It actually makes much more sense to me to count a monthly depreciation cost rather than the whole purchase, this is how we calculate our equipment costs in my job, if we install a piece of equipment that will last 20 years we do not take the full hit in one year.
This is how I handle my car purchases as well. I use GnuCash for accounting but any software (or spreadsheet) worth its salt should be able to do it like this ($10k car example):
Car purchase: $10k from asset "Savings" to new asset "Car"
Depreciation: $1k from asset "Car" to expense "Depreciation"

I calculate the depreciation by looking up my cars' values on Kelley Blue Book. The difference between what I paid and the first time I check the value is the first amount of depreciation. From there I then just compare to the previous KBB valuation. Sometimes it goes up in value (I calculate it quarterly) in which case I just transfer the value back from the Depreciation expense category back to the Car asset category. When I sell a car I do a final depreciation transfer to make the Car asset value match the selling price of the car. Then I transfer that value back into savings (or wherever I received payment for the sold vehicle).

reeshau

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Re: How to categorize a car purchase in the budget?
« Reply #8 on: August 14, 2019, 07:43:16 AM »
@reeshau I am reading your comment as very condescending, so please correct me if I am wrong.  I had it set in my budget and savings plan to purchase a car (I paid cash that I have accumulated).  Of course I will have other expenses when I have a house purchase but I plan on categorizing housing expenses outside of discretionary spending.  I was curious as to how others categorize purchases on a monthly spend/budget statement.  I track every category to the penny monthly and like to compare year over year expenses to find room to optimize.  a $10K purchase is unusual and will throw off my pretty graphs.

I didn't mean it as condescending.  I mean you could simply raise your budget for the year for $10k, under cars, when you know you are going to spend.  There is no law that budgets have to be flat, or on a constant slope.  And of course, a car purchase isn't the only big thing--there will always be "something," so you may drive yourself crazy trying to flatten everything.  For example, how do you depreciate a major vacation?  But in the same sense, the budget will be *relatively* flat, because there will always be something...

Depreciation is fine as a concept:  you can treat these things as wasting assets, like a business does, or you can hold separate sinking funds and then take money from them.  But that's a lot of work for an infrequent occurrence.  The only person you are having to convince / communicate to is yourself.  I myself wouldn't have an issue with living with the lumpiness.

LightTripper

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Re: How to categorize a car purchase in the budget?
« Reply #9 on: August 14, 2019, 07:51:24 AM »
I do mine very roughly.  It cost £10k but I log it as £1k per annum depreciation (in the hopes I can keep it going 10 years: it was 3 years old when we bought it - not sure if this is optimistic or not given it's parked on street).

Like you I prefer to do some smoothing, because I like to see how my expenses are tracking so I can get an idea of what expenses are likely to look like in the next few years.  Car is actually the only category I have to do this for, so it's not complicated.  I guess I could also do it for maintenance stuff on my house, but although that fluctuates it tends to come out broadly similar each year (maybe varying by £1-2k each year, rather than going from £10k to £0k).  If at some point we need something big like a new roof I guess we'll give that the deprecation treatment too!

2sk22

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Re: How to categorize a car purchase in the budget?
« Reply #10 on: August 14, 2019, 08:17:23 AM »
A car is really a capital investment. The moment you drove it off the lot, it depreciated in value even with zero miles. If you really wanted to be a stickler for accounting standards, the expense you would record is the depreciation. Then, every year, you could look up the value of the car in Kellys Blue Book and record accordingly. This does seem a bit complicated however :-)

Incidentally, I too buy cars for cash and hold on to them for about 15 years typically. I think this is the best way to buy cars.

LightTripper

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Re: How to categorize a car purchase in the budget?
« Reply #11 on: August 14, 2019, 09:33:05 AM »
A car is really a capital investment. The moment you drove it off the lot, it depreciated in value even with zero miles. If you really wanted to be a stickler for accounting standards, the expense you would record is the depreciation. Then, every year, you could look up the value of the car in Kellys Blue Book and record accordingly. This does seem a bit complicated however :-)

Yes exactly! So then my record of spending is more like a P&L (and the assets are recorded elsewhere).
Which I think works fine as long as you aren't cash constrained (e.g. if you have liquid savings you can use to pay up front for stuff like this as it arises). 
Then all the capital stuff becomes just "balance sheet" considerations (a transfer from a savings asset to a car asset which then depreciates) and can be considered/tracked elsewhere.