Author Topic: How Do You Calculate Vehicle/Home Purchase Into Savings Rate/Spending?  (Read 3503 times)

2Birds1Stone

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Hey everyone, just curious to to calculate something in my FIRE spreadsheets.

This year I replaced my car, obviously things like transaction costs, taxes, registration, inspection etc are a sunken cost.

However, in terms of calculating my annual savings rate and annual spending, do I count the entire vehicle purchase price?

The reason I ask is I have been saving $$ earmarked for this purchase for quite some time. I also gained an asset (albeit a depreciating one).

If I could the car purchase as normal spending my savings rate will be halved for the year and my spending almost doubled.

How you you guys calculate this as far as FIRE math goes?

happypup

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This probably isn't the best way to do it, but here's what works for me: when saving for a big purchase, I don't count that money towards my savings rate. I consider it basically spent whenever it's earmarked for that future purchase. So e.g. we were saving up for a roof, I had a roof savings fund which we've been putting money in for the last 12 months or so, and the monthly amount going into that I counted as spending. I didn't include that account in my net worth calculation, either. By the time the actual transaction occurs, it's already basically accounted for - just zeroing out that amount doesn't affect anything else.

I suppose once you're at the point of looking at average savings rate over several years, it doesn't matter as much whether you count a lumpy expense at the point it happens or spread it out. For us right now, early in the accumulation phase, doing it this way keeps our numbers from flying all over the map and I think more realistically reflects how we're spending money.


bobechs

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Just spread the cost out over the life of the asset.  The life of a car can be cut up into convenient bits called "miles" in the trade.  TCO of a car (only part of which is depreciation -- the dopelganger of replacement cost-- which is the item you are troubled about) lands in the ballpark of fifty cents a "mile."

If you cost out your cars at about that rate you won't have to jump up through your butt periodically to wrap your mind around the question "jaaay-sus, what happened to all my money this year?"

Note: "miles" is a non-operative term in some parts of the world; past results are not guarantees of future returns; my name is bobechs and I approved this message.

ooeei

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Just spread the cost out over the life of the asset.  The life of a car can be cut up into convenient bits called "miles" in the trade.  TCO of a car (only part of which is depreciation -- the dopelganger of replacement cost-- which is the item you are troubled about) lands in the ballpark of fifty cents a "mile."

If you cost out your cars at about that rate you won't have to jump up through your butt periodically to wrap your mind around the question "jaaay-sus, what happened to all my money this year?"

Note: "miles" is a non-operative term in some parts of the world; past results are not guarantees of future returns; my name is bobechs and I approved this message.

Basically this, it's depreciation.  If you pay $10,000 for a car, and expect it to last 10 years, you'd assume the first year you have it it's an asset worth $9000, the second year it's worth $8000, etc etc until you get to $0. This gives you a net "depreciation cost" of $1000/year.  Other expenses like maintenance are separate.  You can change the numbers to whatever suits you.  If it cost $15,000 and you expect it to be worth ~$5000 in 5 years when you sell it, you need to depreciate $2000/year.

This is the same basic idea businesses use when they buy large equipment. 

acroy

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It is just depreciation; but the $$ value should be a teeny tiny part of your assets used to calculate FIRE.
I just treat it as an expense.
"holy moley I had an expensive 2011!"
"hey 2012 was a lot better"

slugline

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How you you guys calculate this as far as FIRE math goes?

If MMM-style FIRE is your main concern, then I definitely wouldn't count the car as part of your saved stash, unless you have one that miraculously throws off 4% annually in  income/dividends/growth.

Now, when I calculate my net worth, I do include the car, but my practice has been to just list my car's KBB value. It's an old beater that represents such a low percentage of my NW that I'm not terribly concerned about the accuracy of that number.

Retire-Canada

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The reason I ask is I have been saving $$ earmarked for this purchase for quite some time. I also gained an asset (albeit a depreciating one).

If I could the car purchase as normal spending my savings rate will be halved for the year and my spending almost doubled.

How you you guys calculate this as far as FIRE math goes?

I wouldn't count the car as an asset. It's going nowhere, but down and the effort to track its value is not worth the near zero benefit it provides.

I would just count the purchase as normal spending. Who cares if your savings rate is low this year if there is a logical reason to explain it? Spreading out the cost of the car over 5 years may make a graph look nicer, but it has no benefit to you and adds some accounting complexity as you track that one purchase for several years as you depreciate it.

Altons Bobs

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I don't count my car or my house as an asset, I count them as a expenses.

Retire-Canada

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I don't count my car or my house as an asset, I count them as a expenses.

My house is worth ~$400K. If it was paid off I sure as heck would count that $400K as an asset.

ooeei

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I don't count my car or my house as an asset, I count them as a expenses.

That's fine, and will give you very conservative numbers.  I'd call them depreciating assets.  They aren't there to make your money, but they do have some worth.

For FIRE calculations with your strategy, if you bought a $120,000 house in cash, your yearly spending that year would be $120,000 + whatever your normal spending is.  Obviously that's not accurate and would throw off any SWR calculations you make, which is what OP is pointing out.  One strategy to make it more accurate is to depreciate the asset over time, like a business would.  When it's a minor expense it's probably not worth doing, but that's the idea behind it.

Mega

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Re: How Do You Calculate Vehicle/Home Purchase Into Savings Rate/Spending?
« Reply #10 on: March 22, 2016, 11:13:37 AM »
What I have done is create a spreadsheet of all my spending categories and 'average' spending for each. Then I identified which categories are pre/post fire.

For example, I need life insurance only until fire, but I expect to need the same amount of food.

For my car, I assigned a rough value of ~$150 a week ($7800 a year) for pre-fire expenses, and $50 a week ($2600 a year) for post-fire costs. Why? Because I wont be driving 130 km a day for work anymore (queue the clowns).
Current mortage, $500 a week pre-fire. $0 a week post-fire.
Child care: $400 a week pre-fine, $0 a week post-fire.

Then, I went and calculated out what income I need for post-fire expenses, and back calculated the needed stache size (~$850,000).

Now, we finally get to the savings rate. And guess what, buying cars, paying your mortgage, subscribing to TV, and other man toys do not build my stache. Only investable savings builds my stache.

Now that you have an understanding of what you are spending, and when you can stop spending on that item, you can create a projection of your FIRE date.

(e.g. my savings rate with mortgage included is 52%, but since the house add to my stach, my real investment savings rate is 29%. Once my house is paid off, my investment savings rate goes up to 52%. I only look at my overall savings rate when I need an ego boost)


2Birds1Stone

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Re: How Do You Calculate Vehicle/Home Purchase Into Savings Rate/Spending?
« Reply #11 on: March 22, 2016, 12:52:18 PM »
Great feedback everyone.

I think I will factor the transaction costs (tax, title, registration) and use a conservative depreciation amount annually.

Counting 100% of the purchase price as spending for the year will skew my #'s quite a bit. The car I purchased is already worth 35-40% of it's new price so further depreciation will be relatively small moving forward.

It was still a $16,500 purchase where my annual expenses are $20,000 otherwise.

slugline

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Re: How Do You Calculate Vehicle/Home Purchase Into Savings Rate/Spending?
« Reply #12 on: March 22, 2016, 01:40:23 PM »
The important thing is that you have a good understanding of where the money is really going. I think I do know how you feel about not liking the way "lumpy" spending looks. My own expense charts appear to spike each November, but I keep reminding myself that it's because of property taxes, not Black Friday spending. . . .