Author Topic: Listing interest as income?  (Read 4502 times)

lpep

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Listing interest as income?
« on: February 03, 2015, 06:57:41 AM »
I've noticed some posters in journals and whatnot list "interest" as an income category. I would think, since their investments aren't getting cashed out any time soon, they wouldn't list this as income, but... am I missing something? Does it mean they have an account with Lending Club and they're collecting interest from their peer-to-peer loans?

Am I just jargon-psyching myself out?

J'onn J'onzz

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Re: Listing interest as income?
« Reply #1 on: February 03, 2015, 07:17:11 AM »
I personally consider interest part of my income, dividends also, even though they both just get reinvested back into whatever account generated them.

What do you consider it if not income?

lpep

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Re: Listing interest as income?
« Reply #2 on: February 03, 2015, 07:25:42 AM »
Added value to net worth, as an asset. If you count interest as income, does it become a "loan" or an expenditure if it's a bad month and you lose value?

Isn't the point of buying a stock or index fund that you don't own X dollars of it, you own X shares?

I can understand dividends as income-adjacent that way because they actually buy you more shares, and you can choose to cash out without selling anything.

Is that really what they're doing? Why can't I make sense of this?

ShoulderThingThatGoesUp

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Re: Listing interest as income?
« Reply #3 on: February 03, 2015, 07:29:34 AM »
Banks do pay a little interest still in the US (I get about $10 a month). And I guess if you hold specific bonds you could be getting interest payments, though I don't think many people do that.

Besides, we get taxed on interest and dividends, so in the income tax sense they're income.

morning owl

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Re: Listing interest as income?
« Reply #4 on: February 03, 2015, 07:46:54 AM »
I don't count dividend income as "income" because it's being reinvested, and I won't think of it as income until I'm withdrawing it. However, I do keep track of the monthly dividend income separately, and compare it to my regular expenses, to see how "FI" I am.

All of my div income is currently in registered accounts, so I am not taxed on it. Eventually I'll need to invest in non-registered accounts, at which point I'll need to count it as income for tax purposes. I'm not sure how I'll deal with it at that point, but I'd still like to think of it as off-limits to be spent until I am retired.
« Last Edit: February 03, 2015, 07:49:18 AM by morning owl »

Terrestrial

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Re: Listing interest as income?
« Reply #5 on: February 03, 2015, 07:51:21 AM »
Added value to net worth, as an asset. If you count interest as income, does it become a "loan" or an expenditure if it's a bad month and you lose value?

Isn't the point of buying a stock or index fund that you don't own X dollars of it, you own X shares?

I can understand dividends as income-adjacent that way because they actually buy you more shares, and you can choose to cash out without selling anything.

Is that really what they're doing? Why can't I make sense of this?

You are having trouble making sense of it because you are trying to confuse two separate financial ideas, one is the movement of money, the other is a measurement of how much of it you have. 

Receiving money like interest and dividends are both income...it's an amount that you are receiving that is deposited into your account much like a paycheck would be.  In the financial sense they are recorded on an income statement - a tracking of the gaining (receiving interest/dividends or other income) or losing (paying interest or spending money) money over a PERIOD of time.  They can't 'lose value'...once $10 of interest is paid to you, you have received income of $10. 

Once received, they become assets, whether it be left in cash or used to purchased shares of stock, etc, just like whatever the underlying capital is that entitled you to that income (loan or cash in bank to get income, stock share to get dividend, etc).  These assets CAN gain/lose value, but it's not the interest itself that is gaining or losing, it's the value of the asset that income has become.  The change in asset value may entitle you to more or less interest/dividend income in the future but it does not change what has happened in the past.  They are recorded on a balance sheet, a snapshot of the value of your assets/liabilities at a SET point in time.  A balance sheet (how net worth is calculated) doesn't show 'interest', it only shows assets, some of which may have CAME from interest.

« Last Edit: February 03, 2015, 09:46:18 AM by Terrestrial »

Ricky

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Re: Listing interest as income?
« Reply #6 on: February 03, 2015, 08:37:37 AM »
Its unearned income to the government, so it should be income to you. If you didn't use that income for the year then, no, I wouldnt list it as income here.

morning owl

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Re: Listing interest as income?
« Reply #7 on: February 03, 2015, 09:03:15 AM »
If it's counted as income, then how does it affect your savings rate? I.e. if I were to add div income to my regular income then it would lower my savings rate, even though it's never leaving my investment accounts.

ShoulderThingThatGoesUp

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Re: Listing interest as income?
« Reply #8 on: February 03, 2015, 09:36:19 AM »
If it's counted as income, then how does it affect your savings rate? I.e. if I were to add div income to my regular income then it would lower my savings rate, even though it's never leaving my investment accounts.

You're reinvesting dividends, aren't you? The dividend is income when it gets deposited in your account and counts as saved income when the reinvestment transaction goes through.

Terrestrial

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Re: Listing interest as income?
« Reply #9 on: February 03, 2015, 09:44:37 AM »
If it's counted as income, then how does it affect your savings rate? I.e. if I were to add div income to my regular income then it would lower my savings rate, even though it's never leaving my investment accounts.

If you aren't spending your interest, your savings rate actually goes up.  Which accounts the money is kept in makes no difference.

If your income is normally $1000 a month and you save $500 = 50% savings rate.

If you now get $100 in interest income a month (that you put to savings/investments) your income is $1100 but your savings is $600 = 54.5% savings rate.


morning owl

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Re: Listing interest as income?
« Reply #10 on: February 03, 2015, 09:48:58 AM »
OK, that makes sense now, thanks. It's a different way of thinking for me, but it totally makes sense.

tomsang

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Re: Listing interest as income?
« Reply #11 on: February 03, 2015, 10:03:58 AM »
It is all games. Do those that count their interest and dividends also count appreciation in equities as additional savings?  If not, why not? 

You should not use interest on investments to calculate your savings rate percentage when using calculators to figure out years to retirement as the calculators already has a 7% growth.

Lots of apples and oranges of ways of calculating. As long as you understand your calc and what it means to you, then you should be good.

The bigger ones that I see relate to employer paid expenses not being included in the denominator as income. Some on the boards are getting rent, food, healthcare, cell phones, computers, gym memberships and other perks. Their percentages of 90% plus are meaningless as those expenses will need to be covered once they retire.

NoraLenderbee

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Re: Listing interest as income?
« Reply #12 on: February 03, 2015, 12:16:06 PM »
Added value to net worth, as an asset. If you count interest as income, does it become a "loan" or an expenditure if it's a bad month and you lose value?

Isn't the point of buying a stock or index fund that you don't own X dollars of it, you own X shares?

I can understand dividends as income-adjacent that way because they actually buy you more shares, and you can choose to cash out without selling anything.


This is kind of backwards. Dividends are income. They are paid to you as cash. You can then reinvest by buying more shares. Dividends are not new shares that you then cash out. (Well, sometimes there are "share dividends, but that's a different thing.)
Interest is a fee the borrower pays you for the use of your money. Again, it is paid in cash and it is income, which you can reinvest.
Basically, you need to separate the act of receiving divs/interest (income) from the act of reinvesting that income in a mutual fund or whatever.
If you worked a side job and made $400, which you then invested, that 400 would still be income, right? Dividends and interest are the same, except that you don't work for them (hence the term "passive income").

Terrestrial

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Re: Listing interest as income?
« Reply #13 on: February 03, 2015, 12:45:45 PM »
It is all games. Do those that count their interest and dividends also count appreciation in equities as additional savings?  If not, why not? 

No.  Appreciation of equities is a reflection of the increase in current value of an asset, not a receipt of new capital.

That is not the same as receiving cash in the form of dividends/interest, which is income.  I dont see why you wouldn't be able to count those as savings.  I agree in reality for most people it's not a large enough number to move the 'savings' needle.  But some people absolutely get large ammts of dividends/interest...some people even live on it as their income.  For those that don't, I don't see why if you get $1000/month in interest and don't spend it it's any different than saving $1000 out of a paycheck.

An easy way to look at this is rental property.  The rent i get is income.  An increase in the value of the house is not, it's a capital gain.  I think you'd be hard pressed to find many people who think the rent received on a house isn't income, or that if they net $1000 per month from a rental and don't spend it, that it's not savings.  Interest or dividends are no different, they are cash received as a product of an asset you own.
« Last Edit: February 03, 2015, 12:54:36 PM by Terrestrial »

tomsang

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Re: Listing interest as income?
« Reply #14 on: February 03, 2015, 03:11:47 PM »
It is all games. Do those that count their interest and dividends also count appreciation in equities as additional savings?  If not, why not? 
No.  Appreciation of equities is a reflection of the increase in current value of an asset, not a receipt of new capital.

Dividends are not new capital.  They are a distribution of the capital that you own.  If you reinvest the dividends then you are exactly in the same spot that you started with.  You are taking dollars out of one pocket and putting it in another pocket.  That is why stocks drop when they have a large dividend payment.  The company's value goes down by the dividend that they paid out.  The company didn't magically create more value by doing a dividend.   

That is not the same as receiving cash in the form of dividends/interest, which is income.  I dont see why you wouldn't be able to count those as savings.  I agree in reality for most people it's not a large enough number to move the 'savings' needle.  But some people absolutely get large ammts of dividends/interest...some people even live on it as their income.  For those that don't, I don't see why if you get $1000/month in interest and don't spend it it's any different than saving $1000 out of a paycheck.

An easy way to look at this is rental property.  The rent i get is income.  An increase in the value of the house is not, it's a capital gain.  I think you'd be hard pressed to find many people who think the rent received on a house isn't income, or that if they net $1000 per month from a rental and don't spend it, that it's not savings.  Interest or dividends are no different, they are cash received as a product of an asset you own.

Again, it does not matter what you count as long as you are comfortable with the calculation.  You should not use the Shockingly Simple Math to calculate your FI date as that calculation already has a 7% return built into the calculation.  The calc assumes that your investments will grow with value.  So if you strip off the interest that is suppose to be reinvested, and you count it as savings then you are double counting the dividend or interest.  The  calc will be off.  No big deal, just understand that is how it works. 

It also seems strange that you would count dividends and interest, but not count asset appreciation.  Berkshire Hathaway has never done a dividend.  To say that an interest or dividend paying investment is better or increases your savings seems a bit confusing.  Your desire for dividends or interest may skew you away from investing in appreciating assets that don't have a dividend yield.

Rent on a house is the return on investment.  The Calcs have a return already built in. If you turn around and spend your returns then you are treading water.  The goal is for the returns to compound.  I am not saying that you are wrong, just that when we talk about savings rates, we are talking about putting dollars in a pool to compound.  If you are taking the dollars out by counting dividends or interest, then you are not allowing them to compound.  If you reinvest you are getting a double dip.

Do you go to you 401k, IRA, mutual funds, and other funds and figure out how much is dividends/interest and add that back to your income?  Curious.         

sheepstache

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Re: Listing interest as income?
« Reply #15 on: February 03, 2015, 03:30:57 PM »
You should not use interest on investments to calculate your savings rate percentage when using calculators to figure out years to retirement as the calculators already has a 7% growth.

+1

MrMoogle

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Re: Listing interest as income?
« Reply #16 on: February 03, 2015, 05:18:56 PM »
You should not use interest on investments to calculate your savings rate percentage when using calculators to figure out years to retirement as the calculators already has a 7% growth.

+1

+2

But of course, there are many ways to look at money.  I don't consider it, because it's in my compounding math.  You can choose to use a lower % growth, and count it as income.  It's all the same mathematically, but this makes more sense to me.

Spork

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Re: Listing interest as income?
« Reply #17 on: February 03, 2015, 05:41:27 PM »
It is all games. Do those that count their interest and dividends also count appreciation in equities as additional savings?  If not, why not? 
No.  Appreciation of equities is a reflection of the increase in current value of an asset, not a receipt of new capital.

Dividends are not new capital.  They are a distribution of the capital that you own.  If you reinvest the dividends then you are exactly in the same spot that you started with.  You are taking dollars out of one pocket and putting it in another pocket.  That is why stocks drop when they have a large dividend payment.  The company's value goes down by the dividend that they paid out.  The company didn't magically create more value by doing a dividend.   



While the result is true (stocks usually drop) ... this is really an answer to an accounting question, not an answer to how investing works.   It's income.  You have to enter it in your books somewhere.  You put it in as income.

Stock appreciation isn't entered into accounting books (until it is realized).  You measure ownership in number of shares, not value.