How does this happen?

[FLA]

I wouldn't consider the value of my car in my net worth because yes, I could sell it but I would have to replace it with something else. So it does not add to my financial picture in a positive way except that it was cheap and it's paid off.

[disneysteve]

The balance on the 60 month (2.99% APR) loan our Dodge Grand Caravan in $3,480, but as of 31-December the dealer trade-in value was $8,235.

But it has a positive net worth.

Just because it's worth more than you owe doesn't mean it has a "positive net worth". It just means you're not upside down on the loan.

Look at it from another angle. You paid $25,000 and it's now worth $8,000.

[Nutria]

Look at it from another angle. You paid $25,000 and it's now worth $8,000.

And in that time, we've also spent (roughly, of course) $8,800 on electricity, and $52,000 on food. By your logic, we'd be $61,000 richer if we'd not used any electricity or bought any food. But... since we like eating more than gruel and water, and like the comforts that electricity powers, we spend the money. Same with the van: every month, we spend money on something that provides us useful value.

This wasn't a Beemer or SUV with leather seats. It's a (quite reliable) minivan that's carried lots of stuff around on decent gas mileage.

(The car that we just got for the kids is a used Camry.)

[disneysteve]

And in that time, we've also spent (roughly, of course) $8,800 on electricity, and $52,000 on food. By your logic, we'd be $61,000 richer if we'd not used any electricity or bought any food.

LOL. No, that wasn't what I was getting at. And besides, you wouldn't be richer since you'd be dead.

There's absolutely nothing wrong with buying a $25,000 van. We've done it ourselves. The question is how affordable was that purchase for your financial situation. I don't know the answer to that since I don't know your finances.

The rule of thumb is for the car payment not to exceed 10% of monthly income for no more than 36 months. So simply by that guideline, 5 year loans (and 6 and 7 year loans) are suspect. They suggest that people may be buying more car than they can comfortably afford in order to get the payment in an affordable range. "I can afford $300/month" so they buy the most expensive car they can manage with the longest loan they can get ($300 * 84 months=$25,000) rather than saying, "10% of my income is $300 so that means I can afford a car for about $10,000." That's where people get into trouble. The same thing happens with credit cards. They think if they can afford the payment, they can afford the purchase.

All of that said, sometimes a longer loan makes sense for other reasons. For example, we bought both of our current cars with 6-year loans. We didn't do it by choice really. It was just the best financing deal (lowest interest rate) we could find. I paid off my car in 1 year, however, and my wife's van will be paid off in 3. So we benefited from the lower rate but didn't actually stretch out the payments for that long.

[Nutria]

We bought the van that was practical for our needs (the doors, seats, backup camera, high seats which my wife likes), without the expensive stuff that we didn't need (leather seats, rear-seat mounted DVD players, in-dash DVD player, navigation system).

Even though the payment was about 15% of our net income at the time, if we were in the same situation, we'd do it again. (Especially since our debt load is a lot less than 4 years ago.)

I just want it to last until September 2017, when the kids are "safely" ensconced at college.

[JoeP]

This is pretty much a case study in poor personal financial management:

1. Take home $80K per year (after tax), borrow $330 for a house = dumb.

The first one is classic, and I see it all the time. One family I know finally paid off their $220k house, and because the wife is very high maintenance, she convinced her husband to buy a $330k house, which means mortgage again. But it gets better: they discovered something very wrong with the new house, and decided to sell it! So more taxes, more realtor fees, more moving expenses.

[Nutria]

because the wife is very high maintenance

There's your problem...

[JoeP]

There's your problem...

LOL, not "my" problem, but I know what you mean!

We kind of smile when she's at the lake, decked out in high end fashion gear, and gets panicky with gems like, "OMG, is that a bug? Someone please tell me, is that a bug?"

[LivingAlmostLarge]

I mean how many people buy a new camry or accord for their families? What is that $30k? Not unreasonable. But then that's "middle" class. Someone earning $120k and suddenly they are buying $80k cars with the homes.

I noticed next door a BMW and Lexus in the driveway on a $600k home. I am going to guess that they make a good living but how good?

[Joan.of.the.Arch]

I don't know what to say, LAL. This is awful, but in the first situation you describe, I would start wondering, are they spending it on drugs or something? High priced consumables that don't show, so to speak.

The $80,000 car? Well, to me it seems like those who should be able to wisely afford them are few and far between, yet I do see so many expensive cars on the road. Who is is driving them? I don't really get it.

Do you ever get down to specifics about your own financial life with people who talk to you about their own situations? If so, what kind of reaction do they give you?

[disneysteve]

I mean how many people buy a new camry or accord for their families? What is that $30k? Not unreasonable.

Whether or not it is reasonable depends on your income. I'd bet that most people buying cars that expensive can't really afford them.

For the record, I drive a Camry. I bought it used 4 years ago for $16,000 and I earn over 100K. There's no way I would spend $30,000 on a car on my income.

[Fishindude77]

I count our automobiles in our net worth at the Kelly Blue Book value, because they are paid for and that's what we could sell them for. Same goes for a car you may owe money against. If you owe less than what a car is worth, the difference is positive net worth.

I've got a 2011 four door F-150 with all the bells and whistles and 95,000 miles. Have been thinking about replacing, but every time I look at the new ones I get sticker shock ($40,000+) and decide to drive it a bit longer.

[disneysteve]

I count our automobiles in our net worth at the Kelly Blue Book value, because they are paid for and that's what we could sell them for.

That makes sense. It just depends why you're calculating your net worth. Some of us do it using just financial resources - cash, savings, investments. I don't include material goods. I don't include my home either. I'm not planning to sell any of that stuff. Other people include absolutely everything. They want to know basically what their liquidation value is.

So it's okay to include your cars in your net worth. I'm curious if you include other possessions as well like jewelry, furniture, art, electronics, etc. Those are all things that could be sold for cash.

[Fishindude77]

I started doing financial statements for my business lenders and creditors many years ago as I was personally tied to the company in event of a foreclosure. If the company went down, they cleaned me out too if there was any debt remaining.

Net worth should be "liquidation value" if you truly want to get a picture of your real net worth.

And yes, your house, big ticket valuables, household furnishings, tools and equipment, etc. are also part of your net worth and should be considered. Just be aware when setting the value of stuff other than the house, most of that stuff will sell for far less than original purchase price. Value it on your financial statement accordingly.

[disneysteve]

Net worth should be "liquidation value" if you truly want to get a picture of your real net worth.

True, but again, it depends why you're calculating it. For me, the main goal is retirement. I need to know when our assets are sufficient to support us without me working. For that purpose, I don't care how much my car or my wife's engagement ring or the artwork on the walls is worth. We're not going to sell them to pay our bills.

So I do a very simple net worth: financial assets minus liabilities.