Accounting for the new car
We bought a new car in December to replace our VW Golf, which was part of the Volkswagen emissions scandal.
Using rounded numbers, let’s say the new car cost $30k (out-the-door). We intended to pay cash, but couldn’t pass up a 0% interest loan when offered. We put down $10k just because, and a $20k to be paid over the next 4 years. Our VW buyback will net us $20k, so the total net cost of replacing the a car is $10k.
How do I account for this in spending? I see several options.
1) Count $10K of car spending in December 2016, put the $20k buyback money in an account, make payments from that account, and don’t factor any future car payments into my spending analysis. Track the car loan and depreciation in net worth as normal.
2) Count $10k of car spending in December 2016, treat the $20k buyback as a windfall, and count the car payments as part of our spending for the next 4 years.
3) Count $10k of car spending in December 2016, count a credit of $20k in car spending once we receive it (next month), then count the car payments as part of our spending for the next 4 years.
4) Do some math to figure out how long I expect to keep the car, how much it will be worth when we replace it, and “bill” myself for a car over X number of years. This seems overly complicated.
I’m inclined to do #1, which allows me to take advantage of a 0% interest without “feeling” like I’m adding a recurring payment. It’s also dead simple. Yet, it puts the cost of the car all in a single year, even though I get benefit for it for many years. That is also how I handled our first car, which was because we did pay cash up front. I liked #2 because it is conservative and we are getting use out of the money for many years – but perhaps overly so. How do you bookkeep your car spending? Or do you just not care?
Stacking Pennies 
The way that uses less funny accounting is to:
0) Create an asset for your new car
1) Transfer $10k from your savings to the new car value
2) Create a loan account for the car loan and fund it by transferring $20k from it to the new car asset (creating a loan value of -20k and a car asset value of +30k)
3) Depreciate the car at a schedule you determine
4) Monthly, transfer the car payment from your checking account to the loan, thereby paying down the loan
Of your options, 2) is similar to what I did when I bought my car. I could have paid cash and instead chose to put $10k down and finance the other $10k over a year, which turned out to be a huge payment per month. (oops) I put the $10k in cash and made the car payments out of that account each month. I counted the $10k deposit as “car spending” and then the monthly payments as “car spending”. In your case though, you have a windfall that essentially covers the car payments, so option 1 would probably work too. I’d do something like option 2 because that would remind me that the loan is really debt even though it’s at 0%.
So far, my car buying isn’t frequent enough that I care too much about the bookkeeping and I would probably pay for my next car in cash (even if it required selling index funds) because getting the title in my name after paying off my car loan was a huge pain. (I had to take CASH to a government office downtown during particular hours and then they would mail me a new title.) In reality, if you’re looking at your spending ignoring cars, you need to inflate it by the cost of replacing your car at the frequency that you desire.
The question really only applies for examining yearly spending, with Net Worth tracking as you described. I’ve ignored our 2011 car purchase (cash) in tracking yearly spending after the year of purchase, but depreciated the car in net worth tracking.
The $20k isn’t truly a windfall since giving the car back is the driving reason for a different car. I have to either credit the 20k in 2017 car spending (resulting in a net credit for the year), or ignore the car payments going forward. Option 2 will result in a total of $30k in spending, but this transaction of replacing the car should result in $10k of net car spending, A net credit for 2017 is technically the most correct, but I don’t love it.
If I’m ever trying to calculate how much money I need over a long period of time, I’d need to factor in a car purchase every X years. (VW scandal moved our timeline up, but gave us more $ than we would get for a 10 year old car.)
I love your analysis of this. If you ignored net worth, it would be simpler – you would only have to look at the net cost of the new car. If it were me, I wouldn’t have a problem attributing the whole $10,000 to December. But if I wanted to account for all of the transactions within the remaining $20,000, I suppose I would list the $20,000 buyback as income (windfall) and the payments as car expenses. If you wanted to make it more complicated, you could invest at least half of the $20,000 in guaranteed products for a year 🙂
To me, it seems simple from a net worth perspective.
I get 20k cash and a 20k 0% interest loan.
Each month, that 20k cash depletes by some amount, but the 20k loan reduces by the same exact amount since it is 0%. The loan is net worth neutral each month (except car depreciation and the teeny interest I may earn).
If I paid cash instead, there would be no monthly transactions, but the net worth would also be neutral in the long run – after the initial 10k difference
You’re right; I didn’t know if you tracked your car’s depreciation frequently or just ignored it from month to month.
I had been updating it infrequently (a few times a year), but I think I’m going to start doing a fixed estimate depreciation per month and correcting a few times a year.
… not care
I am the worst at bookkeeping.
What would probably happen is it would affect the slush fund in savings that I keep at a certain level and it would affect monthly spending which would affect how quickly we could replenish the slush fund.
So basically I pay attention to one stock (the savings account slush fund) and flows into it.
Whenever I get nervous I look at the other stocks (meaning pools of money). Whenever we need to make a change I look at the other flows. About once a year we do net worth (around tax time). But those are all point in time estimates, not changes.
This seems easy!
Maybe I should stick with not caring for transactions less often than 2x a decade.
Do you ever keep track of your overall spending, or is it just something you don’t care to track in any detail as long as the slush fund is healthy and generally increasing?
We have mint, but it doesn’t do a great job. So mostly no, not really. We generally only look at what can be cut when we have a big income or spending change coming up, which does tend to happen every 3 years or so, so its not like we never look. When we do it is more retrospective. This is how I know a sizable portion of our spending is insurance. I also know we spend something under 200/week on groceries and there are 52 weeks in a year, therefore… back of the envelope kinds of stuff. But no details unless we need them.