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CS 007: Personal Finance for Engineers – Stanford University 2017-20

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Re: CS 007: Personal Finance for Engineers – Stanford University 2017-20

#31

Post by sersi »

wil421 wrote: post #19
thfuran wrote: post #7

Earlier quoted context omitted.

Buying a house shouldn't make your net worth go negative (unless it massively depreciates, I guess). The mortgage balance is debt, but it's backed by the value of the house.

Thanks I’ve been watching videos on YouTube about becoming a millionaire in retirement. They say mortgages and car payments are bad in any form. To them any debt is bad no matter what it is and drags down their calculation of becoming a millionaire. Their calculation for net worth is all savings minus any form of debt.

Car payments and mortgages are very different things. A car payment is a loan for a depreciating asset. So even after you finish repaying your car, at the end you have an asset that's worth much less than what you paid for it.

A mortgage is different, by getting a mortgage and buying a house, you build up your assets with every payments you make, it's often better than paying a rent and not getting anything in the end... The main difference between a car and a house is that the house generally doesn't depreciate, which is why a mortgage can be a good investment.

Re: CS 007: Personal Finance for Engineers – Stanford University 2017-20

#32

Post by neogodless »

wil421 wrote: post #5

I see a net worth video. How important is net worth? My wife and I had about $200k net worth until we bought a house. Now it’s probably the same amount but negative after the house purchase. We max out our 401ks and employee stock purchase. Our mortgage and car note is below the 30% suggestion. It will probably be 5-8 years or more until it’s positive again.

In my opinion, net worth is just a kind of useful "pulse" metric to keep an eye on how you're doing overall.

First, to address the "net worth" when buying a house, as mentioned in a comment, other than transaction costs, you should not have taken a huge hit when buying. The house should be valued close to the overall purchase price.

Net worth should include adding up all assets, such as what the house (and cars) would sell for, any 401k, etc, and subtracting any liabilities, the mortgage and other debts. At the moment of buying a house, you gain debt but you also gain the house as an asset. They roughly cancel each other out. I doubt the transaction costs exceeded $200k!

When you dive deeper into personal finance, depending on your goals, other values may become more important, like the total amount of assets you can and do invest so that they generate their own returns.

Re: CS 007: Personal Finance for Engineers – Stanford University 2017-20

#33

Post by dcchambers »

kevin_thibedeau wrote: post #9
thfuran wrote: post #7

Earlier quoted context omitted.

Buying a house shouldn't make your net worth go negative (unless it massively depreciates, I guess). The mortgage balance is debt, but it's backed by the value of the house.

You don't own the house until it's paid off.

Buying a house doesn't negatively impact your net worth, even if you owe money to the bank, unless your home value nose-dives for some reason (eg recession/depression).

Here's an example:

Let's say today you have $100,000 cash in your bank account and no other assets to your name.

Your net worth is $100,000.

--

Now let's say that you buy a house tomorrow for $500,000. You put 20% down ($100,000) and secure a loan from the bank for the final $400,000. Here's your new net worth:

Asset: House $500,000

Debt: Loan ($400,000)

--

Total: $100,000

Re: CS 007: Personal Finance for Engineers – Stanford University 2017-20

#34

Post by sdfjklgfdsa »

wil421 wrote: post #19
thfuran wrote: post #7

Earlier quoted context omitted.

Buying a house shouldn't make your net worth go negative (unless it massively depreciates, I guess). The mortgage balance is debt, but it's backed by the value of the house.

Thanks I’ve been watching videos on YouTube about becoming a millionaire in retirement. They say mortgages and car payments are bad in any form. To them any debt is bad no matter what it is and drags down their calculation of becoming a millionaire. Their calculation for net worth is all savings minus any form of debt.

Interest rates are abysmally low and a mortgage is one of the few ways you can take advantage of this.

Also, if debt is bad (and I agree), do these people live with their parents? Because that's the soundest financial move possible.

Re: CS 007: Personal Finance for Engineers – Stanford University 2017-20

#35

Post by wil421 »

dcchambers wrote: post #33
kevin_thibedeau wrote: post #9

Earlier quoted context omitted.

You don't own the house until it's paid off.

Buying a house doesn't negatively impact your net worth, even if you owe money to the bank, unless your home value nose-dives for some reason (eg recession/depression). Here's an example: Let's say today you have $100,000 cash in your bank account and no other assets to your name. Your net worth is $100,000. -- Now let's say that you buy a house tomorrow for $500,000. You put 20% down ($100,000) and secure a loan fro…

I wasn’t adding the value of the house into my napkin calculations. I was only looking at the debt and savings.

Re: CS 007: Personal Finance for Engineers – Stanford University 2017-20

#36

Post by Bostonian »

neonate wrote: post #28

It seems to me a bad sign for computer science that this is part of the curriculum. It shows what the degree is really about, and when a field becomes about that, it is decadent.

Stanford costs about $275K for 4 years. Of course students and their parents spending this kind of money care a lot about the financial payoff.

Re: CS 007: Personal Finance for Engineers – Stanford University 2017-20

#37

Post by whatok »

wil421 wrote: post #19
thfuran wrote: post #7

Earlier quoted context omitted.

Buying a house shouldn't make your net worth go negative (unless it massively depreciates, I guess). The mortgage balance is debt, but it's backed by the value of the house.

Thanks I’ve been watching videos on YouTube about becoming a millionaire in retirement. They say mortgages and car payments are bad in any form. To them any debt is bad no matter what it is and drags down their calculation of becoming a millionaire. Their calculation for net worth is all savings minus any form of debt.

Any debt is bad if not managed properly. I don't think buying a house makes sense in all circumstances and that largely depends on where you're living and what you do for work. Being debt-free might feel good but you miss out on a lot of opportunities that you could otherwise responsibly take by completely avoiding debt. I'm assuming by you maxing out your 401k and taking advantage of your employee plans that you're responsible with your finances so I wouldn't completely overthink things.

Re: CS 007: Personal Finance for Engineers – Stanford University 2017-20

#38

Post by neonate »

Bostonian wrote: post #36
neonate wrote: post #28

It seems to me a bad sign for computer science that this is part of the curriculum. It shows what the degree is really about, and when a field becomes about that, it is decadent.

Stanford costs about $275K for 4 years. Of course students and their parents spending this kind of money care a lot about the financial payoff.

Absolutely, but that confirms the point.

Re: CS 007: Personal Finance for Engineers – Stanford University 2017-20

#39

Post by neogodless »

frockington1 wrote: post #10
wil421 wrote: post #5

I see a net worth video. How important is net worth? My wife and I had about $200k net worth until we bought a house. Now it’s probably the same amount but negative after the house purchase. We max out our 401ks and employee stock purchase. Our mortgage and car note is below the 30% suggestion. It will probably be 5-8 years or more until it’s positive again.

The net value of your home is Equity-Debt, so at first the net value of the mortgage will about what your down payment was

Equity is the net value of the home minus the mortgage. So do not subtract the debt (aka mortgage) from equity to determine value.

Either use the purchase price or appraisal as an estimate for what you'll be able to sell the house for. (It's often wise to decrease this number, as you can lose roughly 10% of the value in further transaction costs when you sell.)

Re: CS 007: Personal Finance for Engineers – Stanford University 2017-20

#40

Post by downerending »

Judson wrote: post #13
wil421 wrote: post #5

I see a net worth video. How important is net worth? My wife and I had about $200k net worth until we bought a house. Now it’s probably the same amount but negative after the house purchase. We max out our 401ks and employee stock purchase. Our mortgage and car note is below the 30% suggestion. It will probably be 5-8 years or more until it’s positive again.

My understanding of net worth is that asset purchases like a home would initially be a wash w/r/t your net worth. Starting with a $200k net worth, and you (for instance) put down $100k on the home. You now have $100k in cash/securities and $100k in home equity, assuming you paid the appraised value of the home. Hope that helps!

Also note that in a such a scenario, you've become heavily invested in the real estate market, as opposed to diversifying your holdings. Not necessarily bad, but you really need to pay attention to this imbalance.
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