Depreciating vs expensing purchases to track net worth and personal expenses

Question

Which purchases should you depreciate and which ones should you expense in the context of personal bookkeeping (and not for tax purposes)?

My personal goal for bookkeeping is mainly keeping track of my (1) net worth, (2) income/expenses and for (3) budgeting. Guides I could find seem to base recommendations around tracking your net worth.

To elaborate on my difficulties with this advice based on a few examples:

• A car should clearly be depreciated as it is important to your net worth and you want to have a good overview of its monthly/yearly costs.
• Clothing doesn't really contribute to your net worth and is usually bought yearly, so expensing purchases doesn't cloud your overview of expenses.
• But e.g. furniture, laptops and bicycles are expensive enough to distort your overview of expenses (you don't buy some every year), so you want to depreciate them linearly over the time they are used for the purpose of (2) and (3), but depreciate so quickly that you would want to expense them immediately for the purposes of (1).

So should you simply depreciate even these (unsellable) assets and ignore these when estimating your net worth, or is there some other approach if you still want to accurately track your expenses?

Answer 1

Personally, I wouldn't bother because I don't consider my household goods when I'm calculating my net worth. When I'm thinking about my net worth, I want to know what I have available to me for meeting big goals (i.e. retirement, buying a house, etc.) I'm not going to be selling my couch to fund a vacation or to fund my retirement so it doesn't really matter to me what it's worth.

If you are going to count all your household goods as part of your net worth, they'd just be assets that you assign an (approximate) value to. If you buy a $1000 couch, your checking account balance declines by $1000, your household goods assets increases by $1000. Next year, the couch asset has declined to, perhaps, $800.

Answer 2

I would suggest another approach for dealing with the "household effects". You know they aren't worth enough to really contribute to your net worth, but you worry that recording an expense equal to their whole cost might distort your tracking of "Expenses" each year since buying a couch or a bike benefits you for more years than just the one you bought it (unlike say groceries or other more ephemeral purchases.)

Our approach is to have a budget of so much a month for categories like Furniture, Vacation, Sports Equipment etc. We have a spreadsheet in which we can add the monthly budget to each of those columns each month, and subtract off purchases. In this way, we can "save up" for say a couch, and then not buy more furniture until the "furniture account" (which is just a column in the spreadsheet, all the actual money is in a single real account) can afford it again.

You could simply track the purchases of not-big-enough-to-affect-net-worth items and this would let you answer questions like "over the last 3 years, what have I spent on furniture" to be sure it is not getting out of hand or exceeding your budget/plan.

Answer 3

Regarding your own accounting system, the 3 goals you mention kind of require different answers to your question.

Before we get to that, there are two main things to keep in mind: the utility an object has to you, and its market value. And to get to the punchline early: some things appreciate (potentially cars, also art, etc..). So if you're tracking for market value (which is probably relevant to net worth), you'd need to keep that in mind.

I'm going to leave the question of net worth at that for now, as others are speaking to that, and it's not really my area (unless you have any other questions).

Regarding your other two goals, for budgeting there's a further detail: cash budgeting, or budgeting on 'accrual' basis (which is in line with income/expenses that are more accurate).

Cash budgeting would only take in to account the amounts spent or received. I'm going to ignore that as well.

So let's talk about recording assets you purchase, from purchase date until the date you sell or discard them. This will be in terms of your internal income/expense tracking, and budgeting (accrual basis).

The biggest factor is the time period during which you're going to use something up. Since you're going to totally use up this week's groceries within the month, you expense those.

The car you buy to use to the next 3 years, you would book in your system as an asset (not an expense), and you can then depreciate it each month - either as 1/36 of the cost, or a more elaborate method. Alternate method 1: your use of the car.. if you could estimate how many total miles you plan to drive on that vehicle, and if you track miles driven each month, you could determine a purchase amount per mile driven, and each month book that.

(that entry would be debit vehicle depreciation/expense), and a credit to accumulated depreciation (contra asset to the car asset).

The difference between the car asset (original purchase price) and accumulated depreciation (your use of it) is your car book value.. if/when you sell it, the difference between your sale price and the book value would be revenue (or loss).

And once you have an idea of vehicle cost per month, that can be a non-cash expense in your budget (if you're using an accrual-based budget). This could apply to a bicycle/motorcycle etc.. as well.

Clothing - jewelry could certainly be booked as an asset if the value is that high, and/or footwear, other particular items. But yes otherwise most would simply expense those purchases (not because each clothing item is going to wear out in a year, but because keeping an asset for clothing would be very high-detail).

Computer systems, audio systems etc.. could all be treated same as the car, you can set depreciation across the period of time you expect to own them, or some other creative basis if you prefer.

Other small household items, furniture, etc.. most would find the time it takes to 'book' those (and track usage/remaining life) not worth it, but your decision can factor in a particular piece or two or particular unique items.

Each thing you book as an asset, to keep your system intact you'll need to be sure and take it off your books when you sell or discard it.

Circling back to net worth, only the biggest assets would figure in (besides actual monetary items like checking/savings/investments/retirement funds). There's usually a line item for 'household possessions' I think, where everything else would be included (car, bike, computer and audio etc..). But that doesn't have to interrupt your own internal tracking process for your purpose.

And again if you own something that might appreciate in value, you'd want to adjust accordingly - probably wouldn't include in your budget or income, but it could be something to include in your net worth statement.