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CS 007: Personal Finance for Engineers – Stanford University 2017-20 (cs007.blog)
133 points by Anon84 10 days ago | hide | past | web | favorite | 39 comments





I saw there’s a topic on compensation, and I think this is perhaps one of the most important topics for engineers in the Bay Area.

I rarely run into an engineer with budgeting issues, but more often than not, I run into an engineer who has taken a compensation offer that is less than ideal at an early stage company. I think it’s great that there is a whole topic on compensation. I think the equity side is super complicated for small companies and in many cases, cash is king unless an engineer really believes the idea is going to be a home-run success...


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.

The sticker price of Stanford is not what it actually costs most students. Stanford is a zero loan school. Students do not graduate with debt.

And also, then, why is this class not for everyone?


I think there should be a section on stock options, what happens to your options on subsequent rounds of funding. Similar to how the new law makes it illegal for employers to ask about salary history, it should be engrained in engineers to ask about equity options and how much percentage of the company they own and the associated risk.

A story like this https://news.ycombinator.com/item?id=21358531 could be a case study.


How would one go about attending this course without being enrolled?

If you live near the campus you can just go in and sit in the back and no one will really care. The paper is what you pay for the knowledge is free.

x2.


Pretty solid all around. Would benefit anyone not just engineers. I like how the included a lecture on real estate.

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.


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.

Not sure of location of parent comment, but in the United States, buying a house includes a lot of initial expenses, called "transaction costs." Things like purchasing title insurance, prepaying taxes and insurance for the escrow, paying for inspections and appraisals, and of course the bank has some fees they roll into the mortgage. So unless you value the house you just purchased for more than the purchase price and make up the difference, you'll lose net worth equal to those transaction costs.

EDIT: Ah I see they were implying they went from $200k net worth to NEGATIVE. I hope the transaction costs were less than that!


Yeah, I suppose if you start with 200k and manage to get someone to give you a mortgage with nothing down for a 20 million dollar house or something crazy like that, your transaction costs might wipe out your net worth.

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.


No, car payments and mortgages are very much similar things. Excluding the land, your house depreciates. You have to spend money to maintain both. The rent expense goes to the landlord, and the mortgage interest goes to the banklord. Rent is often cheaper, saving you money. And the savings can be invested and grow in value. You get that in the end.

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.

https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...

There are a lot of variables in play, but buying a house with a mortgage can end up being better financially than renting. There are a lot of factors to consider. If renting is worse than home ownership, and you hold off buying until you can do it without a mortgage, you may lose out. Additionally, if you can get a really low fixed-rate long-term mortgage, but you invest in long-term total market index funds, historically, you'll come out on top over having paid cash for the house.


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.


Net worth is assets (everything you own, not savings only) minus liabilities (like debt).

It depends on several factors including the size of the down payment and market conditions. If the market declines it could be very bad for net worth.

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

You do, in fact, own the house. It is encumbered in that if you sell the house, you have to pay back the mortgage first.

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


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

But you own a portion of the house and the bank owns a portion equal to the loan value.

The bank doesn't, really, they own your debt. The amount that you owe the bank does not increase or decrease with the value of your property.

Can you sell the house and keep the cash? You own the house, the deed is in your name. You have a debt with the bank. The bank has your house as collateral but the city chargers you taxes on it because you own it.

Yes you do!

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.

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.)


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.


You count the equity in the house (price of the house - mortgage), which is probably just your down payment right now.

I think net worth is important to calculate your retirement age.


Net worth is very important. You need to make sure you’re hitting the right goals at appropriate stages of your life to be comfortable.

For software engineers, who easily make six figures a year, I’d say you should shoot for having a million in net worth by around age 30. This would mean you have good cash flow and smart investments.

A home does not inherently decrease your net worth. When you buy, the value of the home is added to your net worth minus however much you owe in mortgage and whatever your downpayment and closing costs were. If your home appreciates in value a lot it can increase your networth powerfully, but it could also just decrease and cause you a lot of pain.

Goes without saying your credit score should also be maxed out by the time you hit 30 to get the best interest rates.

After the first million you should aim to reach the next million by about your mid to late 30s I’d say. Not sure of the trajectory beyond that.


your net worth is likely still quite positive, unless your mortgage(s) is somehow much greater than the value of your house, but the mix has changed. you now have a positive asset that's mostly offset by a (negative) mortgage (and some cash). that doesn't change your (point-in-time) net worth.

over time, some of your income will be diverted to reducing the mortgage so that your net worth grows (rather than being spent). this is why houses are seen as piggy banks--they act like forced savings because the asset has relatively stable value (and can even appreciate).




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