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The post Is a Car an Asset? appeared first on Millennial Money.
When taking stock of your assets and liabilities, you might wonder in which column to put your car. After all, your car fits the definition of an asset because you own it and it has value.
But it also costs money to maintain, not to mention the money you might owe on a car loan. That makes your car more like a liability.
So when figuring out your net worth, where does your car fit onto your balance sheet? Keep reading to learn the answer to the question: Is a car an asset?
Is a Car an Asset or a Liability?
First off, car loans are a form of debt. If you owe any money on your motor, you must count it as a liability when calculating your net worth.
As for your vehicle itself, technically, cars are assets. But they’re almost always depreciating assets, meaning they lose value over time.
The second you take ownership of a new car and drive it off the lot, it goes down in value. That can be a real shocker for anyone who’s just spent tens of thousands of dollars on a high-end vehicle. It’s not easy to accept that their flashy new ride is a depreciating asset.
Why Do Cars Depreciate?
Here are a few reasons why cars depreciate over time.
Wear and tear
Cars are complex machines with a lot of moving — and expensive — parts. They require extensive care and maintenance and the dedicated support of the car owner to keep running.
Over time, normal wear and tear reduce the value of a car. This is especially true for vehicles that operate in challenging climates or terrains. Even salted roads can lead to corrosion and rust damage, making the car less valuable.
Mileage only goes up
Another reason why cars depreciate is that mileage doesn’t decrease. Most cars are only good for roughly 200,000 miles before they become so expensive to repair that it makes more sense to get a new one. So every mile you drive reduces the overall value of your car.
Cars become obsolete
Car manufacturers are constantly rolling out new models and makes. By the time you get used to driving a car, it’s most likely already out of date, with a brand-new model on the dealer’s lot. This has a significant impact on overall value.
What’s more, cars are also a dime a dozen. Most makes and models are easy to come by, which further reduces their value.
Can a Car Appreciate?
In some rare cases, classic or exotic cars do appreciate. However, if you want your vehicle to be worth more than what you originally paid for it, be prepared to spend a lot of money on maintenance.
For example, suppose you paid $10,000 for a 1998 BMW M3 eight years ago. Today, the car’s value might be $15,000 if it’s in top condition. To get the full value of your sports car, you’ll most likely have to spend more on parts and repairs than you might profit from the sale.
Some people make a lot of money by investing in rare and classic cars. But this isn’t an investment class you can easily break into. Ideally, you need extensive knowledge of cars, along with all the tools to fix them yourself.
Claiming Depreciation Taxes
If you use a car for business purposes, you may be able to collect vehicle depreciation credits when you file your taxes.
The process typically entails looking at your car’s purchase price and determining the business-use portion (for example, if you use the car 50% of the time for work). The next step involves multiplying the business portion by the depreciation rate, as outlined by the IRS in the MACRS depreciation chart.
To be sure you’re maximizing your tax credits, it’s best to talk to a certified tax professional.
Why Cars Are Bad Investments
Thanks to depreciation, cars make bad investments. So unless you’ve got a vintage Ferrari in mint condition, it doesn’t make sense to pump a lot of money into your car. (And even then, remember what happened in Ferris Bueller’s Day Off!)
And never make the mistake of buying a car you can’t afford. You’ll spend years paying it down only to have something worth far less in the end.
In case you’re still thinking about shelling out for a fancy new whip, here are more reasons why cars are terrible investments.
Cars are expensive
Owning a car is a significant financial undertaking, and costs extend far beyond the sticker price. Gasoline, car insurance, maintenance, repairs, taxes, and even parking costs can all add up.
Consider this: according to AAA, the average annual cost of maintaining a typical sedan is over $8,000 per year. Pickups and large SUVs run over $10,000 annually.
No matter how you look at it, this is a considerable amount of cash. So if you want to retire early, make sure your car isn’t a potential money pit.
Cars are risky
Cars are also a considerable risk to own and drive. Even a minor fender bender can be expensive to repair. And if you’re at fault in an accident, you can expect to pay more for insurance.
What’s more, you could also injure yourself or others, potentially leading to messy and lengthy legal battles — not to mention the pain of dealing with physical injuries.
Cars take up space
Cars also need to be stored. If you have a house, cars take up a solid chunk of real estate in your garage or driveway. That’s space you could use for storage or even an addition — which could increase the value of your house.
Cars are stressful
Cars can add a significant amount of stress to your life. Getting stuck in traffic, dealing with parking, and keeping your car in top condition can cost you a lot of time, as well as money.
Tips for Managing Car Costs
If you don’t live in a city with decent transportation options — or if you have a crew of children to carry around — you likely need a car. Here are some ways to keep your car expenses down.
Avoid leasing
Unless your car is used strictly for business purposes, it doesn’t make any financial sense to lease it. It’s that simple.
You’d be much better off buying a used car in decent shape and quickly paying it off. Better yet, try to save up and pay for your car in cash. There are plenty of safe, reliable used cars you can buy for $5,000. You might not impress your friends, but your bank account will thank you for it.
Be proactive about maintenance
Make sure to handle routine maintenance when it’s required. Failure to do so can lead to much more expensive repairs, not to mention safety issues.
At the very minimum, make sure to take your car in for routine oil and tire changes. Scheduled maintenance appointments are also good opportunities to have a mechanic inspect your car for potential issues.
Get rid of your car before it falls apart
Often, when cars get older, they cost a lot more money to repair and maintain. Do some research about the specific vehicle you own, paying particular attention to common issues your model is likely to experience.
For example, the automatic transmission is prone to fail on some cars after a certain number of miles. If that happens, it can easily cost a few thousand to fix. You’d be much better off selling your car beforehand and putting that money toward a more reliable ride.
As for selling it, the first step is checking the value of your car on a site like Kelley Blue Book. You can then sell it to a private party through a site like Craigslist or try your luck at trading it when you get a replacement.
Learn More:
Alternative Places to Park Your Money
Due to increasingly high ownership costs, a growing number of car owners are choosing to ditch their vehicles. Recent advancements in ridesharing services and public transportation make it faster and easier to get around without owning a car.
Here’s a look at where you could put your money if you choose not to own a car.
Stocks
Stocks are volatile because they constantly rise and fall in value. However, stocks are assets, and they can lead to steady gains over time. So by investing just a few hundred per month in your brokerage account (instead of spending it on a car), you could set yourself up for long-term success.
Learn More:
Savings accounts
Having extra money in your emergency fund is another good reason to spend less on car ownership.
The unfortunate truth is that most people don’t have enough money saved to cover an emergency expense. Often, that’s because they’ve spent all their money on bills (including a car payment).
A good target is to have six months’ worth of expenses tucked away in your emergency fund. If all your money goes to the car dealership each month, it might be impossible to save that much!
Real estate
If you’re looking for a stable investment with a solid return, consider investing in real estate. Rental properties are typically classed as assets on a balance sheet because they produce income. And although real estate can depreciate, you can also claim depreciation tax credits.
Learn More:
- How to Invest in Real Estate
- The Pros and Cons of Investing in Real Estate
- Best Real Estate Investing Books
Frequently Asked Questions
Is it a good idea to take out a car loan?
Car loans typically come with low interest rates, making them easy to finance. But they’re a form of debt. So, generally speaking, I advise against taking out a car loan unless you absolutely need to.
Is Uber cheaper than car ownership?
It depends largely on where you live, if Uber is available, and how often you leave the house. If you live in an area where most amenities are within walking or cycling distance, using Uber for a longer trip now and then is probably cheaper than owning a car.
On the other hand, if you live in a remote area, Uber costs can quickly add up.
How can I use my car to increase my cash flow?
One way to use your car to increase your cash flow is to get paid to drive for Uber or Lyft. Or you could rent the car on a site like Turo. By doing any of these side hustles, you’re turning your car into an income-generating asset.
The Bottom Line
Your car isn’t a straightforward asset. Over time, it will continue to depreciate, making it worth less than what you originally spent. And at times, it may feel like a liability that drains your finances and adds stress to your life.
The post Is a Car an Asset? appeared first on Millennial Money.
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