Your Car is NOT an Investment
A couple of months ago I shared with you that I still drive my very first car. She’s approximately a decade old now, but she still hasn’t had any engine problems and I haven’t made payments in over five years. Oh, and one more thing, she’s still shiny.
Some people see cars as an investment. Maybe they think that pretty little mode of transportation is going to become a classic and one day they’ll be able to sell it for a nice profit. Most of us, however, aren’t that lucky, and unless we want to retire in our cars (as in sleeping in them), our cars are not an investment.
A Depreciating Asset
Yes, your car is an asset, but it's a depreciating asset. Unlike your house, which is probably holding its value and maybe even increasing in value, your car is worth less every minute. As any sales person can tell you, as soon as you drive your brand new car off the lot, it depreciates in value. And all of that is before you've included the cost of maintenance.
Leverage
Even worse, most of us don't pay cash for our car. We borrow money to buy it based on what we can afford to pay monthly. This means we're making a levered investment in a sure-fire losing bet. We're amplifying our loss by extending ourselves.
Liquidity
And cars aren't terribly liquid. If you’re holding on to your car as an investment in case the economy tanks, you’re in for a rough surprise. Chances are that if you can’t afford your car, or if you need cash so quickly that you’re willing to sell your means of transportation to get it, you’re going to be hard-pressed to find a buyer. So when you're most likely to need to sell it, it's probably going to be the hardest time to find a buyer.
There are a lot of things that can be considered investments—gold, stocks, property, oil interest, education, and many others. However, among that very long list, you will almost never find me adding “cars” as one of them. Your car is not an investment. First and foremost, if there is to be no return, it is not an investment. Your car is a means of transportation and just another expense on your budget. Remember that when you're at the car dealership.
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Ian Brennan wrote:
Fri, 04/01/2011 - 15:06 Comment #: 1I like your point about leverage. People are outright shocked at the idea of borrowing to invest in equities, but don't give a second thought about borrowing to buy a car! I have been very successful in buying previously owned cars from my car dealership. It helps me save most of that initial depreciation. If you let them know you are looking, they will even watch out for good deals for you!
While shiny is good, paid for is even better. Good for you!
retirebyforty wrote:
Fri, 04/01/2011 - 16:02 Comment #: 2I'll count it as an investment if you need it to get to your job. :D
We don't have a car loan right now, it's a great feeling.
BTW, nice photo!
jeff @ Sustainable life blog wrote:
Fri, 04/01/2011 - 16:24 Comment #: 3I'd have to agree with this one. I'm not totally against borrowing to buy a car (I did it) but I think it should be reserved for people just starting out. With the amount I was driving, buying a terrible car had a very high potential to put me in bad situations that I really wanted to avoid.
Anonymous wrote:
Fri, 04/01/2011 - 16:25 Comment #: 4Cars are a money pit, but necessary. We makes ours REALLY work for us - it drives 3 adults to work everyday (quite the scheduling headache but we manage. I would love to live somewhere that I could use public transit instead of a car. When I was a student I enjoyed using the bus as I could get a lot of reading done. I don't read nearly as much now!
Jessica Schmeidler wrote:
Fri, 04/01/2011 - 18:30 Comment #: 5I agree with each of you. I, too, cannot do without a car, as I live twenty miles from town. That being said, when I bought my car it wasn't quite a year old, but that immediate off-the-lot depreciation had already happened to the previous owner. I found the best car I could, with the fewest miles, and while it wasn't a top end sports car, I treated like it was. The car not was not an investment, it was a debt. Once that first one was paid off, I've saved money aside every month for when I eventually have to replace it. By being able to save money, because I didn't have payments, now I can buy my next car outright with cash.
Cars may be necessary, but the debt isn't if you play your cards right. ;) The main point is that cars can almost always be counted on to depreciate. That's not an investment.
sara wrote:
Fri, 04/01/2011 - 21:56 Comment #: 6Good post! We paid cash for our current van (bought private party used, off of Craigs List), and we'll never take a loan out for a vehicle!
Jessica Schmeidler wrote:
Sat, 04/02/2011 - 01:32 Comment #: 7Way to go, Sara! I bet that was a great feeling! :)
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