Are you the type of car person that keeps a vehicle until the wheels fall off? Perhaps you lean towards buying more frequently to take advantage of the updates in car safety and technology. Either way, it’s a great time to evaluate whether or not a car is considered a good investment to help you decide on your next car purchase.
A car is not an investment and should not be considered as one. That’s because a car will not increase in value. Instead, it loses its value the minute it heads out for the road. However, a car is a productive asset that can help you run errands and drive to a job.
The difference between an asset and an investment can be confusing, but keep reading as I explain further why buying a car is not considered an investment and the nuances of assets vs investments.
Why a Car Cannot Be An Investment
A car cannot be considered an investment because it is not going to increase in value. Quite the opposite, really, because a car depreciates based on overall miles driven and condition of the vehicle.
Just like a horse is considered a creature that eats money while you sleep, your car is a tool that is happy to chew away at your hard-earned money. With the right goals in place, the cash outlay becomes less of a priority.
It shifts from looking at the cost of the car to what you lose if you don’t make the car purchase.
With most topics in personal finance, there is more to the story. I mentioned that a car is not an investment in the strictest sense of the word. But let’s examine that in greater detail.
To be examined as an investment, we have to look at its overall value.
The True Value of a Car
What does owning a car look like in your own life?
Some people can get by without owning a car because they have access to reliable public transportation. But if you’re not in an area where it’s common to use the subway, bus, or train station, you’re going to need a car to travel long distances.
The value of a car depends on your lifestyle, not just the resale value.
If you know that you’re on the road often, an excellent reliable vehicle is better than being at the mercy of flights that run the risk of delays or on rideshare services, which can grow expensive when used frequently.
What do you need in your next vehicle? Do you need something bigger that can handle family, friends, and a few four-legged furry companions? Do you want to have plush seats that make long drives more comfortable?
If you’re like me, you probably want all of the bells and whistles to make traveling easier, like in-car navigation and Bluetooth.
Being upfront about what you want and need makes a big difference.
Car Condition and Value
Used vs. new is an argument with car purchases, and it impacts the value of the vehicle in your life.
A used car can still add value, and you get to skip over much of the depreciation experienced by new car owners. But if you like the idea of low maintenance and a car being within the manufacturer’s warranty, a new car could be the better option.
The total cost of ownership is an important metric to consider when looking at whether or not a car is an investment. Simply put, the total cost of ownership is everything you need to spend every year to keep the vehicle in excellent condition.
For some cars, this might mean just a few basic oil changes, or it could mean taking it to a specialty shop to be serviced several times a year for other vehicles.
A Car is a Liability Because It Doesn’t Grow in Value
A liability is simply something that you own and that costs you money. In this case, you own a car, and the car costs you money over the time you own it. However, a car can also be an asset, because it brings in money and can be sold for cash.
A car may be considered both an asset and a liability, but it is a non appreciating asset since it falls in value over time. This makes it the opposite of an investment which the goal is to grow in value.
We all have assets that we rely on. Most people think of their own home as an asset, and that is only true if you can make money with it. However, it gets a bit trickier with a primary home. Why? Homeowners who don’t work from home, or use it as their place of business, can’t say that their home is an asset.
Homes that are not used as a way to make money become a liability because you must put money into it every year with maintenance costs and taxes. However, like a car, you can use it to make money, but it will cost more to maintain than the potential profits you can make with it.
In the case of a car, you have to look at what the car does for you, not just how nice it looks. Plenty of people have learned the hard way that a nice-looking car isn’t necessarily a very reliable car.
Using a Car for Business To Make More Money
Business use changes a few parameters, but not many.
Most people will not use a vehicle entirely for business use, so the non-business use must be calculated separately from when the car is used for commercial purposes. These purposes include anything from food delivery to making sales calls.
If you’re looking at vehicles for business use, the conversation changes significantly.
You’re still facing depreciation and loss of value over time, but you can generate revenue with the car to balance things out. A reliable vehicle used for business purposes adds to your bottom line and can generate tax savings when handled by a professional.
It’s a balancing act to ensure that you still aren’t spending too much on a vehicle for business purposes just because you have the potential to generate money from it.
You must be as neutral as possible if the focus is on a vehicle for business use.
Make sure that you prioritize what you want to do with the car. For example, if you’re dreaming about a landscaping business, you will need to have a truck that can pull a trailer without harming the suspension.
A good trailer amplifies the vehicle’s value, as it will allow you to carry zero-turn lawnmowers and other equipment for your landscaping company.
Collector Cars Are Not Always Profitable
Maybe you still want to get a car just for investment purposes.
The path most take is to look for collectible cars, but they aren’t a very good investment, either. Why? The market for collectible cars isn’t very large, as ongoing maintenance costs are higher than traditional vehicles.
Making collectible car purchases worthwhile requires extensive research, networking, and maintenance of the vehicle while it’s in your hands. The ongoing costs of keeping a collectible car looking good before finding a buyer can eat away at any profit that you could have gained.
Unless you plan to do all of the maintenance yourself, you have to take a collectible car to a mechanic shop specializing in that type of work. Taking it to the local mechanic that hasn’t touched anything close to your type of specialty car would be a recipe for disaster.
It bears mentioning that a collector’s car can take a long time to sell.
The buying market is fickle, and tastes change all the time. You may not get any buyers for a collector’s car until you make modifications, which can be expensive. Remember that classic cars don’t always have easy-to-find parts.
Parts for these special cars can also be quite expensive.
A typical modification to a classic car would be air conditioning or power windows, which are features that just weren’t present in the original vehicle. However, they are features that most drivers can’t live without anymore. In some advanced restorations, Bluetooth and navigation are desired and sought-after features.
As you can imagine, getting a classic car can end up being more than what you anticipated.
Cars Can Bring More Value To Your Life
Are you looking for something that’s going to grow and become an investment?
Buying a car wouldn’t meet that definition automatically, so it’s better to look at the value a vehicle brings to your life.
Many people begin looking at a future vehicle in terms of their future family, and a car that can handle family life becomes super important, even if it wasn’t in the past. So the value of a vehicle is much more than just its resale value or even if it’s collectible or not.
It’s about getting things done, moving cargo, and having a comfortable ride for the family.
Don’t overlook the value of having a vehicle that you can count on for extended travel, such as RV camping. Buying something that can pull a fifth wheel or an extended travel trailer can be pretty expensive, but it opens the door to a level of travel that will give your family plenty of memories to enjoy.
The Time Value of Money and Car Financing
One way to get value back from your car and to combat the value depreciation is to finance your vehicle with a low cost car loan.
For example if you get a cheap 3 or 4% loan you may be able to put the cash that you didn’t spend on the car to work in the markets. If you can generate at least the average yearly market return of 8% then it becomes worthwhile to finance your vehicle.
It is important to note that you should not finance a vehicle for the sake of financing. You should have the money for the purchase of the vehicle, that way the money not used in the purchase of the car can still generate revenue and be used for investment purchases.
Think of it this way, you are essentially taking a negative 4% return and turning it into a positive 4% return by financing if you invest the rest in the market. That positive 4% can help to combat the devaluation of the vehicle purchased.