Cars easily rank among the costliest items most of us will purchase in our lifetimes. But is a car an asset? How should it be accounted for during the process of calculating your net worth? Keep reading as I share my thoughts and tips for contextualizing your vehicle’s value.
Is a car an asset? Yes – with one big caveat
Your car is an asset in the sense that it has residual value. You can unlock that value by selling your vehicle as you would any other asset with residual value, such as stocks or real estate.
Cars are not like those other assets, though. Stock and real estate valuations typically appreciate (rise) over time. Cars, meanwhile, are depreciating assets. Their valuations begin plummeting the second you drive off the lot.
The key takeaway? Your car is an asset – but it’s not an investment. This has some very important ramifications when it comes to including vehicles in your net worth calculations. Let’s explore that next!
How to include your vehicle in your net worth
Generally speaking, you should include your vehicle’s residual value as part of your net worth. You’ll need to make some adjustments for accuracy, though.
Periodically adjust your net worth to account for vehicle depreciation
You can easily find your vehicle’s approximate value at any time using Kelley Blue Book. Consider doing this periodically and updating your net worth accordingly.
Once per year should be good enough for general net worth tracking purposes. However, you might want to update your vehicle’s value ahead of schedule if something major (i.e. an accident) happens that could speed up depreciation.
Account for inevitable negotiations
Any savvy car buyer (particularly dealerships looking to turn a profit) will likely negotiate a lower price for your vehicle than its Kelley Blue Book value. Consider adjusting your net worth accordingly. That way, you’ll have a more accurate picture of how much money you could actually free up by selling your car.
Of course, determining exactly how much wiggle room to account for will require some research. According to YAA, the average markup on used vehicles is $2,500. Subtracting that amount from the typical asking prices for your make and model will leave you with a good idea of what dealerships are actually paying for those vehicles.
If you have a car loan, account for that as well
Don’t forget to include your car loan as a liability when calculating your net worth. For example, let’s say your vehicle is worth $20,000 but you have a $15,000 loan against it.
The car’s $20,000 value should be reflected in the “assets” portion of your net worth. However, it should be offset by the $15,000 loan under the “liabilities” portion of your net worth. The end result should be that your vehicle contributes a net of $5,000 to your net worth.
You should also update your net worth to reflect ongoing payments towards your car loan. If you have a monthly car payment of $400, for example, subtract that amount from your liabilities every month.
Think twice before padding your net worth with car modifications
Many people make the mistake of assuming aftermarket modifications automatically increase a vehicle’s value. More often than not, this isn’t the case, as confirmed by CJ Pony Parts (a company that actually makes aftermarket car parts). In fact, some aftermarket modifications can actually make it harder to sell your vehicle at market value.
Keep this in mind when tracking your vehicle as part of your net worth. If you have a heavily modified vehicle, you may even want to conduct additional research to see what non-stock versions of your make and model are selling for. It will almost always be much less than stock variants. Account for this in your net worth calculation if it’s the case.
How to keep your car from destroying your net worth
While tracking your vehicle’s value as part of your net worth, you’ll likely realize that cars are an absolute money pit (if you didn’t know already). With that in mind, here are some tips for limiting your car’s negative impact on your net worth.
Buy vehicles that hold their value relatively well
All mass-produced vehicles depreciate in value. They don’t all depreciate at the same rate, though. According to AutoGuide.com, these vehicles hold their resale value relatively well:
- Nissan Frontier
- GMC Canyon
- Dodge Challenger
- Subaru WRX
- Toyota 4Runner
- Toyota Tundra
- Porsche 911
- Jeep Wrangler
- Toyota Tacoma
According to CarEdge, meanwhile, these brands have the worst resale value:
- Land Rover
Take advantage of low-interest car loans
Personal finance writers tend to be split when it comes to car loans. Some say they’re Satanic while others (such as myself) see them as useful wealth-building tools.
The key is to finance your vehicle using a low-interest (4% or less) loan then invest the cash you would’ve otherwise used to buy the car.
This is how I approached my recent vehicle purchase. Rather than paying cash, I took out a 1.09% loan and left my money in my investment portfolio, which has been earning 10% annually on average.
While this doesn’t change the fact that my vehicle depreciates, it does give me an opportunity to use leverage and take advantage of money’s time value.
Buy used (generally speaking)
Given that vehicles depreciate quite rapidly, you can often find great deals on two or three-year-old cars.
Now, as of writing, this trend has been upended since ongoing vehicle shortages have led to higher than usual used car prices. But in any normal time, you can easily save yourself thousands of dollars by purchasing a used vehicle instead of a new one.
Full disclosure, I bought my car brand new. In my defense, it’s a fairly cheap car (a Toyota Corolla) and I wouldn’t have saved a whole lot in the grand scheme of things. Buying used is generally an economically sensible approach when it comes to costlier vehicles, though.
Buy a vehicle in good condition
The wrong vehicle can be a financial black hole even beyond depreciation if it requires lots of maintenance. Avoid this by having a vehicle thoroughly inspected before purchasing it (assuming you’re looking at a used car). If you’re buying a new vehicle, you’ll typically be protected by a manufacturer’s warranty so this is less of a concern.
Don’t pump money into your vehicle unnecessarily
As I mentioned earlier, vehicle modifications almost never increase your car’s value but can even decrease it. With this in mind, don’t go adding a new stereo or fancy rims to your vehicle expecting it to help your net worth. Modifications can certainly be fun but don’t expect anything beyond entertainment.
Is a car an asset? Conclusion
So, is a car an asset? Yes – but it’s a depreciating asset. You’ll need to keep this in mind when including a car in your net worth calculations.
I hope this article has helped you understand the best practices regarding tracking your vehicle’s impact on your net worth and keeping car purchases from taking too big a chunk out of your personal wealth.
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