Assets Vs. Investments
Any value-addition to your list of possessions is an asset.
The house you own, the funds you have in the bank, your car, furniture, and appliances are all assets.
Investment, on the other hand, is something that will generate revenue or returns over time.
Mutual funds, stocks, and rental properties can be considered investments.
Usually, all your investments are assets, but the reverse isn’t necessarily true.
A car is an asset because:
- It loses value over time
- It doesn’t generate income when in use
- It won’t generate any profits when sold
Why It Is Important To Know The Difference Between Them
If you realize that a car is an asset, you might rethink how you want to buy it or if you actually want to buy it.
You will consider if you want to finance it, buy it upfront, or go for other alternatives like buying a used car.
The clarity will also help you decide between models and compare between multiple dealerships so you can negotiate additional discounts on the car’s selling price.
What To Know About Depreciation
In financial and accounting terms, depreciation is defined as the reduction of an asset’s value over time until it becomes negligible or zero.
There are many reasons for depreciation, and for cars the most-common factors are the model, age, miles driven, and wear and tear.
For a $20,000 car that you plan to drive for 3 years, the first year’s average depreciation will be almost 25%, and 15.60% for the 2nd and 3rd years.
It can go up to 35% in case the car falls under the high-depreciation items category. On average, the value at the end of the period will be at best between $8,000 to $10,000.
Why Buying A Used Car Can Be Better
If you buy a used car, you’ll be saving a lot on the upfront cost of the car.
The costs of new cars are at an all-time high as car manufacturers keep pushing out newer models and upgrades that impact the sale price of used cars to a large extent.
Cars lose almost 25% of their actual cost in the 1st year itself, so buying a used one can directly save that amount.
The older the vehicle, the lower the depreciation value.
Additionally, you can find low-rate financing options and certified pre-owned programs that can help save extra money as well.
Moreover, don’t forget the additional benefits like the lower insurance rates, less hassle to get approved, and leg room for additional negotiation.
Most used-car dealers will provide you detailed history reports of the vehicle that can help you choose the best car out of the lot.
Don’t Forget Ongoing Expenses
A car’s resale value also doesn’t yield returns because there are additional expenses like gas, maintenance, and insurance throughout the time you drive the car.
Buying a car with financing also incurs additional expenses.
For instance, you’ll need to pay loan processing fees and then there are the monthly installments coupled with interest.
You’ll also have to bear the title fee, vehicle registration fee, insurance, and other charges that the dealership or the lender requires.
Add all of these costs to the price of the car and you’ll realize that a car is an asset that depreciates very quickly.
Cars As Status Symbols
While we often consider cars status symbols, this is a bad thing from an individual financial perspective.
The goal of any vehicle is to provide transportation.
Experts say that the right financial decision is buying a car that costs between 10% to 50% of your annual gross income.
Just to meet unrealistic expectations, many car buyers feel forced to go over budget.
This leads to additional loans, more interest, and unexpected financial crunch which ultimately leads to a debt trap.
In certain cases, buying a vintage car or a unique model can turn out to be an investment.
Still, it requires ample capital given vintage models don’t come cheap.
If you stay within budget and consider a car to be a tool instead of a status symbol, you can save a lot of cash for other expenses.