An asset is anything that you control and has an economic value, and which you expect to return benefits sometime in the future or generate income. On the other hand, a claim against that asset is what we call a liability. The drawback arises from business operations or transactions and does not return a profit.
So based on this definition, is your automobile an asset or a liability? Many people will argue that their vehicle is a liability because of the numerous associated expenses. Let’s explore more.
The Cost of Owning a Car
Your car is an asset if it helps you generate an income. Whether you are operating an Uber or hauling business goods, the car is an asset because it is at the center of a profit-generating activity. But it is a different ball game altogether if you bought the auto on loan, and you use it for cruising around town when bored.
Many folks are not conscious of the fact that the actual cost of having that neck-turning truck in your driveway doesn’t end with its selling price. To be blunt, a car is an expense on wheels.
There is repair cost, maintenance cost, car insurance, fuel and parking costs to deal with. The situation worsens when the car is old, and the repair costs already exceed its value. CEO of Trico Group Patrick James highlights the importance of following the maintenance schedule to the letter. But an old car may require more than following the schedule. It needs extra TLC, repairs, and the replacement of critical parts.
Is a Car an Investment?
Investors worth their salt are always keen to ensure every expense or dollar out of their pockets will give them returns. They are always after investments that will return a much higher value than what was spent to acquire them. But is this the case with a motor vehicle?
If you asked someone convincing you to buy a car as an investment about how much profit it will return, the answer would not be satisfactory. In particular, you will lose more than half of the car’s value within only a couple of years.
The moment that you drive off from the showroom, the investment begins to lose its value. It loses about 20% immediately and a further 10% every year you own it.
In a nutshell:
- The car depreciates 10-15% immediately it leaves the lot
- It depreciates a total of 20–30% after one year and 40–50% after three years
- Your car will depreciate between 60 and 70% after five years
You can determine how much your car is worth through the Kelley Blue Book. You have the option to choose between the trade-in value or the ‘for sale by owner.’ Each option will pull up different results. Typically, you will make more money if you sell the vehicle privately instead of trading it in.
Is Owning a Car a Good Thing?
From a financial standpoint, your BMW is not an asset. But it is not worthless. A car makes you travel faster, conveniently, and safer. For most people, having a car makes life a bit easier and more fun. But apart from the fun of it all, you can convert that BMW into an investment asset in several ways.
For example, you can join a ride-sharing app such as Uber and make money during your free time. Most people these days prefer ride-sharing apps to taxis because of safety and convenience. Also, moms, if you’re already hauling your kids around to activities, practice, lessons, and school what’s a few more? Become the neighborhood ride-share for kids. You can also lease the car to travelers staying in your area for a couple of days, and then use the income for insurance and other costs and minimize your expenses.
Some people also use the car to run errands for other people. It could be to get some groceries for people who haven’t got the time, move some furniture, or even take the kids to school. Depending on your location, there could be apps you can use for this purpose.
No doubt owning a car comes with its costs, and it is a fast depreciating asset. But that does not mean it is your worst investment. A vehicle comes with its comforts that are, for most people, worth the price. However, there are several ways that you cut the costs by using the vehicle to generate income, such as Uber, running errands, and leasing.