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Are Cars Assets or Liabilties?
By JD Bluefield | May 9, 2008
With all this discussion on gasoline, cars and ethanol, it brings up the question: Are Cars Assets or Liabilities? It can be argued that cars can be both assets and liabilities at the same time. Lets look at the many aspects to it:
Providing Transportation:
- Whether for work or pleasure, a car is an asset. No matter how ugly it looks, if it gets you from point-A to point-B, it is an transportation asset.
- When it no longer performs this task reliably, constantly requires repairs, can’t be insured/registered, etc. the car becomes a liability.
Effect on Your Net Worth:
- A car’s “Blue Book” value is an asset which adds to your net worth.
- But keep in mind that over the long run, vehicles are a constantly decreasing asset. Over time, the value approaches zero.
Effect on Your Cash Flow:
- A car may be required for getting to your job to make money or make you more time/energy efficient. For making more money in less time or expending less energy, it is asset.
- On the other hand, the cost involved in providing that transportation is a liability:
- GASOLINE
- Insurance
- Maintenance (oil change, oil filters, air-filters, car wash, tires, etc.)
- Storage (garage, renting a parking stall, street parking)
- Repairs
- Car Loan
- When maintenance and operational costs increase, your liabilities increase. In other words, when crude oil increases, gasoline (not to mention engine oil) increases.
- Arguably, anything above basic transportation makes you look good and feel good, but does not contribute to increasing your wealth. In fact, buying a fancy car beyond your means may even hinder your future growth. Excessive monthly costs such as loan interest, insurance, maintenance and fuel could have been gaining interest or used to purchase stock.
Sadly, in the end, practically all cars will eventually become pure liabilities. The car will not run, it breaks down constantly, lacks required safety features, smokes, gets poor gas mileage, repairs run through the roof and trying to sell it will yield minimal returns.
How Do You Engineer Your Transportation:
- Evaluate if you need a car or not: A friend of mine is trying to sell his vehicle, and live with no vehicle. He now lives within biking distance of work and walking distance of most necessities. He’s estimated that he will save $25/day. With gas going through the roof, that savings will only increase.
- Evaluate what you really need. More importantly, be realistic on what you don’t need: How far do you drive? How many people are in your family? To be frank, 99% of people don’t need a truck, an SUV or even a van. Even with a family of 4, all that’s necessary is a simple car or possibly a “crossover” (read: station wagon). Growing up, we had one small 2-door car and one small 4-door japanese hatchback. There were no SUVs, crew-cab trucks or massive mini-vans, which are in no way mini anymore. I consider the VW squareback a mini-van.
In the next year, body-on-frame SUVs will become much more rare, replaced by more unibody construction “crossovers”. In fact, the legendary grand-daddy of SUVs, the Ford Explorer will be a unibody “crossover” next year. - Evaluate how much you can afford: See the second bullet in Effect on your Cash Flow, add up all those estimated costs, then see how much your budget can afford. When I was looking to pick up a car. There were many adds with taglines like “TOP (Take Over Payments)”, “baby on the way, gotta sell car” or “would love to keep it, but can no longer afford it”. I personally love these types of adds, because it means I can most likely get a great deal. For you the read, this is where you never want to be. You should never buy a car (or any investment), where a sudden change in income or expense will force you to sell. Some are some easy and clear signs that a certain car is more than you can handle: If you have to lease it to afford the monthly payments, that is a car you can not afford. If you have a car loan with a high interest rate or years in length, that is also a car you can not afford.
- Evaluate if you should keep your current car or buy a new one: Before you run out and buy another car, think about how much that car will cost compared to your current vehicle. Many people looking for new cars because of gas prices, but you also need to factor in the costs like depreciation and higher insurance on newer cars. The best compromise may be a “newer” used vehicle, that gets better gas mileage.
Topics: Engineered Living, Travel |
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