When you've got a car, you need to decide whether it's more of an asset or a liability. And treat it accordingly.
One of the most important lessons to learn if you want financial success is the difference between assets and liabilities. This applies to most things that you purchase. While you might need to keep some liabilities on your household's balance sheet, understanding what they're costing you and working to limit those costs can help you avoid serious problems later.
Your car is one of those things that you should evaluate regularly to determine whether it is an asset or a liability.
Your Car Can Be an Asset
There are times that your car can be an asset, providing you with ample return for your investment. Of course, when you start thinking about your car as an asset, you have to account for some of the benefits that aren't strictly related to money.
Some of the advantages to having a car include:
- It provides you with reliable transportation so you can get to work and make money.
- The car itself is an item of value; you can sell it and receive cash in return.
- You can receive peace of mind, knowing that you have a certain amount of independence with your car. It's not a financial benefit, but it can reduce the stress you feel.
I like having my car because it's great for camping — which is an activity I enjoy participating in with my son. This intangible benefit provides emotional returns for my financial investment, even though the car continues to depreciate in value every year.
What Does Your Car Cost You?
Of course, the cost of a car goes beyond the purchase price and the interest that you might end up paying as a result of a loan that you get to buy the car. There are other costs associated with car ownership, including auto insurance, maintenance, and repairs.
You can minimize some of these costs by shopping around for insurance, and by taking good care of your car. I take my beloved Subaru Outback in for regular maintenance and keep up with the manufacturer's suggestions. I did this with my previous car as well, and the result was that there wasn't a need for major repairs.
It also helps that my husband and I buy relatively new cars as well. My Subaru was bought brand new, and the Prius my husband drives was a lease return. This means that we don't have to worry about breakdowns and repairs, and the cars are usually still under warranty — at least for the first couple of years.
Some cars also hold their value better than others. The Outback and the Prius both hold their value well, so the depreciation isn't such a big deal. However, before you buy, it's a good idea to check into the problems your car is likely to have. There are sites that look at popular cars and determine what they are likely to cost you, as well as what problems you might run into.
Make sure you understand these issues before you buy so that you don't find yourself saddled with unexpected costs that turn your car into a huge, costly liability.
Your Auto Loan is a Liability
No matter how you view your car — as a helpful asset that promotes independence and gets you to your job or as a money pit that isn't worth keeping — it's important to understand that your auto loan is a liability.
When you owe money on your car, it costs you. You pay interest, and that is money that goes straight into someone else's pocket and doesn't really benefit you.
This doesn't mean that you should never get a car loan, though. I usually buy my cars with loans. And I find it's worth doing in the current environment since interest rates are so low.
I see the car loan as leverage. I can get the car I want, make very affordable payments, and use the money I would have spent for something else — like investing. In fact, I'm not in a hurry to pay off the Outback loan (the Prius is paid off) because the interest rate is 1.9%. Instead of avoiding that 1.9% interest and buying the car outright or paying off the loan faster, I can invest the money. My annualize returns over the last few years far exceed the interest I pay on the car loan.
The story changes, though, if you have a higher interest rate. In those cases, the loan does little more than offset the value of your car. When figuring your net worth, you subtract what you owe on your car from its value. In some cases, if you have a car that depreciates rapidly or if you have a high interest rate, you can reach a point where you owe more on your car than it's worth. Then, when you add in the costs to keep the car running, it's a real liability.
What do you think about your car? How do you view it? Is it an asset or a liability?