Many personal finance authors take the stance that a car is a liability, and with good reason. Based on personal experience and running some numbers, I have a slightly different view, and would suggest that it is both an asset and a liability at the same time. The degree to which naturally depending on your particular situation.
Allow me to explain.
3 Reasons Why a Car is a Liability
Reason #1 – Depreciation
This is the easy part. As many of you are aware, a new car loses value the moment it leaves the car lot. This is based on the concept of depreciation, that material things decrease in value over time due to wear and tear. If you buy a pair of jeans, eventually they will wear and get holes in them. The same concept applies to cars, homes, electronic equipment etc.
Let’s take a look at a few car models for comparison. The vertical axes is car value, the horizontal axes is time.
Some important observations based on the below graphs of car depreciation over a 12 year period (don’t get too hung up on whether the 12 year period is the most applicable, the general concept still applies).
1) Vehicles lose the largest amount of their value as soon as they leave the car dealership and are driven for even a short period of time.
You can see below that this holds true whether it’s a Toyota RAV4, Ford F-150 or Mercedes-Benz E-Class, losing 20-30%+ value in the first few days.
2) Some brands & models lose value faster than others
If we compare the % value drop we can see that it is comparable for the Toyota RAV4 and Ford F-150, but the Mercedes-Benz E-Class loses ~10% more value in the first year.
3) As time goes on, the amount of value lost changes (in other words you can optimize smart times to buy)
Notice how for the RAV4 the % decline is 12.8% after 4 years, but is only 6.69% after 5? But then it drops off 19.21% after 7 years.
In reality, cars have a longer useful life than just 12 years. I’ve driven my share of older vehicles (think 20 year, 200,000 mile+ category) that needed a bit of help cosmetically, but ran perfectly fine. The base concept is the same though, if you extend out the useful life from 12 years to say 25 years, you will see declining value over time, but that the difference in value from year 12 to year 14 isn’t as large.
Reason #2 – Maintenance & Cost of Ownership
This is just as you would expect. It costs money to maintain a car over time. Things break. You need an oil change, or get a new air filter etc. You also have to pay for parking in cities, as well as car insurance, registration and a drivers license etc. These are all necessary expenses that take money out of your pocket and put it into someone else’s.
Some vehicles cost much more to maintain and insure than others, so you can argue that some cars are a greater liability than others.
Reason #3 – Non-Income Producing
In a business, you have operating expenses, but you typically also have income to pay for those expenses. The typical argument is that for most people, cars do not produce them money. That’s not the case for everyone though, so let’s take a look at why cars can be an asset as well.
2 Reasons Why a Car can be An Asset
Reason #1 – Income Producing
Strategy #1 – Driving for a Ride Hailing Company like Uber or Lyft
Driving for companies like Uber and Lyft, you can make decent (certainly not amazing) side money doing this. However, your expected earnings will be greatly impacted based on where you drive, according to ridester.com.
Top earning states included Hawaii ($25.55/hour), Washington ($23.16/hour), Minnesota ($19.52/hour), Massachusetts ($17.55/hour) and Pennsylvania ($17.39/hour).
While the lowest earning states included Oklahoma ($9.17/hour), Florida ($8.95/hour), Missouri ($8.78/hour), Texas ($8.67/hour) and North Carolina ($6.62/hour).
When I was in Chicago, I took an Uber back to my hotel and was surprised when a young driver picked me up in a Mercedes-Benz SUV. After chatting for a while, I asked him about how Uber was working out for him, and he told me that driving a few hours in the evening part time enabled him to make his monthly car payments and earn a bit extra. It was certainly a nice ride, so while I’m not sure if it is a huge earner for people, as long as you’re making a profit you’re 1) subsidizing the cost of your car, and 2) making some money. That sounds like an asset to me.
Strategy #2 – Renting Your Vehicle Out to a Ride Sharing Service
Using a company like Turo, you can rent out your car part or full-time and make just as much money as many people do on Uber or Lyft. Turo claims that car owners make $500/month on average.
Reason #2 – Income Enabling
The other aspect of owning a car, is for people who live in areas with under developed public transportation, not having a vehicle means that you’re not able to get to work consistently on-time everyday, or at least not without having to go to great lengths.
Just as you need to be of sound physical and mental health in order to be able to keep your job and earn money, similarly, you also need to be able to consistently arrive at work on time and have the means to make your life work. Using that reasoning, a car enables income and is an integral part of your income, which you wouldn’t have without it, therefore it’s an asset.
However, does that mean that a BMW is an asset as much as a Toyota or a Ford or a Fiat? Certainly no, we can’t argue with the price tag, nor the difference in depreciation.
Thus, my take is that the basic function of a vehicle (getting you from A to B) in a consistently running and reliable, but not image oriented vehicle is an asset.
It would depend on where you live, but that might be a car in the $3,000 to $7,000 price range or so. Beyond that, and you’re mostly investing in image. Yes, newer, higher spec cars have better safety features and bells and whistles, but really people 30 years ago didn’t need them to be safe drivers and if you’re honest with yourself, most likely you don’t need them either. You might want them, which I totally get. But that image related portion, for most people that’s the liability because it doesn’t help bring in additional income.
The caveat here, is that if you are indeed commercializing your car via Uber, Lyft, Turo etc, or you’re in a profession where having a luxury vehicle actually does increase your earning power, then that’s a different story, as you well know.
For these last situations, it really comes down to how much is it costing you extra vs. a more inexpensive vehicle, and how much more do you estimate you’re earning because of it. It’s a very grey area, so use your best judgement here to see if you have a solid asset on your hands or a non-performing asset.
Conclusion
If you
– need your car to Earn a Steady Income
– rent out your car using a Ride Sharing service
– drive your car part-time for a Ride Hailing service
– are in a profession where image is related with income
Chances are you have a good argument that at least a good portion of your car can be considered an asset. However, this has to be balanced with conservatism to recognize that chances are a large part of your car (that is more tied to image vs. function) is indeed a value depreciating liability.
Next time you are on the market for a vehicle, it may be helpful to keep the above framework in mind and see if it impacts your buying decision. You could also keep track of how much your “luxury” is going to cost you over time, and see if it’s worth it.
Taking a close look at the depreciation tables and market value of the vehicle you own and plan to sell, as well as the vehicle you plan to buy can help you figure out the optimal time to get the most value out of your vehicle.
For me, I look at in terms of monthly cost of transportation. If it cost you $5/day to get to work on public transportation, or say $110/month, and then an additional $90/month getting around for groceries and other life basics, and it took you an estimated 8 additional hours/month waiting for public transportation or having it take longer to get from A to B (inverse is also quite possible as well), and you value your time at say $20/hour = $160/month.
That totals $360/month of expenses related to public transportation, with $200 of actual out-of-pocket cost.
Compare that to the cost of monthly car ownership (or some other alternative using ride sharing, ride hailing, car pooling etc) and it becomes clear that you can indeed end up ahead if you buy well when you’re getting a new used car.
In my situation, I opted to buy a used vehicle with higher mileage because I am expecting to be able to get my monthly cost of ownership well below what other alternatives would cost me. This key element of this strategy is minimizing non-required maintenance expenses and owning the car for as long as possible.
Alternatively, there are other strategies to buy almost new vehicles and own them for a shorter period of time and re-sell them when the depreciation drop is more optimal. That’s the topic of another post though.
What are your thoughts? I encourage you to join the discussion 🙂
