JoshWhen people start to learn more about personal finance and investment, previously held assumptions about money start to be reevaluated. One of the most common realizations that people in this place in life have is that their car is not an asset. “But…”, people tend to say, “I own it and it’s worth money!” The reality is, this is not the full criteria for an asset. We’ll explain what an asset is as well as several reasons why your car does not qualify.
- What is an Asset? An asset is anything you own that earns you money. The last part of that statement is the most important. We can have lots of possessions that have inherent value. Some might even gain value over time. But unless the thing you own brings money into your life, it’s just a thing you own.
There are more reasons that cars are not assets. This an important idea for financially savvy people to grasp, because an understanding of this issue will help you invest in things that are assets. Investors want as many assets as possible. Here are reasons why cars (and other similar items) are not assets.
- Cars Depreciate in Value the Longer You Own Them. Unless you have a rare car for which there is a very specific collectors’ market, your car is only going to lose value as you own it. This is one of the reasons why new investors often emphasize buying a cheap and dependable car rather than sinking monthly payments in something fancy. Even though you’ll own your car outright by the time it’s paid off, you might not even be able to sell it for half of the price at which you bought it. Not a good investment (in the technical sense) and certainly not an asset.
- You Can’t Improve a Car to Make it Worth a Great Deal More. For the most part, you can’t take a new car and make it any more valuable through your own effort or engineering. It is what it is. Contrast this with a business which, if you were to buy it, you could certainly improve. Investors regularly buy majority stakes in businesses, then sit on the board and make those companies better, thus increasing their value. There is an exception for people who can buy junk cars, repair them, and then sell them for profit. Even these, however, aren’t proper assets, as they aren’t bringing in value on their own.
- Cars Have Unpredictable Costs. It’s impossible to know how much you’ll have to pay to drive and maintain your car. You car insurance costs might go up, your transmission might go bust, you might get fines and other unexpected expenses.
Even though cars have inherent value, they aren’t assets. For this reason, anyone who wants to make the most of their future wealth should think about only using cars which meet their basic needs, without spending any more money than necessary. If you save money on your car, you might be able to afford some real assets.