The next time you’re watching TV or listening to the radio, count how many times an advertisement for cars or trucks comes on. Cars and trucks are not an investment. They are a depreciable asset and one of the financial mistakes to avoid. This means they drop in value over time.
In contrast, assets like stocks, bonds, real estate, and cryptocurrencies appreciate over the long term. Think of depreciable assets as you losing money. They are an expense and a common financial mistake to avoid.
Popular rebuttals to the fact that vehicles are a depreciating asset and why a new car is needed:
- I need a car to get to work
- I want something reliable
- My old car started to cost money to fix
- I paid off my old car so its time to get a new one
Common Financial Mistakes: Buying a Car or Truck
One of the the most common financial mistakes and biggest wealth leaks in the USA is people buying cars they don’t really need. On top of that, many people buy a vehicle that financially they can’t even afford in the first place! I call it a wealth leak because it is money trickling off the common person’s net worth.
Most people do need a car or truck to work and live their lives. But, do they really need to purchase the more expensive car? Or are they just robbing their future selves thousands of dollars? This scenario applies to so many other examples of financial mistakes that are commonly made.
Are Cars and Trucks a Good Investment?
Let’s use a real-life example of a familiar investment predicament that people run into when shopping for cars. The most common question: Are cars and trucks a good investment?
Joe makes $80k per year and has a stable job. The monthly car payment Joe can afford is $500/month. Joe finds a dealer with 0% financing that is willing to give him a 6-year term. That means he can buy a car worth about $36k. Therefore, Joe buys a new $36k car.
Six years down the road, Joe decides that he needs a new car again because this car is now “old” and started to have some “maintenance costs” that are coming up. So, he trades that in for $14k and repeats the bad investment cycle of purchasing cars or trucks. Joes is stuck always wishing he had more money throughout his life because he didn’t avoid the common financial mistake of buying cars and trucks.
Buying a Car vs Investing the Money
Another scenario involving buying a car vs investing the money is with Bobby. Bobby decides that instead of spending $500/month on a car, he decides to buy a car that only has a payment of $300/month. He then invested the $200 difference for those 6 years that he is paying for the car. Assuming an 8% rate of return on that $2,400/year invested, Bobby would have $17,600 after the 6th year.
At this point, Bobby buys a $36k car paying the full $500/month after his trade in of the less expensive car. And repeat the cycle of the first example. If he keeps the $17,600 invested as it grows at 8% for the next 30 years and does not add anything to the account, Bobby would have around $177,000!
Small financial choices make a huge difference over time.
Mistakes to Avoid Financially
Cars and trucks are, for most people, the most expensive items we pay for in our lives. Outside of where we live, buying a car or truck is the most costly purchase. Don’t get caught up in the great advertising that car companies do. They are professionals of making us feel like we need the latest and greatest vehicle. However, it’s important to think of long term investing and make sure to be aware of the mistakes to avoid financially. Put your money in appreciating assets not depreciating assets.
Time and consistency are your best friend, when it comes to investing your extra cash in the bank. But making financial mistakes along the way, with big ticket purchases like a car or truck, can have a dramatic negative effect on your net worth over time.