How Buying a NEW Car Affects Your Net Worth

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How Buying a NEW Car Affects Your Net Worth

By JLP | July 12, 2006

Have you ever thought about how buying a new car affects your net worth? I did a little research and found out that the average new car depreciates 20% as soon as you drive it off the lot. So, if you buy a $30,000 car, it will be worth $24,000 the moment you drive it off the lot. WOW! So, let’s take a look at the impact such a purchase would have on a net worth statement.

Here’s what a net worth statement might look like BEFORE the car purchase:

Now, we assume that you buy a $30,000 NEW car, using the $2,000 in your savings account for a downpayment. We will assume that you will finance the remaining $28,000 with a loan. We will also assume that you are going to keep the old car, which is worth $5,000. So, here’s what your net worth statement would like AFTER you bought the car:

Notice that your net worth declines $6,000 from $159,000 to $153,000. This decline is due to the fact that the car declines in value as soon as you drive it off the lot. So, that’s the penalty for buying a new car. However, remember that almost any car you purchase is going to continue to depreciate. For the most part, a car is not an investment.

Topics: Budgeting, Net Worth Statement |

Comments to “How Buying a NEW Car Affects Your Net Worth”

Bunny Says:
July 12th, 2006 at 1:19 pm

That is why I bought a used car and plan to drive it until it dies!! It’s a 1998 Honda Civic and it just hit 109,000 miles! I’m going to bite the bullet and replace the timing belt as recommended in the Honda book so that it will last as long as possible.

samerwriter Says:
July 12th, 2006 at 2:42 pm

I think your last point is key; the car continues to depreciate after the initial $6,000 hit. By the end of the first year, you may have lost $10,000. And another several thousand per year for years to come.

I finally decided to not include depreciating assets like vehicles in my net worth valuation for this very reason. Ultimately, what I want to know from my net worth value is when I can retire. And a car that is doing nothing but depreciating won’t help me figure that out. If I buy a new car, I want to be fully aware that I am now $20,000 further away from retirement than I was the day before.

By including vehicles in a net worth statement, one is really just hiding the true cost of the purchase from himself. The true cost will become apparent over time.

Steve Says:
July 12th, 2006 at 4:17 pm

Good illustration. Samerwriter makes some good points too. Vehicles can be a huge financial drain. I tend toward Bunny’s strategy with buying “newer” used vehicles.

But whether we buy new or used, there is another side to the story. One thing the numbers don’t show is that vehicles provide considerable value from their utility. This includes transportation to a good job, convenience for running errands, taking a vacation, visiting distant family/friends, or basic safety. How do we quantify the ongoing value that vehicles provide?

Sure, vehicles have plenty of negatives (high sticker price, loan expenses, maintenance costs, depreciation, insurance expense, gasoline, etc.) but they do add value to our lives. Or don’t they? My guess is they provide more value than all of the costs. If they didn’t, then I presume we wouldn’t buy so many of them.

» Weekly Mash-Up in the Blogosphere » Consumerism Commentary: A Blog About Personal Finance Says:
July 14th, 2006 at 9:17 am

[...] AllFinancialMatters shows how buying a new car affects your net worth and Blueprint for Financial Prosperity suggests spreading your money across multiple banks. Penny Foolish presents the first Festival of Under 30 Finances, and No Credit Needed is on his way to saving $20,000 by his planned date. [...]

» Interesting Blog Posts of the Week on Blueprint for Financial Prosperity Says:
July 14th, 2006 at 9:54 am

[...] JLP discusses how buying a new car affects one’s net worth. [...]

Dave Says:
July 14th, 2006 at 2:27 pm

Someone sent me a link to this thread, and it’s a good one. I was flying to Tampa and happened to be sitting next to a minister/CFO that did financial counseling and assistance for his parishoners. He gave me a good rule of thumb for buying a car:

A. The average life of a vehicle is 12 years.
B. People keep vehicles for about 2 years.
C. Buy a 2 year old vehicle and keep it for 8-12 years.

I like that rule of thumb, but I think I’ve improved upon it. The key, to my mind, is buying just the right amount of vehicle based on my needs.

The IncomeTrap.com method for buying the right amount of vehicle.

A. Identify the vehicle that meets your needs. For me, the answer is a Toyota Sienna.

B. Determine how many miles/years the vehicle will last before becoming mechanically burdensome. For me, a Toyota Sienna will last about 180,000 miles.

C. Determine how many years & miles you’re going to keep vehicle/drive a vehicle. For me, this is 8 years and 120,000 miles (we drive 15,000 miles/year or less).

So, the ideal vehicle for me is a 4 year old Toyota Sienna with 60,000 miles. Cost ~ $10,000 (cars.com).

Of course, if you can “just say no” to a car, you’re much better off. My family of 4 shares a single car, and I commute to work on my bicycle or scooter. I rode in today with a 62 yr. old that commutes 20 miles each way on his bicycle!

Alberen Says:
July 15th, 2006 at 1:56 am

I’ve been driving the same Ford F-150 pickup since I was sixteen…it’s a 1989 model and is doing great….

I did buy a 2005 Toyota Rav4 and really don’t like the payments at all…but I am just paying them as an interest rate move. It just reminds me how often a month comes around.

If you are thinking of taking on a monthly payment why don’t you sit down and think about that for a while. Think hard enough and swallow enough pride and I bet you can find a way to never make another (mandatory) car payment again!

Mighty Bargain Hunter » Roundup for the week of 10 July 2006 Says:
July 15th, 2006 at 12:47 pm

[...] All FInancial Matters posts on how a new car affects your net worth. [...]

Nozferatu Says:
November 11th, 2007 at 5:09 am

I’m faced with a bit of a dilemma.

Back in 2005, I sold my VW GTI so as to not have any payments. I purchased a used 2001 Ford Focus and paid for it in full. The car is running well but will probably need about $1K of work to keep it maintained and safe (i.e. new shocks, tires, probably a timing belt, etc).

One thing that happened to the car that makes me nervous is when I purchased it, I changed the plugs immediately. Well, the old plugs were so badly worn that a piece of the ceramic end of the plug chipped off and fell into the engine block. Needless to say, I didn’t realize it until the engine fired up again. The noise wasn’t pretty but the piece went out the exhaust port and things cleared up. Now the engine has a bit of a clattering sound when cold. It worries me because I think there was some damage done although I experience no oil burning or power loss or poor fuel mileage.

Anyway, my point is that the car needs some maintenance work. Now…the kicker. My sister needs a car but can’t afford one. So I was thinking I’d give her this car and she can pay me monthly for it interest free…at a lower price than what I’d sell for outside.

The dilemma…I need to get another car. Frankly, I don’t want to get another used car. I’d rather get a new one and keep it for a while. I already made the mistake of selling my GTI (economically speaking) but I don’t regret it. Being payment free is wonderful but obviously my Focus doesn’t have the safety and comfort of a newer car.

With that said, I can definitely afford the car. My wife and I do make decent money together…we’re actually almost debtless other than a couple of grand left to pay off her car and our recurring credit card debt (which we have because we buy everything on that and then pay it off at the end of the month…no balances).

What do you guys think? I’ve had the Focus now for about 2.3 years. It has about 60K on it. I bought it for around $6.5K and will give my sister a price of $4K and she can pay me whenever, however monthly.

I’ve been looking at the 2007 Nissan Sentra SER model with CVT transmission…slight better fuel mileage than the Focus even though it’s more powerful and larger. I can get one for $16,995K +T/L…a very good deal considering the INVOICE is like $19K. I guess they want to move these things for the 2008’s.

Insurance I checked is like $60 more per year than the Focus believe it or not. I considered going used or certified but man…as I said before, they do charge an arm and leg for used cars. For the price of a used Honda, you could easily by a new one most of the time…it’s outrageous!

Any opinions? Suggestions?

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How Buying a NEW Car Affects Your Net Worth