The question of whether buying a car is a good or bad investment depends on various factors and individual circumstances. Generally speaking, a car is typically considered a depreciating asset, meaning its value tends to decrease over time. However, it’s important to distinguish between an investment and a necessary purchase.
While many financial experts say that buying a car is one of the worst financial investments of your life, you are the one to decide whether the total utilities and benefits you receive from it outweigh the cost of it or not.
Here are a few points to consider while buying a new car:
Cars often lose value over time due to factors like wear and tear, mileage, age, and market demand. This depreciation can significantly impact the resale value of the vehicle.
2. Maintenance and operating costs:
Owning a car involves ongoing expenses such as insurance, fuel, maintenance, repairs, and registration fees. These costs can add up and impact the overall financial picture.
3. Utility and convenience:
For many people, owning a car is a necessity for commuting, transporting goods, or fulfilling personal and professional obligations. The convenience and utility provided by a car may outweigh the financial considerations for some individuals.
4. Resale value and market factors:
While cars generally depreciate in value, certain models or collectible vehicles can appreciate over time. Rarity, condition, and demand for specific cars can influence their resale value. However, it’s challenging to predict market trends accurately.
5. Personal circumstances:
Your individual situation, lifestyle, location, and transportation needs play a crucial role in determining whether buying a car is a good investment for you. Consider factors such as alternative transportation options, access to public transportation, and car-sharing services in your area.
Financial Analysis of Buying a Car:
The different car models have different purchase prices, depreciation rates, maintenance costs, and resale values, which also depend on many factors. Let’s do a generalized calculation of investment in a new car.
The average car price in the US is around $50,000 in 2023, according to money.com.
New cars depreciate faster than used cars, losing around 9-11% of their value as soon as they’re driven off the lot. Within the first year of ownership, a new car typically loses about 20% of its value. Over five years, the depreciation rate continues at approximately 15-25% annually, resulting in a total loss of around 60% of the car’s original value.
If you purchase a car worth $50,000, at the end of the 5 years, it will be worth only about $20,000. If you sell it after one year, this value will be around $40,000.
Over the past decade, the cost of vehicle parts has steadily risen due to a combination of factors including the availability of parts and inflation. If we look at the cumulative maintenance cost in 5 years by different brands, the average maintenance cost becomes $966/year. Another study by The Balance Money also states a similar figure of maintenance cost which is $900/year for a yearly drive of 10,000 miles.
If we take the current fuel price of $3.5 per gallon, with fuel economy of 25 miles per gallon (average mileage for a car), the total fuel cost with a yearly drive of 10,000 miles becomes $1,400/year.
License, Registration & Taxes
National average = $675/year (This includes all government taxes and fees that need to be paid at the time of purchase, along with the annual fees required to maintain the vehicle’s license and registration.)
1. Investment Analysis of Buying a Car
In simple terms, if you buy a car for $50,000 today and own it for 5 years, the total loss (without considering the time value of money and inflation rates) would be around $750 per month or $9,000 per year. If you own the car for only one year, your loss would be around $1,080 per month or $13,000 in one year. In actual terms, the loss is even more because money loses its value, and operating cost increases over time.
If you decide to buy a car, the best advice is that you own it for more than a year or at least 5 years.
2. Income Analysis to Buy a Car
In 2022, the average disposable income in the US was $55,698 according to the most recent data from Fed. Disposable income refers to the money that remains after taxes and social security charges have been deducted, and it can be used or saved according to one’s preferences.
With a saving of 15% on disposable income, buying a car worth $50,000 is equivalent to the savings of 6 years. Even if the saving is increased up to 20%, it takes equivalent savings of 4 and a half years to buy the same car. But you don’t actually have to save the total money at once to buy a car unless you are thinking of paying in a lump sum.
When purchasing a vehicle, you have two options: you can either finance it with a loan and make payments over time, or you can choose to pay the full amount in cash upfront. By paying in cash, you avoid any interest charges and monthly loan payments.
Public Transport vs. Ride Sharing vs. Buying a Car
In 2019, the average cost of a monthly bus pass for passengers was $58.53 in the United States. During the second quarter of 2019, Uber was the most affordable ridesharing service, with an average cost of $25.37 per ride in the United States. Uber also has a monthly pass for daily commuters which is slightly cheaper (5% off on eligible rides). From our calculation above, if you buy your own car, your average daily travel cost ranges from $25 to $40 (considering both purchase price and operating cost).
In conclusion, the cheapest option is to use public transport.
If you have to travel daily, the best advice is to use public transport if it is available. The second best option for daily commuters is buying a car than using an Uber.
What are Better Investments than Buying a Car?
It’s worth noting that investing in assets that appreciate over time, such as stocks, real estate, or certain businesses, typically has a better potential for long-term financial gains compared to buying a car. However, owning a car can provide value in terms of convenience, mobility, and personal satisfaction. If owning a car helps you earn money, make sure you make more money by using it than you invest in it.
Ultimately, it’s important to carefully evaluate your financial goals, lifestyle, and transportation needs before determining whether buying a car aligns with your overall investment strategy. In terms of investment, buying a car is not a good alternative but the utilities and benefits you get from it might improve your lifestyle.