Cars: Asset, Liability, Expense or Investment? - Lazy Investing Way

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Wednesday, November 01, 2017

Cars: Asset, Liability, Expense or Investment?

Featuring my friend Darwin inside Allyn's Car :D
I was planning to write about cars a while back but just forgot about it. Then I recently accompanied my mother to a car service center and someone also asked me about what I think about cars in one’s the financial picture.

So, is a car an Asset? Is it a Liability? Or Expense? Perhaps an Investment?

Asset – are items that are owned and have value and also something that can generate cash in-flow

Liability – are obligations or items that are owed to others. Something that does not contribute any positive cash flow

Expense – the cost required for something; the money spent on something.

Investment – "An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative."-Benjamin Graham and David Dodd, 1934

Although it costs you money, and occasionally PAIN, your car itself is an ASSET. Anything you own that can be sold for cash counts as an asset. HOWEVER, it’s not a liquid asset and at the same time, its value diminishes over-time (Depreciation of 20-35% – the moment you buy that car its value starts decreasing, even if you don’t use it!). That’s assuming you have already paid off your car.

The only way for it to be an asset if it puts money instead of taking money off your pockets! Does your car make you money? Well, it gets you to and from work. That helps you make money. But you could use public transportation for the same purpose.

Unless you are a pro/taxi/uber/grab-driver, driving instructor, or any other profession that is based in a vehicle, a vehicle is not usually tied directly to your ability to make money.

A car loan is a liability, or debt. So if you didn’t pay your car in full but through some sort of loan-financing, then your car ownership is a liability. The longer you own a car, the more you will have to budget for future repairs (a liability!) and the lower its potential selling price.

The expense comes in the form of daily use as well as the “HIDDEN COSTS OF OWNERSHIP.” Fuel, repairs, insurance, registration, sales tax, toll fees, loan interests, and parking/storage are all expenses – that is, costs of owning a car – the costs almost always outweigh the monetary value of a car.

Let’s have a quick rough estimate of the usage expenses per year: Fuel – Php80K; Maintenance – 12K; Insurance – 12K; Parking – 40K; TOTAL = Php144,000 / annum

This amount does not include other fees and the car loan.

So, a car may be an asset, but it’s one that incurs expenses and gives rise to liabilities over time.

But what about car investments? Just because a car costs a lot of money, doesn’t mean it is an investment. This only applies to ‘classic cars’ that are coveted by collectors. To name a few:

•Volkswagen Beetle/Mircobus – in US auctions this year, some were sold in the range of USD70K -  350K.

•Lancer Evos – can also fetch up at least USD100k

I’m not against cars, but owning one is a huge decision that should not be rushed simply because you have the money to buy one. Get help from a professional to plan it all out and don’t just base your buying decision on emotions.

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Originally Published in Philstar - The Freeman Newspaper last October 31, 2017.

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