Is Buying a Car an Investment?

young couple looking to buy new car
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Although your car is an expensive purchase, this does not mean it is an investment. Many people consider a car an investment because of the large price tag. When you spend a large amount of money, you may assume that you will receive a return on the money that you put into the it. The rule of thumb is: investments make you money. Where a home appreciates in value over time and stocks pay a dividend and appreciate in value, a car depreciates over time and is worth less money each year.

Why Is It an Asset and Not an Investment?

Your car may be considered an asset because you can sell it for a large amount of money. This can help in emergency situations, and may help you to get out from underneath the loan. But your car is not an investment. It depreciates over time. In fact, in the first year most cars depreciate in value at least $1500.00. Many depreciate much more than that. The average decrease is about $2500.00. Over the first five years of ownership a new car will depreciate in between $6,000.00 and $10,000.00. This money is not recoverable.

It is important to realize as you make your car purchases that they are not investments. They are large, and often necessary purchases. You should carefully research all of the options and you may want to look at how well your car model and make resell, but it is important to realize that you will not recover all of the money that you make on the purchase. Since it is a large purchase, you should carefully consider all of your options. You do not lose as much money when you buy a used car, because a car takes it biggest depreciation hits in the first three years of ownership. Realizing this may help you choose between a new and used car.

Additionally, you should take into consideration the amount that you are spending to maintain the car. Your car insurance is an additional expense. When you make improvements on your home, it will go up in value. However, the money you spend maintaining and repairing your car will not increase its value or even help it to hold its current value. This is important to consider as you determine how much you should spend on a car. 

How Much Should I Spend on a Car?

It's important to make sure that the worth of all of your cars is less than half of your annual income. If it is more you are spending too much money on cars. You can purchase nice cars that make a good impression without making yourself go broke in the process. If you feel that you need a luxury car, ask yourself why, look at your annual salary and then see what you can afford. Often you do not really need that car in order to continue in your current profession.

The amount that you spend on a car should reflect your current financial situation. If you are still carrying consumer debt or have large student loans, you should be more conservative when you purchase a car. A car payment will tie up your a percentage of your income and make it more difficult for you to do other things like pay off your debt or handle emergencies. If you buy a more affordable car, you will be in a better position financially and be able to fix your situation 

What Do I Do If I Spent Too Much on My Car?

It can be frustrating to realize that your car payment is holding you back from doing the things you want to in your life. I have known people who paid more on their monthly car payment then they did in rent each month. The money can be put towards better things. If you feel that you need a nice car because of your job, you should be able to find a car that is nice without making you go completely broke. Leasing a car is the same as buying a new car, but worse because you cannot sell it when you are ready to get a new car. One of the best things you can do is set up a sinking fund for your next car. Then you can begin to pay for your cars in cash. This strategy can help you avoid some of the mistakes people make when buying a car. If you are completely overwhelmed by your car payment, you may need to sell it and buy a used car with cash. You will need to save up money since many people end up owning more on the loan than the car is worth.