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 it.
However, the general 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 depreciates in value 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 the first year, most cars depreciate in value at least $1,500. Many depreciate much more than that. The average decrease is about $2,500. Over the first five years of owning a new car will depreciate between $6,000 and $10,000.
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 its 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. This is important to consider as you determine how much you should spend on a car.
How Much Should I Spend on a Car?
Experts suggest that you only spend between 10 and 50% of your annual gross income on your car. 1
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 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.
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. If this is the case, you should try to sell your car and buy a cheaper one. You should also avoid leasing a 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.