Buying A Car: The Worst Investment?
Those who know how to build wealth understand that every dollar they spend should be seen as an investment. Even if you don't have a lot of knowledge (or even interest) in how the stock market works, you surely know how to be successful: you buy a stock at one price and later sell it at a higher price, making a healthy and impressive profit. (For related reading, also take a look at 5 Ways To Buy An Used Car.)
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The Worst Investment?
Let's set up a hypothetical scenario. You have $25,000 to invest and a certain investment broker approached you with a great new investment vehicle. He starts by telling you that it is one of the most popular investments in North America. He goes on to say that you can feel safe because a large amount of Americans invest in this product.
You have the same question as most would: "How much money can you make on this investment?" When you ask, you're surprised by the answer. Your investment broker tells you that the chances are nearly 100% that you will make no money at all. Then he tells you the really shocking part: The chances are nearly 100% that you will lose at least half of your investment and most likely much more than that!
Who would sign up for an investment like this? The answer is, quite possibly, you! You would sign up for it because like most Americans, if you are purchasing a new car, you're probably leasing or financing it. For most Americans, a car is a terrible investment, but you need one, so what do you do?
The Facts about "Investing" in a Car
In this case, $25,000 is the amount that you are considering investing into this investment vehicle, so let's act like investors and examine the facts:
- An automobile is a depreciating asset. As it ages, it loses value rapidly and drastically. There is very little chance that an automobile used for personal transportation will appreciate in value.
- Along with the financing payments, this "investment" has to be insured, repaired and maintained and registered with the state, further driving the cost of it higher. According to Edmunds.com, over five years it will cost an estimated $33,604 to drive your $25,000 vehicle, making the loss on this investment even higher.
- A reliable form of transportation is essential in order for most people to produce an income.
- Many people see an automobile as a social status symbol, but is the luxury component of an automobile worth the investment dollars?
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How to Lose Less
To be fair, one could argue that owning this car allows them to travel to their place of employment to produce an income so the investment isn't actually losing as much as the raw numbers would suggest. Most would concede that owning an automobile is a necessity so let's look at a better way to make an investment in an automobile without losing so much of the original dollars.
First, purchase a used car. On our original $25,000 car, over 10% of the value will be lost in its first year from depreciation. By purchasing a car that is more than one year old, you don't have to lose your investment dollars to the first year depreciation.
Next, only buy an automobile when you can pay cash for it. Pay cash and you save an estimated $3,100 in finance charges on a $25,000 car. Buy a four-year-old car paying cash and you could have about $13,000 leftover from your initial $25,000 budget.
Now, take that $13,000 you saved and invest it in to a high dividend paying stock of your choice for the same amount of time that you were going to finance your car. Assuming Verizon's dividend stays at the same for five years, your $13,000 investment will generate over $650 per year in income for you. By buying a used car, You can potentially save half of your original "investment" in that new car, and you make 5% for five years by investing the money.
The Bottom Line
Looking at it as an investor would, purchasing a new car is a terrible investment, but what's worse is purchasing a new car using credit, and now we have numbers to prove it. (For additional reading, also see 10 Tips For Buying A Car Online.)
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