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.)
IN PICTURES: 4 Biggest Investor Errors

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?

IN PICTURES: 6 Millionaire Traits That You Can Adopt

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.)

For the latest financial news, check out Water Cooler Finance: Anti-Government Protesters Rock Egypt.

Related Articles
  1. Economics

    What is a Complement?

    A good or service that’s used in conjunction with another good or service is a complement.
  2. Retirement

    Ipsy Review: Is It Worth It?

    Discover the history of ipsy, how much packages cost, options available for membership, major competition and what the future looks like for the company.
  3. Stock Analysis

    The Biggest Risks of Investing in Johnson & Johnson Stock (JNJ)

    Learn the largest risks to investing in Johnson & Johnson through fundamental analysis and other potential risks. Also discover how JNJ compares to its peers.
  4. Budgeting

    Craft Coffee Review: Is It Worth It?

    Learn more about one of the first and most flexible specialty-grade coffee subscription services on the market, a perfect fit for any coffee lover.
  5. Home & Auto

    What If They Can't Fix Your VW? (VLKAY)

    The latest news is that VW may not be able to fix the pollution controls to make those doctored cars meet U.S. environmental standards. Now what?
  6. Budgeting

    Plated Review, Is It Worth It?

    Take a closer look at the ready-to-cook meal service, Plated, and learn how the company can help you take the hassle out of home cooking.
  7. Stock Analysis

    Volkswagen: A Value Play for 2016? (VOW.DE)

    Understand why Volkswagen could be a good value play for 2016 depending on your outlook regarding the company's current EPA imbroglio.
  8. Saving and Spending

    Why the Classic Car Boom Might Be Ready to Bust

    The collectible car market has grown spectacularly, but recent numbers show that it may be heading for a correction.
  9. Investing

    Barbie's Body Wasn't the Problem (opinion)

    Barbie's body type wasn't what killed sales, argues Angela Travillian. Other factors were at play.
  10. Stock Analysis

    Financing iPhones: The Next Apple Move (AAPL)

    Look at how Apple's plan to finance the purchase of new unlocked iPhones will impact choices of carriers as well as profits for both Apple and the carriers.
RELATED FAQS
  1. How does a cost-of-living adjustment (COLA) affect my salary?

    Some companies build salary adjustments into their compensation structures to offset the effects of inflation on their employees. ... Read Full Answer >>
  2. Where can you buy NetSpend reload packs?

    You can only purchase NetSpend reload packs at Giant Eagle, Albertsons, Roundy's and Pathmark supermarkets. NetSpend cards ... Read Full Answer >>
  3. Can your car insurance company check your driving record?

    While your auto insurance company cannot pull your full motor vehicle report, or MVR, it does pull a record summary that ... Read Full Answer >>
  4. What does marginal utility tell us about consumer choice?

    In microeconomics, utility represents a way to relate the amount of goods consumed to the amount of happiness or satisfaction ... Read Full Answer >>
  5. What are some common ways product differentiation is achieved?

    There are many ways to achieve product differentiation, some more common than others. Horizontal Differentiation Horizontal ... Read Full Answer >>
  6. What is the difference between an OEM (original equipment manufacturer) and a VAR ...

    An original equipment manufacturer (OEM) is a company that manufactures a basic product or a component product, such as a ... Read Full Answer >>
Trading Center