When it comes to determining your net worth, creating a list of your assets and liabilities is one of the first steps you take to calculate where you stand. Some property, like real estate, bank accounts, and investments, are immediately recognizable as assets with monetary value. That being said, one big-ticket item has eluded an easy designation as asset or liability—your automobile. And while there are many reasons why your set of wheels can be considered either, it's important to remember that the circumstances matter.
- Considered a "money pit" by most standards of wealth measurement, motor vehicles can straddle the line between asset and liability.
- Unlike real estate and most other assets, motor vehicles immediately begin losing value once the owner takes possession.
- A motor vehicle can appreciate in value if it's a rare model.
What's an Asset?
When it comes to personal finance, an asset is anything you own that can be worth something right now or at a later date. You or your household can own the asset, but it has to carry some monetary value. Common types of personal assets include certificates of deposit, real estate, jewelry, and investments like life insurance policies and stocks.
On the business side, something is considered an asset if it holds value and can help sustain a company's operation and growth. When it comes to listing a company's assets on a balance sheet, they are usually two types: current and fixed assets. Current assets are things that can be sold off in a fiscal year, such as accounts receivable, cash and cash equivalents, and sellable goods or materials. Conversely, fixed assets are tangible things like machinery and buildings and intangible things like patents and licenses.
How Is a Car an Asset?
Motor vehicles are notorious for immediately losing much of their value as they roll off the dealer's lot. According to U.S. News & World Report, the average new car can depreciate by as much as 30% in the first year, with each subsequent year marking another 15% to 18% in value lost.1 So if an asset is something that holds value, then how can a car be considered one? The answer lies in the concept of a depreciating asset.
A depreciating asset is something that loses value over time, but still retains value. Unlike real estate, savings accounts, and other assets that increase in value, automobiles are vulnerable to a range of depreciating factors that can cause values to plummet. The more miles it has on the odometer, the more a car has endured wear and tear. Get in an accident or fall victim to the elements and each ding and dent chips off even more value. As time goes on and newer models are released, an older motor vehicle loses even more value. And that's not even taking into account the cost of ownership, which now costs approximately $10,000 per year and includes maintenance, insurance costs, and gas prices.2
Even with all that in mind, a car is an asset because you can quickly put it on the market and convert it to cash, albeit for less than what you paid. That alone makes it an asset by definition. It's those added costs and the constant decline in value that make a car a depreciating asset.
Soften the Blow of Depreciation
All vehicles naturally depreciate in value over time and with regular use, but that doesn't mean you have zero course of action. By making a wise purchasing decision and finding a model that fits your needs, you can purchase a car, SUV, truck, or any other kind of vehicle that retains more of its value over time.
According to Kelley Blue Book (KBB), Toyota is the value brand that tends to hold its resale value, while Porsche holds that distinction for luxury brands. As for 2021 specific models, KBB identified the Toyota Camry, Subaru Outback, and Tesla Model X as models that best retain their value.
* TIP: Certain exotic models of cars can depreciate slower or even gain value over time. Though it's not a common occurrence, an exotic car's rarity, condition, and popularity can affect its value.
Another way you can lessen the sting of a vehicle's depreciation is by claiming that loss in value when you file your taxes as a business owner. Under the Tax Cuts and Jobs Act, you can deduct up to $18,200 in depreciation if you use the vehicle in question for the business.
And as always, by taking good care of your vehicle, you slow its depreciation. Keeping up with regular maintenance, ensuring that the upholstery is clean, and getting needed repairs done will ensure a top resale value.
Finding Your Car's Actual Value
If you're curious about how much your car's worth these days, there are a couple ways you can find that out. The easiest way to do this is to visit the Kelley Blue Book website. Once there, you can provide information like your vehicle's year, make, model, amount of mileage, and vehicle identification number (VIN). With that information in hand, KBB can get the trade-in and private party values for your vehicle. The former option will almost always give you a lower number, since dealerships will want to buy low and sell high.
Should Your Net Worth Calculation Include Your Car?
When calculating your net worth, you need to subtract your liabilities from your assets. Since your car is considered a depreciating asset, it should be included in the calculation. When factoring in your vehicle, however, you need to determine its current market value. That being said, any car loans associated with your vehicle are considered a liability and should also be included.
Is a Financed Car Still an Asset?
Yes and no. The vehicle itself is an asset, since it's a tangible thing that helps you get from point A to point B and has some amount of value on the market if you needed to sell it. The car loan you took out to get that car, however, is a liability. You agreed to pay that loan off in full over a set amount of time, so that financial responsibility will stick with you.
Can a Car Ever Be Considered an Investment?
Yes, a vehicle can be considered an investment, but that answer comes with a truck-sized caveat. Rare and exotic cars actually increase in value as the number of road-worthy models decreases. Unless you're talking about a rare and perfectly maintained car like a 1964 Ferrari 250 LM or a 1994 McLaren F1, then it's highly unlikely that your car will retain much value over the years and will ultimately become a poor investment.
The Bottom Line
No matter the make, model, or production year, nearly every vehicle on the road will depreciate in value over time. Miles driven add to its wear and tear, accidents and dings cause values to crater, and planned obsolescence means today's shiny new cars will become tomorrow's jalopies. Still, with enough knowledge of the car's actual worth and by keeping a diligent maintenance schedule, you can turn your big metal "money pit" into cash on the market.