Financial planners will often tell you that everything you pay money for should be evaluated as if it were an investment. Economists will tell you that everything you pay money for should be evaluated in terms of its true value. Based on these extremely general assumptions, a reasonably priced smoothie made with tropical fruits and added minerals plus vitamins could be considered a valuable investment; after all, it provides nutrition, enjoyment, and health benefits. When it comes to car purchases, however, financial planners and economists will probably agree that they are terrible investments.
All American drivers have heard the axiom about how quickly the value of a new car drops as soon as it is driven off the dealership lot. Things get worse once you start figuring out the true cost of auto ownership. In 2018, credit reporting bureau Experian crunched a lot of numbers to estimate the average payment on a financed car each month: $523. The American Automobile Association took things further by adding the following expenses that all drivers are familiar with:
* Fuel costs
* Registration fees
Based on the above, the true average cost of car ownership in the United States is closer to $878 per month, which comes up to more than $10,000 each year. This estimation is for drivers who put 15,000 miles each year on their cars; those working for Uber or delivering parcels for Amazon are in a different category because their fuel and maintenance expenditures are higher.
When we look at car depreciation rates, we begin to understand why economists bristle at the thought of buying new cars. Once you put 10,000 miles on a new car, the average depreciation rate is 20%. As long as you drive under 15,000 miles per year, depreciation will continue at a rate of 15% per year. Should you manage to keep your car on the road for 10 years, your initial investment, if you can call it that, would have dropped to about 10% of the purchase value.
Aside from not buying a car at all, something that many economists recommend to individuals who live in regions with plenty of public transportation options, there are ways to lessen the expensive burden of car ownership. Drivers who heed to car repair advice given by experts can cut down on maintenance expenses. If you successfully keep a car on the road for five years, you might as well think about getting the most out of it by going over 100,000 miles on the odometer.
One of the problems with car ownership is that mechanical wear and tear exacerbates value depreciation. Imagine paying more than $800 per month for a car that is no longer in top condition; unless you are driving a 1969 Ford Mustang that you are paying to restore, the true cost of car ownership starts to weigh down on you. It is perhaps for this reason that we are seeing car subscription services becoming more popular among drivers who are members of the Millennial Generation. If you are destined to pay more than $1,000 per month just for the right to drive a car, might as well pay for the chance of choosing from a collection of new cars you do not have to maintain.