No matter how much you love it, how reliable it’s been for you, or how much you spend on monthly payments, the brutal truth is: your car is not an investment.
A lot of people think that spending thousands of dollars on a car or truck qualifies it as an investment, but that’s not accurate. Let’s think about what an investment actually is.
Why a Car Isn’t an Investment
When you invest in something, you put money into it with the expectation of receiving a profit. Though you might expect to get a profit from your vehicle, you probably won’t. That’s because cars lose their value over time. The general rule is anything that loses value after you purchase it is not an investment. That’s the category a car fits into.
The typical car loses an average of 15 to 20 percent of its value every year, with the largest amount of depreciation happening in the first year.
Let’s say you purchase a brand new $30,000 car today. In two years, your car might be worth only $21,000. You’d lose $9,000 in depreciation. That’s $9,000 you wouldn’t get back if you decided to sell it.
Now, if you compare that to a home which typically appreciates in value. Would you buy a $100,000 home if you knew it was going to be worth only $70,000 in two years? Of course, not because you realize that a home is an investment and investments should increase in value, not decrease.
Opportunity Cost Knocks
Opportunity cost is the value of the next best choice when you give it up for another option. Think about the alternative of investing your money into a high-yield investment account rather than putting it toward a car payment.
If you invest your $2,000 down payment and $600 a month into an account with a 3% APR after two years you would save and earn almost $15,000. On the other hand, you would spend $16,400 on product that’s lost considerable value. And, at that point, you’d probably owe just as much as, if not more than, what you’d already spent on the car. Which sounds like the investment to you: the $15,000 you saved up or the $16,400 you spent?
I said it before, but it’s worth repeating: an investment is something that you put money into in expectation of receiving a profit. That said, there’s a right way to invest and to start you should get out of high interest debt.
Investing won’t truly pay off if you’re paying out more interest on your debts than you’re receiving on your investments. So, rather than rush to put your money into the stock market, use that money to knock out debts that have high interest rates. This includes things like credit cards and loans.
Learn About Investment Vehicles
No, I’m not retracting my original statement about cars being a good investment. By investment “vehicle” I mean the thing you invest in. There are different types of investment vehicles, some low-risk, some high-risk, some long-term, some short-term. Here’s a brief overview of a few investment vehicles for beginners.
- Savings Accounts. You might already have a savings account, but probably didn’t think of it as an investment. Savings accounts can turn a profit, albeit a small one, but it’s a profit nevertheless. Learn more about online savings accounts.
- Money Market Savings Accounts. These savings accounts have a slightly higher interest rate, but also have high minimum balance requirements.
- Certificates of Deposit (CDs). CDs have a higher rate of return as long as you leave your money in the CD for a specified amount of time. Learn more about the best CD rates.
Savings accounts, money market accounts and CDs are all short-term, low-risk investments.
- Bonds. A bond is a type of government-backed investment with a relatively low interest rate.
- Stocks. When you purchase stock, you’re purchasing ownership in a company. Stocks have the potential to have high gains, but there’s also the potential for high losses. Read more in our article series on How to Invest in Stocks.
- Mutual Funds. Mutual funds allow you to invest your money in different types of investment vehicles – stocks, bonds, CDs. Mutual funds have managers who decide what the money in the fund will be invested in.
Bonds, stocks, and mutual funds are long-term, low-to-high risk investments.
How Much Will You Invest?
Next, figure out how much money you’re going to invest each month. You can start an investment with as little as $20. Take a look at your monthly budget to see what you can afford to invest. Since you’ve paid off your high-interest debt, you should have more funds available for investing.
Before you invest your money into something, make sure you completely understand it. Is your money protected? How much will you earn? Are there any fees? Are you allowed to pull your money from the investment if you need it?
And you thought car buying was difficult. Investing takes time to figure out, but the payout is greater than what you’ll get from your car.