Until you get to your car, determining your assets and obligations is rather simple. Is an automobile a valuable asset or a liability? If you ask a group of people, you’ll probably get two different answers. So, how can you know which is the correct answer? This article explains what assets and liabilities are and how they apply to your car. That way, you’ll be able to determine your net worth with precision!
Assets vs. liabilities, and purchasing a car
Net worth is made up of two components: assets and liabilities. One will raise your net worth, while the other will lower it. Of all, we all desire more of what raises our net worth, but getting there sometimes necessitates borrowing (liabilities). Is a vehicle, on the other hand, an asset or a liability? First, we need to understand Assets and Liabilities separately as definitions
An asset is everything you own that is valuable. Stocks, bonds, bank accounts, jewelry, and collectibles are all common examples. An asset is anything you can liquidate (sell) for cash. The majority of assets appreciate, but not all of them. Because assets are valuable, they raise your net worth.
You owe money to a bank or another person if you have a responsibility. Liabilities, such as a vehicle loan, credit card debt, and a mortgage, all reduce your net worth. When you owe someone money, your net worth decreases since you would have to liquidate your assets to pay off the loan, leaving you with less cash on hand.
Is car a liability?
Some people consider an automobile to be a liability because it is costly to maintain. Gas, oil changes, and other routine maintenance, as well as car expenses, must all be paid for. You must also pay for insurance and repairs if it breaks down. A car, on the other hand, isn’t a liability in the real meaning of the word because it has worth. It’s a depreciating asset instead.
What Makes a Car an Asset?
Automobiles are infamous for losing a significant portion of their value as soon as they leave the dealer’s lot. According to U.S. News & World Report, the average new car can lose up to 30% of its worth in its first year, with each succeeding year losing another 15% to 18% of its value. 1 So, if an asset is something that has worth, how is a car called an asset? The concept of a depreciating asset holds the key to the solution.
A depreciating asset is one that depreciates over time but keeps its worth. Automobiles, unlike real estate, savings accounts, and other assets that appreciate in value, are subject to a variety of depreciating factors that can cause their prices to collapse.
Finding Out How Much Your Car Is Worth
There are a handful of ways to find out how much your car is worth these days if you’re inquisitive. The most straightforward approach to do so is to go to the Kelley Blue Book website. You can enter information such as your vehicle’s year, make, model, mileage, and VIN number once you’ve arrived (VIN). KBB can get the trade-in and private party values for your vehicle with that information. Because dealerships aim to purchase low and sell high, the former choice will nearly always result in a lower number.
How to figure out a car’s depreciation value without using the KBB
If you don’t have access to a Kelley Blue Book, you can determine your automobile’s depreciation using the typical calculation that your car will depreciate 10–20 percent every year, depending on the make and model. The guidelines below demonstrate how your car may depreciate over time.
When you drive the car off the lot, it depreciates by 10%–15%.
It will have depreciated by 20–30 percent within one year.
It will have depreciated by 40–50 percent after three years.
It will have depreciated by 60–70 percent after five years.
If you’re estimating your car’s value yourself, the ranges above are a reasonable starting point, but keep in mind that some models are simpler to sell than others. Regardless of how you figure it out,
Your car is a special kind of asset because, unlike other assets, it depreciates over time. Your car’s value will depreciate over time, beginning the moment you drive it off the lot. Even though your automobile depreciates, you should still include it in your net worth calculation – just make sure your car loan is included in your liabilities if you have one.