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“NEVER BORROW MONEY to buy a depreciating asset.” This personal finance tip is often used to dissuade folks from taking out car loans. But does a car really leave folks poorer?
When we value an asset, it’s typically thought of as its dollar value on a balance sheet. The monetary value of my car might indeed decline, and quickly at that, but it has far more usefulness than my personal balance sheet shows. When I consider my car’s true value, I think of how much it improves my life.
I made a major change in 2018, moving from Philadelphia to Scottsdale, Arizona. I landed with two suitcases, a backpack and my cat. I had a job starting in three weeks in the heart of Old Town Scottsdale—a pricey area.
In Philadelphia, I’d never needed a car. There’s great public transportation and I could get almost anywhere by walking or taking the train. If you’ve ever been to Phoenix and its surrounding suburbs, it’s a different story. It sprawls in every direction and lacks decent public transportation.
As a young professional 2,000 miles from home, I needed to travel this big expanse. I also wanted to do some exploring in the West, so I took out a loan to buy a new car.
I don’t imagine I’ll ever recoup the money I paid for the vehicle. In fact, I suspect that my car will always be asking me for more money—for maintenance and repairs—even after I’ve paid off the loan. That’s fine. My expectations are set on this because I see so much additional value in owning a car.
Monetary benefits. Old Town Scottsdale’s rents are at least 20% higher than some surrounding areas. I can live less expensively nearby as long as I can handle a 10- to 15-minute commute.
My car also provides me access to a larger pool of jobs. On top of that, I have reliable transportation, which makes me a more dependable employee. Finally, in this gig economy, a car opens up opportunities for self-employment, a side gig or temporary income during a gap in employment. This could come from signing on with services like Uber, DoorDash and Instacart.
Emotional benefits. My car is truly liberating. It can buy me time by making travel more convenient. It allows me to live where I want and gain happiness through new experiences outside of my neighborhood. The ability to go anywhere at any time is hugely appealing.
If it takes a loan to realize these benefits, I’m willing to bear that cost. I think most Americans would agree with me. Even when you’ve decided that a car is worth buying, however, another financial argument breaks out. It’s about whether it’s better to buy a new car or a used one.
This is where I find the biggest ridicule from finance influencers. They advise never to buy a new car, and especially never to buy a new car with a loan. That’s because the moment you drive a new car off the dealer lot, it takes a big hit, thanks to depreciation.
Perhaps, in an ideal world, we’d all buy a good used car with cash. But that option isn’t available to many people. Moreover, even if you can afford to pay cash, there can be a good reason to buck the conventional wisdom. The benefit I’ve received from buying a new car can be summarized in one word: reliability.
A new car brings me peace of mind, knowing it’s unlikely I’ll be waiting on the side of the road for AAA. I don’t have to leave an extra hour early for work in case my car doesn’t get me there. I also knew I’d be traveling along dirt roads and across state lines to do some exploring, so reliability was nonnegotiable with my car purchase.
A new car works out well for me on another level. I’m not a car guy. I lack the understanding of how to take care of one. The new car warranty typically covers the scheduled service for the first few years. I’m happy to pay more to get that responsibility off my plate.
My goal has never been to turn around and sell my car for a decent sum when I’m done using it. Instead, I want to pull out all the value I can along the way. I’ll increase both my life experiences and my financial wealth through its use—and not by selling it at the end.
Logan Murray is a solo financial advisor. His company Pocket Project offers subscription-based financial planning services to young professionals. For more financial insights, read Logan’s blog, connect with him on LinkedIn and check out his earlier articles.
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Thanks Logan – agreed.
I recently saw a YouTube video with a title something like “20 things that are not worth your money”. It followed all the usual stuff of store bought coffee, streaming subscriptions etc. To my mind, the video could have been titled “20 ways to deprive your life of any joy”. We all need to be prudent with money, but spending it wisely and in a way that brings some benefit and joy, is what it’s all about.
In management, we are taught to separate operating decisions from financing decisions. First, we have to evaluate whether the operating benefits are worth the investment. Second, we find the lowest cost mechanism for the financing. The classical advice is solely from a financing standpoint: borrowing to fund a depreciating asset is not a good idea. (this prescription assumes that the opportunity cost of your own money is sufficiently low, an assumption that can be questioned).
To make this idea clear, consider a firm figuring out whether to buy a machine. It will evaluate the potential revenue against the cost of the machine to make an investment (i.e., operating) decision. Next, the firm has to figure out whether to raise the money internally or to borrow it (the financing decision). It is easy comingle the decisions, creating confusion. That said, in some settings, the decisions are structurally mingled as in the case of seller-financing at a other than market rate.
In the case of the car, it will depreciate the same no matter how you finance it. The decision to buy is simply trading off the benefits of having a car versus the operating (incl. depreciation) costs of having one. The other decision is how do you come up with the money to buy the car. Here, one can argue for different solutions based on what is available.
When I think about the value I get from my car, going from A to B is what it is used for. So, whether I drive an old Pinto or a new Tesla, I still end up in the same place. And, right now as I write this, my ol Subaru is parked, it has been all day. Where is your vehicle right at this moment? Most folks have transportation that just sits and doesn’t move most of the time in 24 hours, so, don’t buy an expensi