Most people consider their car to be an asset but in financial terms, an asset is something that generates income or grows in value. Unfortunately few cars fit this definition, says GetWorth director, Colin Morgan.
Owning a vehicle is costly, but with a different approach, it could make a huge difference to one’s wealth over a lifetime, Morgan said.
By means of a simple example, excluding inflation and interest, one can easily understand the real cost of a vehicle over a lifetime, the director of the car buying firm said.
Paul purchases a vehicle for R200,000 and every three years, he sells his current car and buys a new one. He drives 30,000 kilometres per year and his car reduces 20% in value in year one, 10% in year two and 5% in year three.
This equates to a selling price of R130,000 each time he gets a new car.
Between the ages of 25 and 73, Paul would own a total of 18 cars and would have spent R1.26 million of his wealth.
When one adds some perspective, the picture changes considerably, Morgan said. The example assumed that Paul would sell his vehicle at a retail price. If the dealer gave him 10% less than the retail price, then the selling price would drop to R117,000 each time. This would mean that the total spend by age 73 would be R1.494-million.
Then one could add interest. Assuming Paul would have earned or paid interest on the money used to purchase the vehicle at just 3% per year compounded. This would add R626,000 to his lifetime cost, bringing the total to R2.12-million, GetWorth said.
“These are simplifications and there are numerous other factors that magnify the effect of vehicle ownership on your wealth in the real world. Examples include financing and interest rates, insurance, optional extras and warranties,” Morgan said.