A car is one of the most significant purchases a person will make. In terms of wealth creation, it is also arguably one of the worst investments available. A vehicle is often a necessary means of transportation to maintain employment. However many people view a car as a status symbol or pay a premium for the driving experience. The true cost associated with purchasing an expensive new car is often overlooked. Unlike stocks, bonds, and real estate, cars are essentially guaranteed to lose value over time. Estimates show that cars lose up to 10% immediately after being driven off the lot. Many cars will lose about 20% of their value within the first year. After 3 years, the car is worth about 60% of what you paid for it. After 5 years, the car is worth about 40-50% of the original purchase price. Let's take a look at a specific example using the best-selling sedan in the United States for over a decade: the Toyota Camry (2015 XLE Edition). Pricing and annual depreciation information was taken from the Edmunds True Cost to Own® tool.
By the end of year 5, the Camry is worth about half of its original purchase price. Assuming the owner decides to trade in the Camry for a new model at that point, the cycle repeats. How to avoid this cycle? One option is resisting the urge to trade in your used car for a new model. This means driving your current car for as long as possible. Another option is buying a used car. After a few years, a significant amount of depreciation has already occurred. The potential savings could be used to create a diversified portfolio of appreciating assets. Always consult with your financial planner to see what makes the most sense for your specific needs.