Is your car an asset or a liability? With the average price of a new vehicle well over $35,000, this is a looming question for many Americans.
Since expenses associated with your car are likely a major chunk of your monthly budget, it is a good idea to understand if your vehicle is an asset or a liability. You can then use this information to calculate your net worth.
Let’s take a closer look to figure out where your car stands.
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Difference Between Assets and Liabilities
Before you can decide if your car is an asset or liability, you need to understand how the two differ.
What is an Asset?
An asset is anything you own that has value.
Assets can include things like:
- Precious metals
- Real estate
As you consider your belongings, remember that an asset is something that has value. For example, you might be able to sell precious metals or rent your extra property.
What is a Liability?
A liability is any outstanding debt or financial obligation. These are things that take money out of your pocket. For example, a loan is a liability.
Importance of Assets and Liabilities
Knowing how assets and liabilities differ can help you calculate your net worth. In turn, this can help you achieve your financial goals. But what is net worth?
Your net worth is a snapshot of your current financial picture and is calculated by subtracting your liabilities from your assets. While it cannot predict the future, it can help you get a clear view of where you currently stand financially.
When you have a full understanding of your finances, you can allocate time and money in ways that will help improve your net worth. For example, if you have extra money, you could potentially increase your net worth by putting the cash into a retirement account.
Is a Car an Asset or a Liability?
The car is an asset since it is something that has value. However, cars fall into a special category of assets called depreciating assets.
A depreciating asset is an item that loses value over time. Cars can start to lose value as soon as you drive them off the lot. In some cases, your car could lose up to 20% of its value the second you drive it home.
This means that you’ll need to consider depreciation over time when calculating your vehicle’s value.
Importantly, if you lease your car, then it is not an asset. Without ownership, you cannot count the value of the vehicle as an asset. Instead, it is a liability.
Furthermore, remember that any auto loans you have are financial obligations. Make sure to classify those as liabilities.
How Your Car Impacts Your Net Worth
To calculate your net worth accurately, you’ll need to include your car.
You can add the value of your car to your total assets. If you have any outstanding auto loans, you’ll need to add those balances to your total liabilities.
As you calculate the value of your car, don’t forget to make adjustments over time.
How to Determine Your Car’s Value
To calculate your car’s current value, start with a rough estimate of depreciation.
Some facts to consider include:
- A new car’s value can drop by 20% or more in the first year
- After the first year, your vehicle could lose 10% of its value each year for four years
- Your car could lose 40% of its value in 5 years
Keep in mind that the type of car you own and how you maintain it will impact its resale value. For example, a vehicle with a respected brand name may hold its value better than an unreliable brand.
Since there is a huge range in how cars can hold their value, checking out Kelly Blue Book could be helpful. This site provides you with a fair estimate for the value of your car. In order to calculate an accurate price, you’ll need to determine your vehicle’s condition.
Here are the condition options that Kelly Blue Book uses:
- Poor: A vehicle with extreme mechanical issues or major cosmetic flaws will fit into this category. If you have a car in poor condition, it won’t do much to help your net worth.
- Fair: Cars in fair conditions are vehicles that still work. Although there may be some mechanical and cosmetic flaws, a buyer could easily resolve these issues.
- Good: A vehicle in good condition will not have any major flaws. It may have some minor scratches, but the engine should run without any hiccups.
- Excellent: It is rare to find a car in excellent condition because it would essentially need to look like new. The engine must be running like the day it came out of the factory and the appearance should be pristine.
It should be somewhat obvious which category your car falls into. If you aren’t quite sure, you can take advantage of the free vehicle condition quiz Kelly Blue Book offers.
Once you determine the condition of your vehicle, you can uncover your vehicle’s value quickly. For example, I decided that the reasonable current value of my 2008 Chrysler is between $2,861 and $4,808.
I chose to use the lower end of my car’s value in my net worth calculations. However, you can make a value determination based on the confidence you have in your vehicle’s worth.
A car can serve many purposes. It can help you travel to work, earn extra income or get around town.
As you calculate your net worth, include the value of your car as an asset. Just remember to add any loans associated with your vehicle as liabilities.
Want to increase your net worth? Check out this article on how to increase your net worth by $100,000 in the next 5 years!