3 Good and Bad Ways Cars Can Impact Your Financial Success
“Nothing you will do in your lifetime, realistically, will waste more money than buying a new car,” said self-made millionaire and bestselling author David Bach to CNBC Make It. “It’s the single worst financial decision millennials will ever make.”
Harsh words are echoed by many financial experts, from Bach to Suze Orman, Dave Ramsey to Kevin O’Leary. However, cars can negatively and positively impact your financial success, depending on how you acquire, use and maintain them. Here are some good and bad ways cars can influence your financial situation:
Good Ways Cars Can Impact Financial Success
1. Employment and Income Generation
Owning a car can enable you to access job opportunities that may be geographically distant, potentially leading to higher-paying positions or better job prospects. Moreover, they can increase your productivity and efficiency. Having a car can save time and increase productivity by reducing commuting time and allowing for more efficient use of your day.
2. Carpooling or Ridesharing Income
If you participate in carpooling or ridesharing services, you can earn extra income to offset the costs of owning and maintaining a vehicle. Additionally, if you use your car for business purposes, you may be eligible for tax deductions related to mileage and expenses, which can lead to potential tax savings.
3. Asset Appreciation
It’s rare — very rare — but some cars, mainly classic or collector’s cars, can appreciate over time, potentially providing a financial return on investment. There are several types of cars that you should target for investment purposes that are unique, rare or enjoy a cult following, but you’ll need to do your research and be willing to spend a bit of cash on hand.
Bad Ways Cars Can Impact Financial Success
1. Depreciation
Cars typically depreciate over time, often rapidly during the first few years. This means you may lose a significant portion of the purchase price when you sell or trade in the car. Also, purchasing a car involves significant upfront costs, including the purchase price, taxes, insurance and registration fees. Ongoing expenses like fuel, maintenance, repairs, and insurance premiums can also be substantial.
2. Overspending
Your bank balance and long-term financial success and can take a significant hit when you buy a car. Purchasing a more expensive or larger car than necessary can strain your finances, so buying a vehicle that meets your needs without exceeding your budget is essential. Emotional attachment or societal pressure can lead to impulsive car purchases that aren’t financially sound, causing undue strain.
3. Opportunity Cost and Negative Equity
The money you tie up in a car purchase could be invested elsewhere, potentially generating higher returns, compounded, year after year. This is known as the opportunity cost of owning a depreciating asset. Furthermore, if you finance a car and its value depreciates faster than your loan balance decreases, you may owe more on the car than it’s worth, leading to negative equity.
Understanding these factors and making informed decisions about owning and using a car can help you minimize the negative financial impacts and make the most of the positive aspects of car ownership. It’s crucial to consider your financial situation, needs and long-term goals before committing to a car purchase.
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