The term vehicle investments is certainly not one that we normally hear. However, vehicles are a need. Therefore, I’m going to cover this topic with some advise that make your skin crawl! So, here we go.
I believe that we need to seriously consider what we are purchasing. The basic purpose of a vehicle is to get us from point A to point B. Therefore, any extra option or upgrade to the vehicle is a want.
Here is where the rubber meets the road, as some of my friends love to say. Do I really need the brand new $50,000.00 vehicle with all of the bells ans whistles? Do I have the ability to get the same vehicle that is five years old and half the cost, maybe more? Again, we must decide if it is worth it. With the average american having a credit score of 695, what will the APR be on this new vehicle? Let’s say it is %5 and that we do a 60 month loan. The vehicle ends up costing us nearly $950.00 per month new. If we take the same vehicle that is half price, we are only talking around $480.00 per month.
We also need to take into consideration depreciation of the vehicle. CarFax.com recently posted an article stating that a vehicle loses 10% of its value the moment that you drive it off of the lot. It then loses approximately 60% of its value by the end of year five. Therefore, the new $50,000.00 vehicle that you purchased for $57,000.00 is only worth $20,000.00 at the end of year five.
How about a good punch to the gut while we are at it? What would have happened if we had taken the additional $25,000.00 and placed it into an index fund that is averaging 10% per year over the same five year period? Let’s compare apples to apples and do it using the left over $470.00 per month that we mentioned previously. If we take $470.00 and invest it every month using compound interest at a rate of 10%, we are sitting with $34,432.00 in our investment account, plus a vehicle that hasn’t depreciated nearly as much. We will assume that our 10 year old vehicle is worth around $5000.00. We are now sitting with approximately $40,000.00 in assets versus $20,000.00.
Personally, I would say find a vehicle that you can pay in one lump sum, but that isn’t always feasible. I hope everyone has a great day and happy investing!