FINANCIAL QUOTE FOR THE WEEK
“Rule No.1 – never lose money. Rule No.2 – never forget rule No.1.” – WARREN BUFFET
Even though everybody desires financial success and wealth, our decisions to own certain types of assets like a car or vehicle can be curse or a blessing. There is no day that we don’t spend on our vehicle, and that has become a way of life. Even when you have not eaten in the morning, the first thing a car owner thinks about is fuel. Some even borrow to buy fuel. For some, personal car acquisition has improved their wealth, while others are getting poorer on a daily basis as they even disinvest or withdraw money from their emergency funds to buy fuel and repair their cars. The issue of whether a personal car is necessity or luxury, or a liability or asset, is a major concern for all wanting to create or sustain wealth.
For many, a car or vehicle is either a necessity or a luxury – and therefore whether it is an asset or a liability is not an issue. Many of us depend on our vehicles to get us to and from work every day, transport children to events etc. Because vehicles or cars are such an important aspect of our lives, most people want a vehicle that is reliable and can address those needs.
Others see cars as a luxury. Many individuals want a vehicle to get around for comfort, pleasure, fashion, and style, with considerations such as design, colour, model, specifications, interior etc. The vehicle choices are almost endless and car salesmen are notoriously assertive, so finding the right combination of wants and needs with an affordable price tag can be challenging.
Despite being a necessity or a luxury, the impression formed by society with regard to people who own their personal vehicle is that they enjoy good living and financial wellbeing. People accord respect to individuals who own their own personal vehicles in both advanced and developing countries. However, the extent of respect differs – from the type of vehicle one drives to the part of world where one resides (i.e. developed countries v developing countries).
Personal Vehicle as an Asset or a Liability in Your Investment Portfolio
Investment Portfolios centre on diversification. Different securities or investment instruments perform differently at any point in time, so with a mix of asset or investment types a person’s entire portfolio does not suffer the impact of a decline in any one security or investment. When your stocks go down, you may still have the stability of bonds in your portfolio. Investment in a personal vehicle, if not used to generate cash-flow, depreciates in value and introduces additional cost in terms of maintenance – and therefore forces the asset’s owner to use existing investments in his or her portfolio to service the vehicle. This therefore impacts on the performance of a person’s investment if not managed.
For a vehicle to qualify as an asset means that after acquisition it must enhance a person’s cash-flow generating ability in terms of business activities, and also use the cash-flow to support all necessary cost associated (i.e. maintenance cost, fuel, servicing etc.) with owning a personal vehicle without using the person’s existing investments to service it.
Therefore, any personal expenditure that does not bring any income or appreciate in value is a liability.
Owning a personal vehicle initially seems like an asset in the short-term, but it’s rather a liability in the long run. An asset is supposed appreciate and not depreciate.
A vehicle is not an investment – at least not a good one. Vehicles depreciate in value quickly; so when you buy a new vehicle, you can expect it to continuously decrease in value from the moment you take ownership. In fact, a new car typically decreases in value by 25%-40% averagely in the first two years. The best thing you can do is to let someone else take the initial 40% hit by buying a slightly-used vehicle that is a year or two old. Even this still does not prevent the car being a liability rather than an asset.
Owning a personal vehicle is one decision that presents other associated costs which we don’t normally consider at the time of deciding to purchase – examples include maintenance, insurance and petrol. This affects one’s ability to save, and thereby affects people’s finances and their ability to meet other equally important expenditure – such as owning a house, meeting medical bills, payment of children’s school fees, etc.
The vehicle’s actual cost is important, but what is often overlooked are the hidden long-term maintenance, insurance and fuel costs that go along with vehicle acquisition.
The hidden costs that we over look are:
- Maintenance Cost, including oil changes
- Insurance Cost and Roadworthy Cost
- Fuel Consumption Cost
WATCH OUT FOR PART-2 OF ABOVE ARTICLE NEXT WEEK 23 SEPT 2019. ………….Culled from my “Personal Finance Today Book”.
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Statements and opinions expressed in the articles or review herein are those of Aanstreet Finance. While every care has been taken in the compilation of this information and every attempt made to present up-to-date and accurate information, we cannot guarantee that inaccuracies will not occur. Aanstreet Finance will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within this article or review.