A golden rule to investing...cars are not investments!

A golden rule to investing...cars are not investments.

Have you heard this one before? Well, if you have, but you never understood the math behind it, let me break it down for you...

Today, in the Globe and Mail  Glenn Curtis says, a new car will loose anywhere between 15 and 20% per year of it's original value.  So, if you buy a brand new car at $50,000 today, you lose 20% of that value over the next year. By Sept of 2012, the car is now worth $40,000.  Add another year (by Sept 2013), you're car is now worth $32,000...and this keeps going down each year. Not to mention, many people say there is another 8- 10% depreciation the minute you drive the car off the lot.

This formula is a broad generalization for the average car - so keep in mind some cars are more in demand than others and will hold their value longer. Also, the better you take care of your car, the more value it will also hold.

Now this beg's a question... if you knew the luxury car you were buying today would drop in value anywhere between 15- 40% over the next couple of years...and never recover the original value...would you still buy it? If we go back to our example of a $50,000 car - that 2 years equals $18,000 in cash...would you rather use that $18,000 for something else?

Funny enough, when I was young, my dad used to drive us around in beat up old van! I remember thinking he looked like a complete dork on the road. It was one of those Chrysler/Plymouth vans that was as old as I was (1985). It looked similar to this photo, but it was not quite the same. I remember asking my dad, who was an investment advisor and previously owned a BMW before he had kids, "Why don't you buy a new car? A nice one?"  I remember him telling me that this one still worked perfectly good and that we would only mess it up (the new car)! Now, looking back, I realize they were a young couple, with 3 kids to take care of, and they were being smart investors.

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