Your Car – An Asset or Liability?

Your car an asset or liability

When calculating your net worth, do you include your car as an asset? What value do you assign to it and what about all the running and insurance costs? According to accounting definitions, a car can only be classified as an asset if its current value is greater than what you owe on it (car loan). The other reason a car can be classified as an asset is that anything you own that can be sold for cash counts as an asset. However it is a depreciating asset, in that the car loses value the moment you drive it off the lot (up to 20%). So every time you calculate your net worth, the contribution your car value makes will go down.

Even though your car maybe a positive asset it does generate a number of expenses and liabilities over time, which is the reason why a lot of people classify a car as a liability. Ongoing ownership costs include maintenance, lease/loan payments, gas and insurance. These are also the costs (expenses) of owning a car and while not necessarily included in your net worth calculations, they will have a significant impact on your month-to-month finances. For older cars, the annual running and insurance costs may be greater than the value of the car.

When factoring your cars value into your net worth calculations, make sure you deduct the current liabilities from it’s current value (i.e. the loan amount from the current car value). In your monthly budget, you need to factor in the various ongoing expenses – something you should have an idea of before you buy the car. In today’s society, despite high gas prices, you need a car for transportation needs in most places. So whether it is an asset or liability for you, it is most likely a necessity. Just make sure you know what you are getting for your money and the expense stream you are creating when you buy a car.

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