Driving Like Dummies 2 - A Car is NOT an "Investment"

Compared to those who lived twenty years ago, us Indians of today are a pampered lot. For instance, anyone who wants to buy a car is spoiled for choice today. During those non-liberalized days when I was growing up, you couldn't buy a car even if you had the money for there were only the 2 and a half ancient models available in the market.Today, every car company in the world worth its salt are jostling for space in the Indian market with their wares of every hue and size, but mostly skewed towards the bare-bones hatchback type, unlike most other developed economies of the world. "Affordability" and some other economic conditions that make up our complex society might be the reason for this, and the desire to move up in life fuels this ambition. And contrary to popular belief, people still buy cars more as a "status symbol" and for convenience than they do for necessity.

For most people, buying a car is a step ahead in social emancipation, and quite an exciting prospect at that. In most cases, they would be the first ones in their bloodline to acquire such an object of intrinsic value, given the centuries of poverty and nothingness our ancestors have lived in. Well, not that most of us can trace our ancestors beyond 4 to 5 generations. In all the excitement, the way people approach or think of  the entire situation is just as wrong as it is how they are going to drive the thing. It is easy to get misguided in matters of finance, especially since we have almost no knowledge of experience regarding all this. I have heard of many people talking about a "Car as an investment", which is not just totally wrong financially and in most cases economically, but also in the way we think about it.

"Investment" has different meanings in economics and finance. As defined at investorwords.com

In Finance:

The purchase of a financial product or other item of value with an expectation of favorable future returns. In general terms, investment means the use money in the hope of making more money.

This is the traditional sense of investment: Such as investing in property, shares, gold etc. A car does not make money, it loses money.

In Economics:

The purchase by a producer of a physical good, such as durable equipment or inventory, in the hope of improving future business.

Such as "investing" in raw material, intellectual property, machinery etc. In this case, if a car propagates your business to earn returns, such as in the case of a hotel or a transportation service, it is indeed an investment.

Why is a car not an investment?

Since we are not intending to buy a car for business needs but to get our behinds around, we will be talking in financial terms from now on. Investment means that you put your money somewhere where it grows in value over time and can be later disposed of for more money than it was worth in the beginning. This is why a car can never be considered an investment vehicle. Most people think buying a car is an "investment' only because of the (usually) huge sums of money involved in procuring it, and just to reassure themselves about the mental uneasiness of letting go said huge amounts on money. The thought that it can be "sold off" earning back the money is misleading because your car makes you lose money all the time, which cannot be matched even if you sell it off.

Depreciation is the main cause for the car not becoming any pricier over time. Your car loses 10% of its value the moment the showroom puts its seal on the bill and it loses 30-40% of its value during the first year of ownership alone. That is right, it loses money even when it just sits around there doing nothing. Add to that all the incremental expenses such as  fuel costs, insurance premiums, maintenance, spare parts, damage repair, road tax and so on. Even if you think you can recover the value of the car after 3-4 years of ownership, you will get only a part of it which will be equalized on all your spends on the car making you lose a hell lot of money. Take a look at what Forbes has to say about this.

A Small and Simple Calculation

Car Cost: Rs.500,000 (Not considering finance)

Years of Ownership: 4

Spent on Fuel: Rs: 240,000 (Assuming Rs.5000 per month)

Maintenance Costs: Rs.75,000 (Approx, including servicing, spare parts, assuming no accidents)

Insurance Premiums, Road Tax: Rs.50,000

Accessories, Miscellaneous: Rs.25,000

Total spends on the car: Rs.400,000

Total expenditure: Rs.900,000

Depreciation: Rs.250,000 (See calculation here)

Value of the car after 5 years: Rs.250,000

So if you sell off the car after 4 years and hypothetically assume you get paid the exact current value of the car (which you will not), you still have lost Rs.150,000 over and above the value of the car. You have spent a total of Rs.9 lakh on the car, and you got back Rs.250,000 - A loss of Rs. 650,000 in financial terms. You can read more about cost of ownership here

Now, if this were for a plot of land or a mutual fund scheme, would you consider that an investment? Say, a banker comes to you asks you to invest Rs.500,000 in a scheme where you get some flashy benefits but will end up losing Rs.650,000 after 5 years, would you consider that an investment? No? Thought so. Then there is an argument which says that the money paid for a car gets you benefits in terms of transportation, usability etc and hence it is an investment. Going by that argument, isn't every thing we spend money upon an "investment" because it provides us benefits? But we hardly say that we have "invested" in a train ticket or a newspaper or a bottle of alcohol or a box a condoms, do we?

Then what is a car? Is it an Asset?

You are going to put a considerable amount of money in it, and it will provide you the service of transporting you to wherever you want and can go. It is something you can utilize in the way you want to, will be in your name and owned by you. It will be worth something, unless you live in a Micheal Bay universe, where things spontaneously explode. Even if you crash it into nothingness, you can sell it for scrap. So it is an asset, like let us say, furniture. But the original value of the item is irreclaimable as it loses value over time. So, even though it is an asset, it is not one per se, but is what we would call a "depreciating asset."

So, you are not "investing" in an "asset" when you are buying a car. When it comes to financial terms, a car should be viewed only as another object you spent your money on which can be used to makes your life easier, a necessity, as so much is a refrigerator or a washing machine, only of higher value and nothing more. The only place where this rule does not apply is in the true vintage car market or if your coveted machine is a 1971 Plymouth "Hemi" 'Cuda or a 1969 Dodge Charger or a 1969 Pontiac GTO or even a 1967 Shelby Mustang GT-500 or any of those machines which we have seen Vin Diesel and Nicholas Cage driving. In which case, you will not be reading this anyway.

But there is life beyond finance. Take good care of your machine because you spent so much money on it and not because it's value will increase if you did so. Treat her well, and she will surely serve you well. She is not an investment, the same way your kids are not. Understand the bond between man and machine which runs beyond petty money matters and forget all the rest. Happy driving. But learn to drive first.

1967 (Ford) Shelby Mustang GT-500. Yep, "Eleanor"

Next: Driving for Dummies Part 3 - "The Story of the Indian Car Industry"

Other Episodes

Part 5 - Story of the Indian Car Buyer Part 2

Part 4 - Story of the Indian Car Buyer Part 1

Part 3 - Story of the Indian Automobile Industry

Part 1 - Traffic in India

%d bloggers like this: