Doesn’t factoring depreciation into the cost of car ownership rely on the assumption that you will eventually sell that car? If so, why is that a reasonable assumption?

Question

Recently watched [this video](https://www.youtube.com/watch?v=ztHZj6QNlkM) which puts a significant chunk of the cost of owning the vehicle into depreciation. Wouldn’t the loss in value of the vehicle only matter to me if I bought this car with the intent to sell it in the future? I *could* drive the car until the engine block falls apart and it becomes basically unsellable.

In: 2782

Answer 1

Financial analyst here.

Even if you ended up with an unsellable car you would need to include depreciation as a cost of running it.

Worked example. Buy it for $10k, run it for 10 years and get nothing for it at the end. Your annual depreciation cost was $1k ($10k/10).

Same as if you sold it for $5k at 5 years into your ownership.

It sometimes help to think about what you need to spend in cash to mean that you always have a car.

In your example you first need $10k to buy the car and you then spend nothing in cash so when it dies you have nothing.

If instead you saved money exactly in line with your cost of depreciation, you could buy another car at 10 years – Save $1k per year and you have $10k – buy the car.

Same in 5 years. Buy the car, save $1k a year, sell it for $5k after 5 years and you have $10k again.

That’s why taking account of depreciation is the TRUE cost of running a car.