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.
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Depreciation can be viewed as saving up for the next car. But that only applies if you do not take out a loan to buy a car; otherwise loan payments should be used instead of depreciation.
Or the guy in the video might be assuming that “cost” is impact on wealth, which includes value of the car. that is a bit of a theoretical computation.
> 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?
Tracking depreciation can matter if you want to know the change in your assets, such as when qualifying for loans. You may not plan to default on the loan but the lender will want to know what they could potentially come after to satisfy your debt, and how much that is worth.
Another reason the change in value is important is for taxation. If you get taxed on your assets then knowing that your car is reducing in value and by how much can be useful for reporting how much you will be taxed based on. Even if you don’t ever plan to sell the car you will be taxed.
And when it falls apart, you’ll have to buy another one. The capital cost of the car has declined to nothing at that point – that is what depreciation is supposed to account for. Selling it has nothing to do with it – from an accounting perspective, you’d balance the remaining (non-depreciated) value of the car against the sale proceeds anyway.
You can always sell a car. It contains hundreds of pounds of valuable metals. The metals recycling industry exists because cars are so much better a source for iron than iron ore. Someone will always buy your car to shred it into metal bits because those bits are valuable.
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Not necessarily, you can think of depreciation from the aspect of a buyer and it becomes the replacement cost.
You might *want* to drive the car into the ground but what if an elephant stomps on it tomorrow? You need a new car and in theory you have insurance that will cover it’s replacement. But the insurance company doesn’t drive up and park an “Equal” car in your driveway. They will just give you the *value* of the car and wish you good luck. So in theory the depreciated cost is the value it would cost you to re-purchase an “equal” car in this contact.
Point being, if your 10 year old Civic gets destroyed you’re not getting paid out for a new Civic, you’re getting paid out for whatever your Civic was worth at the moment of destruction, in theory, a 10 year old Civic in similar condition.
Similarly, if for whatever reason you are using your car as an asset on a loan, they’ll only “count it” for as much as it’s worth. “any” Civic is not worth as much as a brand new Civic.
Outside of selling, buying, or replacing your car. Yeah, you probably don’t care terribly much about depreciation.
The idea is that you always trade in or sell the old one to get some value to get a new one. This is because people treat vehicles as a form to keep wealth. Since the assumption is, that at some time you will want a *better car*.
However… in reality housing and vehicles should be treated as consumables. Stuff that is meant to be used and that will over time break down and need to be replaced. And this is why we still have a “housing crisis” even though we know what kind of fucking massive social and economic burden it is – but people want to own homes that go up in value. Then people want a thing they can use, which won’t drop in value.
I personally think of a car like a tool. It has a function, and I use it to that function. And I use it till it no longer fills that function for me.
Which is why I drive a 22 year old Opel Corsa that is showing no fucking signs of giving up. Filling the tank adds 10% of value to it by my estimate.
Depreciation only matters if you have an intention of selling the car to get a better one. If you don’t then you can ignore it completely in the value assessment.
You do raise a good point which appears in finance in that depreciation is not cash flow – which is often what businesses (and normal people) really care about. If you intend to drive a car until the wheels fall off, then a usual depreciation schedule doesn’t apply to you.
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.
You can use something after it’s fully depreciated, so no depreciation does not assume sale. The point of depreciation is spread out capital cost over the lifetime of the asset, instead of “expensing” it 100% immediately.
That being said, depreciation is an accounting concept. You can rationalize the purchase however the hell you want
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