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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If you expect your car to last a finite amount of time depreciation is how you account for that.
Why would you not sell it? You’re just going to accumulate a pile of scrap metal that you expect your children to hold on to and pass down?
Not really. At its most basic depreciation is just picking a lifespan for a thing and then breaking the cost of buying that thing into chunks spread over that lifespan as opposed to all at once. If you are trying to come up with average cost per year of owning a car depreciation is just spreading the purchase price over the expected years that the average person will own it or its useable lifespan. Another thing to consider is that the repair expenses for a car for this kind of calculation should be expected and ordinary, in other words not the cost of replacing the transmission etc.
At some point, your car will stop being useable for you. Either you will sell it or you will junk it or you will give it away. Sure, it’s possible that you could keep it forever and cherish it as a beloved collectable, but as a capital expenditure, it’s assumed that it isn’t going to be usable forever.
Once you stop using the car entirely (for whatever reason), it isn’t going to have any value for you. The tax agency and/or accounting system lets you devalue the car over the expected lifespan of the car because you paid $ however much and it’s going to be worth $0 eventually.
For most people, depreciating your car isn’t going to make any difference because you can’t save on your taxes and you really don’t need to keep track of the asset value of your car. You certainly can depreciate it as you calculate your entire net worth, but it isn’t going to do much for you other than give you a more accurate idea of how much wealth you actually have. If you’re a business that’s paying taxes on business income, you can write off expenses and losses and that depreciation is part of those expenses and losses (as long as you bought the car for the business to use – you wouldn’t write off a vehicle that’s entirely for personal use, would you?)
I just re read your post and I think a simpler answer would be to take your case of driving the car till the engine block falls apart and it is unsellable.
What would the annualized cost of what you paid for the car be over the span from when you bought it till when the engine block falls out? It would be purchase price divided by that number of years. That is what depreciation is.
You don’t have to sell the car for depreciation to affect you. You buy a 10k car and run it until it dies (lets say 10 years), that was 1k/year depreciation.
But also generally someone who buys a new car wants to drive a new car and won’t be driving it in 10-15 years when it’s old and potentially unreliable. Also on the other side of things, someone that likes to buy cheap high miler cars will likely buy them and run them until they die. I’d say it’s rare for someone to buy a new/expensive car and run it until it dies.
The depreciation happens whether you sell it or not. You need to know how much the car is worth if you want to get an accurate view of your assets and net worth. In addition, if you total the car the insurance will only pay out the market value of the car, not the price of a new model.
If your mechanically inclined and don’t mind putting a little time into it this is a fantastic plan. I typically get 20 years out of a car this way. If you have a family like me it’s also a good idea to make sure one car is still in the newer half of its life for road trips (just in case). It really eases your budget if you have long stretches without any car payments. If your not at all mechanically inclined this can be a bit riskier.
People will usually sell the car, that is a reasonable assumption, but the application of depreciation is a bit wrong headed here.
Let me explain, say I buy a 1.2 million dollar airplane you intend to us on mail routes as a contractor. That is my initial acquisition cost, then you have mandated maintenance and the fact that after an amount of flying hours the repair costs start to become too costly in lost productivity (I have to wait for parts and mechanics) and in straight up costs. You decide what that is at the outset and then you model it out. That way at year 7 or 7,000 hours I know I am either buying a new plane or I am overhauling the one I have at significant capital expense.
A car is a different idea, you aren’t really using it to make money (mostly) and if you lose access to the car due to repairs you can easily get an uber or use public transit or rent a car or whatever. On that note, though, if you are using your vehicle for making money you better get your depreciation schedule handy. You want to know your F-150 is going to last 5 years (or whatever) before you budget for overhaul or replacement.
Unless you just like this kind of thing, your average consumer could give a rip and repair costs are generally less than a new acquisition for a long time. Years and years. People don’t usually replace cars because they are essentially unfixable, they replace them because their tastes change. A company might be fine replacing a transmission, you won’t be, but a transmission replacement can be a hell of a lot cheaper in a commercial vehicle than buying a new one. Overhauling a diesel in a Peterbilt is a realistic option to a new acquisition. You are probably not going to bother overhauling a Honda V6 in your 2009 Accord Coupe.
All of what was said is true, but the bottom line there is no free lunch. I used to buy junk cars and run them into the ground, and then started to look at the true cost of the vehicle. The purchase price, the maintenance price insurance that all of this stuff whatever and divided it by the months I had it it realized I could have bought something new for the same price. Or you could just lease if you’re going to really take care of it. But all of this cannot be avoided and gives you a basic threshold number that you have to assign to your life for the cost of getting around. There’s no way around it.
This is the greatest indictment of American society. If you don’t have a car and you’re not willing to spend that 8 to 11,000 minimum a year then you’re fucked. And there are a lot of people that really have a hard time putting this money together. Those are numbers that I came up that kind of reflect what I have spent in my life, but I think they’re pretty realistic and I’m sure a lot of people spend a hell of a lot more per annum. This can probably be increased also with inflation these days. But if you’re elderly, infirmed, handicapped, extremely poor or just don’t want to drive in America you’re fucked. All of that well that could have been better spent for education, better housing so many other better things to spend our roadways and automobiles coming up to mince the countless hours some people devote to sitting in them commuting, another horrible crime against humanity
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