When it comes to finances, most people have two expenses that are much larger than any others in their life: homes and cars.
There is a vast divide between these two major purchases and almost everything else we buy during our lifetimes; the next most expensive thing the average person buys is probably a vacation - and that's still likely < 5-10% of the cost of a car.
So it makes sense to think about these purchases very carefully, right? Yes.
And it follows that these two purchases are in the same category, right? Nope.
Property is an asset. It's a somewhat speculative and illiquid one - granted - but it's still an asset.
Take a look at the value of property over the medium to long term and it will almost certainly have grown by a decent percentage. As you can see from the charts above, it varies significantly by country, but the trend is definitely upwards.
The biggest purchase of your life is most likely a sensible one. Well done you 👏 .
Cars are a liability, not an asset. They depreciate at an astounding rate, especially when new.
The average new car costs around $35,000 but will lose 11% of its value the first time you drive it, 25% by the time it's one year old, 46% by the time it's three years old and 63% by the time it's five years old. So the average person, who buys the average new car, will have lost ~ $22,000 after five years of owning it.
If you bought the same car when it was just one year old, the first owner would have absorbed 25% of the depreciation already, so after four years you would lose 'only' ~ $13,000.
So buying a new car really sucks from a financial point of view - and most people know that and deal with it - but the cost is actually much, much bigger, than most realise.
The missing piece - opportunity cost.
Let's stick with the example from above; buying the one year old car, instead of a new one would save you ~$9,000. If you had invested this in the stock market (which historically has produced a ~10% return p/a) it would have been worth:
After 5 years: $14,495
After 10 years: $23,344
After 20 years: $60,547
After 40 years: $407,333
So what does this mean?
The difference between buying a brand new car and buying a 1-year old one, works out to be enough to buy you another car 10 years later, or a house 40 years later (or a couple of Ferraris). And remember, that's only based on buying the average one year old car. If you were to buy an older car, or one that cost less than average new, the amount you could save over a lifetime would be even more startling.
How much are that new leather smell and the shiny black tyres really worth to you?
Why Teslas are different.
If you're not familiar with Teslas, I'm surprised you have an internet connection. Did someone print this for you?
In my opinion, Teslas are really blurring the boundaries between vehicles and technology. I believe they will be the first vehicles to be assets rather than liabilities, or at least break-even (especially if you buy one now) for a number of reasons:
1. Teslas are already fully self-driving, it's now just a matter of legislation catching up with technology. If you've never seen a fully self-driving car in action, you have to watch this. Once all the legislation is in place, you'll be able to assign your Tesla to a kind of driverless Uber fleet, so it will make you money while you're not using it - more info here.
2. The Tesla Model 3 (not yet on the market), was the biggest product launch in history. Yup. Over 400,000 people paid $1,000 to reserve one. With such insane demand, I'm pretty sure you'll be able to use your Tesla for quite a while and then resell it to an impatient soul for at least what you paid for it - although I highly doubt you'll want to part with it.
3. They're fully electric. Duh. They have around 20 moving parts, vs 200+ in an internal combustion engine car. That's a lot less wear & tear, so a lot less depreciation.
4. They're awesome. Fastest accelerating production car in the world. Oh and electricity is a lot cheaper than gas!