Are cars assets or liabilities?

Are cars assets or liabilities?

I’ve done a lot of car posts lately. Honestly, they are probably the most popular posts that I write! For whatever reason, people get REALLY fired up about their cars and will defend their position on them to the absolute death.

Whatever your opinion is about people buying new or used cars, it doesn’t matter for this post. If you think buying used cars with cash is cool, you’ll probably like my site a lot. If you don’t, it’s OK. Hopefully you’ll get some value somewhere else on M$M.

But the one thing that I can say is legitimately concerning in all of the comments I’ve seen (especially on my sponsored Facebook posts) is the misconception of assets and liabilities in relation to cars.

I’ve seen the following statements about cars so far:

Cars can’t be assets because they lose value.

Cars are only assets if you can use them to make money (like driving for Uber).

Cars are only assets if you own them through your business.

Cars are only assets if they are rare and appreciate in value.

If you are an accountant – I am so so so so sorry that I had to just put you through that. You’re probably tearing your hair out and screaming at the screen right now!

Let’s just define assets and liabilities really quickly as they relate to your net worth (and cars):

Asset: Assets are items that are owned and have value.

Liability: Liabilities are obligations or items that are owed to others.

Here are a few examples of assets:

  • Cash
  • Retirement funds
  • Real Estate
  • Personal Valuables
  • Stocks

Here are some examples of liabilities:

  • Mortgage
  • Student Loans
  • Credit card debt

Trust me – I understand people not being familiar with these terms. It’s not like they teach people this stuff in high school (being serious even though that looks like sarcasm). I just want to help clarify for people that might be using the words totally freaking incorrectly. 🙂

So if a car loses value by depreciating, how can it be an asset?

Here’s the important distinction: the car itself wouldn’t be the liability in terms of calculating net worth. The car loan is the liability. The actual vehicle is an asset because it has value that can be realized when you sell it. Assets can appreciate (gain value) or depreciate (lose value) and still be considered…well…an asset.

However, if you sell the car and can’t get enough money to cover the loan amount that you owe, it will go down as a negative against your net worth. If the car clearly isn’t worth what you owe on it (which many aren’t), the amount you still owe is a liability.

I know this can boil down to semantics, but this $hit is important if you are trying to get a good picture of your net worth!

On the flip side, if your car is worth more than amount owed on it – it will actually add to your net worth because the asset is more than the liability! Pretty cool, right?

Why is knowing my net worth so important?

Knowledge = power. Always. Your net worth is basically a picture of your financial health, and knowing what it is can help you make long term goals based on current information.

A lot of my readers have a lot of student loan debt, car debt, etc. That might mean that you have a negative net worth! Know this – it’s OK. I had a negative net worth at one time too, but understanding that reality made me hustle harder to get my student loans destroyed and start building wealth.

Understanding how all of the big purchases we make like cars, houses, and even a college education work together to create your financial picture is key. Hard to make something better that you don’t really know much about, right?

If you want to know more about your net worth and how your car fits into the picture, check out my review of Personal Capital. It’s a free tool that my wife and I use on a weekly basis to keep an eye on our money!

Question for you:

I actually don’t have a question this time. Assets are assets and liabilities are liabilities when it comes to cars.


Live differently. Your bank accounts will thank me later. ~M$M

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22 comments… add one
  • The Green Swan Nov 14, 2016, 7:25 am

    You make some great distinctions there, MMM. And even though my family is a two car house, let me add one more distinction…cars are assets, but generally pretty shitty assets that you don’t want to invest more into than you have to (unless you are sitting well off).

    • Millennial Money Man Nov 14, 2016, 8:11 am

      Oh for sure – I drive a $6,000 car for a reason. I just don’t want to lose that much money on something I don’t really care about.

      • Mr. Realistic Nov 14, 2016, 9:36 am

        This advice is also benefits 2 fold. First, being what you mentioned above, spend less, lose less to depreciation. Second, insurance. Carrying only liability on an older, less expensive car can be a quarter of the price verses full coverage on a new car. Win Win.

        • Millennial Money Man Nov 14, 2016, 11:45 am

          That’s a great point on the insurance – for some reason I keep leaving that out of my car posts haha

  • The Accountant Nov 14, 2016, 8:21 am

    You did a great job explaining assets vs. liabilities in basic terms. Cars have a short depreciation life (5 years) versus houses (27.5 years) meaning your expenses add up over the short term. That’s why I find it crazy when I see that the average car loan is 6 years because the car itself is usually only considered an asset (WITH VALUE)

    • The Accountant Nov 14, 2016, 8:24 am

      *It’s only considered an asset with Value for 5 years. That puts you in the hole right off the bat.

      I’m not sure why my comment posted before I finished my sentence or how things ended up in capital letters. My apologies!

      • Millennial Money Man Nov 14, 2016, 11:46 am

        Haha no problem! Great point with the depreciation time periods – definitely not something people tend to think about when considering these purchases.

  • Mr. Realistic Nov 14, 2016, 9:31 am

    Driving a less expensive car is 2 fold as well. The first being what you mention above, spend less loose less to depreciation. And second, Insurance. Only carrying liability on an older vehicle can be a quarter of the price of insuring a new vehicle with full coverage.

  • Financial Panther Nov 14, 2016, 9:43 am

    We’re a 1 car household ourselves, and generally stick to biking around. I try not to think of a car as anything really. It’s just a piece of property, like a couch or a computer. It just happens to be a pretty expensive piece of property. I don’t think a lot of people calculate things like furniture or electronics into their net worth calculation. Now…if you’ve got a car loan, that’s obviously a liability. Just the same as financing a mattress or a couch or something!

    So I guess what I’m saying is, a car is nothing, unless you have a car loan. Then it’s a liability!

    • Millennial Money Man Nov 14, 2016, 11:48 am

      That’s a nice mindset trick. I’m kinda the same way, mostly because the car I drive is so old/worth so little that it really doesn’t factor too much for me.

  • Michelle Nov 14, 2016, 9:57 am

    As an accountant I appreciate your efforts to stomp out ignorance around assets and liabilities! I think plenty of people think of it as a “liability” because it’s sort of a money pit- aside from the loan, you’re paying for gas, insurance, maintenance and repairs. It can hard to think of something as an asset when you’re shelling out cash for it all the time.

    • Millennial Money Man Nov 14, 2016, 10:24 am

      Haha no problem, always nice to get the accountant seal of approval on a post!!!! 🙂

      I totally get the misconceptions on cars, but as you know, assets and liabilities are what they are.

  • Rick Pavia Nov 14, 2016, 10:09 am

    While a car can be an asset, in most cases it is a depreciating asset as opposed to an income producing asset. Generally speaking, the former is one that people should try to minimize while the latter is one that people should seek to maximize. For example, a typical car requires additional cash for expenses such as insurance, gas, repairs and maintenance, fees, etc. in addition to loan payments. Plus, there is the depreciation aspect. So as an example, you might spend the following in a year: $3600 on fuel; $800 in insurance; $100 in license/registration or other fees; $750 in repairs and maintenance. That’s a total of $5250 per year! And that does not include loan payments (which include interest). YIKES! Contrast that to an income producing asset such as a CD where you earn at least something for your investment. If you put $1,000 into a CD at 1% interest, you’ll actually have more money (even after you pay tax on the gain) than you started with. So whereas the car is costing you more money, the CD is making you more money. Interestingly, the asset or liability question can also apply to a house. Unless you are renting it, a house actually costs you money (taxes, repairs/maintenance, upgrades, utilities, landscaping, snow plowing, association fees, not to mention the loan (and interest). Hmmmmm

    • Millennial Money Man Nov 14, 2016, 10:27 am

      I think that’s a little bit of the misunderstanding – as long as you can sell it for any amount of money, cars are always an asset regardless of income produced by them or how much they depreciate/cost to maintain.

  • Mrs. Picky Pincher Nov 14, 2016, 10:15 am

    Yup, cars are still assets, although many people call them “depreciating assets.” I think that’s where the confusion comes from. Assets don’t always mean they actively make you money! For example, you can buy an absolutely gross house and it’s still an asset, as awful as it is.

    I was able to get rid of my $10,000 car loan this year, which improved my net worth and credit score! That also meant we got better financing options for the house we just bought. 🙂 It’s a never-ending battle between frugal people as to whether you should take a loan or pay cash for a car. In our case, it seems that paying cash was the way to go. However, we still have a car payment on our second car, mostly because of how the math worked out.

  • Good FIbrations Nov 14, 2016, 1:39 pm

    I’d rather people misunderstand accounting terminology en masse if it meant they might come to grips with just how much of their lifetime income (and the opportunity cost of not investing that income) is spent on cars. And that a large percentage of that income spent on cars is totally optional in most cases.

  • Andrew Nov 14, 2016, 7:39 pm

    Great post, I agree with your take. Although personally, I hate adding my car to my net worth statement. This is only because I don’t like seeing something on my statement decrease year over year.

    Another interesting ‘throw in’ would be classic cars as an asset. I have seen many go up in value in recent years. Especially if maintained really well.

    • Millennial Money Man Nov 15, 2016, 8:18 am

      Yeah the depreciation is definitely a bummer, but if you drive an old car like I do you don’t take as big of a hit! 🙂

  • Kathryn @ MYMM Nov 15, 2016, 12:21 pm

    As an accountant, I feel obligated to comment on this post. Ha!
    As a car family (my husband works in the auto industry and loves cars), we drive around nice, newer cars. And the benefit of it is that we don’t have car repairs-basically, ever. We also don’t have auto loans, so they’re not really a liability to us, other than the costs of fuel, insurance and basic maintenance.
    However, in answer to your question “are cars assets or liabilities?” they in essence are both but what they really aren’t are INVESTMENTS. Unless you have a sweet classic car, please do not tell me your car is an investment. Sure you can call an asset :).

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