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:
- Retirement funds
- Real Estate
- Personal Valuables
Here are some examples of liabilities:
- 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!