Going through the process of looking at your book value and market value or estimated market value, you may be a little bit frustrated by the fact that those two figures are so far apart. You may be frustrated that you put money into modifications for your vehicle that may not be able to be returned to you upon the sale. Or you may be concerned or frustrated by the fact that your vehicle has depreciated quite a bit since you purchased it. This is all part of the challenging process of buying a vehicle.
When you\’re looking at your vehicle, you come to learn that it is typically a depreciating asset. Your car depreciates, and there\’s not much you can do about it.
Depreciation is the difference between what you purchased your vehicle for and the value that is existent today.
Say you bought a new F-150, maybe paid $52,000 for it, and now it\’s worth $44,000, or whatever the case may be. When you\’re looking at that difference, you might be saying, \”Okay, well, why is there eight grand of a difference?\” That is depreciation. Your vehicle became considered a \”used vehicle\” from the moment you drove it off the lot. Now there\’s mileage on it, wear and tear, and there are other components that factor into that new value as well.
According to Kelley Blue Book, every sector and aspect of the new car industry has increased year over year, except for electric vehicles, high-performance cars, and high-end luxury cars.
This doesn\’t correlate directly to what vehicle would maintain and hold its value best with that. It\’s more about how much the manufacturers increased their prices year over year. It shows that those three sectors did not increase, but rather decreased from last year.
So let\’s try something out. Start by choosing one of your vehicles or one of your family vehicles. What is the purchase price that you paid for the car? You may have to do some digging to find that out, but determine the purchase price before tax, title, license, and modifications or accessories you put on that vehicle. Finding this info will give you a starting point.
That starting point will guide you from the book value to finding the market value now. Then the difference will show you how much it has depreciated over a while.
Now, suppose you have that original purchase price, the actual book value, and market value for the vehicle. In that case, all you simply have to do is take the original value and subtract the book value from that and then look at how many years ago you purchased that vehicle.
For example, if you had a three-year-old 2019 Ford F-150, you\’re looking at a straight-line approach. That\’s an accounting term and approach to look at the level of the depreciation curve. Now with that, cars don\’t typically depreciate on a straight line. They depreciate more right when you drive it right off the lot the first year than they do in the second or third year. Depending on the vehicle, you\’ll most likely have that immediate drop-off, and then it will level out.
Looking at this three-year-old Ford F-150 with 36,000 miles, in excellent shape, with about an $8,000 difference, you would assume the straight-line depreciation on that vehicle would be about $3,000 per year. For an F-150, that\’s actually not that bad because that equates to about 6% of depreciating per year.
When you hear about these certain vehicles that depreciate 10%, 15%, 20% in the first year, and then you look at an F-150 that depreciates 18% over the first three years, it\’s not too bad.
So again, if you are confused by the process, look at your vehicle as it sits today. In our case, we looked at the 2019 Ford F-150 and went through the process of figuring out the market and book value of that vehicle. More specifically, you probably want to go off of that book value, but based on the book value of that 2019 vehicle, you can look at that brand new vehicle\’s value. If you go to ford.com you can actually look at this vehicle and look at the fact that it was a SuperCrew with a short bed, four-wheel drive, with a certain color and packages, in this case, and the FX4 package. You can also build up that vehicle to have an idea of how much that vehicle depreciated over the three years or more of owning it. This process may be helpful for you just to make sure that you\’re going through that process of looking at how much your vehicle has depreciated and to figure out the following steps to limit that depreciation.
Beyond that, Kelley Blue Book put out a great resource that helps you look at what vehicles have increased the most year to year. From that, it will help you determine if you should change your path or approach to the cars you own.
I mentioned this specifically because I\’m trying to drive towards intentionality regarding car purchases. For most people, a car purchase is the second-largest purchase they make. However, many get into a rhythm of buying a vehicle out of emotion rather than logic. Therefore they end up paying for it because that vehicle depreciates faster than the loan they paid down on that vehicle. They then acquire negative equity, which must be added to the next vehicle purchase they make.
Knowing the best time to buy a vehicle, how long to keep it for, when to sell it, and how the depreciation curves year by year is crucial if you want this vehicle purchase to affect your finances in the most minimal way possible. Doing so will help ensure that you aren\’t carrying negative equity from one car to the next and that you don\’t lose the vehicle value on that purchase ultimately.
What Should I Do Next?
Calculate the depreciation you\’ve experienced on your vehicle by looking at how long you\’ve owned that vehicle, what that value was when you purchased it, and what the value is now. Doing so will give you an idea of whether you can stomach that kind of depreciation with your next purchase.
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