The D Word: Depreciation

Depreciation. It’s that sneaky process that takes your money when you least expect it — especially when it comes to our cars. When we are driving our cars, we know deep down that the value is declining. The more miles you put on, the lower the price you can sell or trade it in for. The problem is most of us don’t factor that expense into our budgets because it happens over a long period of time.

We do factor in shorter-term things like filling the gas tank and oil changes. In the old days, you had to keep a close eye on the gas tank needle. Now you get flashing lights on the dashboard that warn you to find the nearest gas station or that you are due for an oil change. These can be irritating, but they certainly beat the alternative of walking down the freeway with a little red gas can or rebuilding your engine.

It’s too bad there is no gauge that shows the value of your car as it declines. But wait, there is — the odometer. Well, mileage is one of the primary measurements of depreciation. The other major measurement of your car’s declining value is the age.

When you get a chance, visit one of the car value sites and input your car’s year and mileage into the calculator. Then jot that value down and do it again but check it for one year older (2016 vs 2017) using the same mileage. When I tried it on a 2016 versus 2017 four-door sedan with 36,000 miles, the value based on the age alone was about $1,200 less. When I added an extra 12,000 miles on the older model, the difference was about $1,950. The age depreciation by itself was $1,200 and the mileage by itself was $750. Of course, this will vary depending on your car model, age and mileage.

The condition of the vehicle, both cosmetic and mechanical, is, of course, another major factor in depreciation. However, many of us don’t factor in the technological depreciation. Automatic braking, lane departure notice and back-up cameras are just a few. These make the newer model more valuable than the older one.

These depreciation factors are silently eating away at your net worth just like piranhas on an Amazon river swimmer. But don’t worry, the dealers and lenders are helping you out by making the auto loan terms longer and longer …

Oh wait … that’s not good for you. Your loan balance reduction will probably be less than the depreciation, which means you are sinking farther into debt. It can keep you in perpetual auto loan debt if you do not factor it in to your savings plans.

But all is not lost. I always save the good part for last.

It is easy and even fun to figure out your depreciation rate and then put together a plan to reserve for it. Large corporations and other organizations do this all the time with very sophisticated systems. Your system doesn’t have to be fancy. Just figure out the depreciation rate (ballpark is fine), start an automatic monthly savings deposit and don’t borrow as much when you sell or trade in your old, depreciated hunk of metal for a new, or new to you, car.

Let’s start reducing that national personal debt level, one person at a time.

Written by Dave, an Accredited Financial Counselor® who has been helping families plan their finances for more than 30 years.