Brand new cars will lose 20% of their value in the first year of ownership, and 60% in the first 5 years (Ramsay Solutions, 2023). This means that a car worth $40,000 will be worth $32,000 after one year and $16,000 after 5 years of normal use. In this case, the owner’s cost of depreciation is $8,000 in the first year, and $4,000 in the subsequent years. Since your automobiles are considered assets in your ‘net worth’, the loss in value will negatively impact your net worth. It should be your goal to maximize your net worth, and therefore minimize the depreciation of your assets. Thus, you should always buy used cars to avoid taking on the largest portion of depreciation which occurs in the first years of ownership. I do mention in my Automobile Affordability post that brand-new vehicles should not be purchased unless your net worth is greater than $1,000,000. The only reason for the million-dollar net worth exemption is that with over a million-dollar net worth, you can afford to take on the depreciation if you choose to (but you still shouldn’t!).

Since you want to minimize depreciation on your automobiles, follow these tips:

1. Purchase an in-demand vehicle. Avoid buying a unique vehicle that may be difficult to resell.
2. Avoid models with poor resale values. Luxury cars generally have some of the highest rates of depreciation. Do some research before purchasing so that you have an idea about the amount of depreciation to expect. There are several websites that will show historical values and estimate future values.
3. Take care of your vehicle! Maintain it, wash it regularly, and repair damages when they occur. The condition of the vehicle will impact its resale price.

References:

Ramsay Solutions. (2023, August 24). Car Depreciation: How Much Is Your Car Worth? Ramsey Solutions. https://www.ramseysolutions.com/saving/car-depreciation