Do you include vehicle depreciation in your spending?

[icyappraiser]

I was considering potential gaps between my spending tracking and what I would actually need for FIRE and realized I am not counting vehicle depreciation in my spending (I include all other vehicle ownership costs, including registration/fuel/insurance/maintenance).

Do others include this in your annual spending? If so, how? It's not as precise year to year as other actual costs.

Do you calculate each year's depreciation individually, or average out over the vehicle ownership lifecycle? For example....

Purchase Price: $20,000
Sale Price: $10,000
Ownership Time: 5 years
Annual Depreciation: $2,000

This example would add ($2,000 * 25) = $50K to a hypothetical fire number ($100K for 2 vehicles).

All this assumes you are buying your cars in cash, and not financing/leasing--so there is no monthly payment to include in spend tracking

[uniwelder]

I've usually heard of it in a different way--- sinking fund vs depreciation.  People here talk about setting aside money in the budget for expected high dollar replacement costs for vehicles, roof, etc.  I think it's a bit of the same concept as what OP is discussing.

[GilesMM]

I wouldn't know how to calculate it. Our cars have >100k miles so the depreciation is minimal.  It's not very Mustachian to own a newer car with much depreciation because the cost is real and it is a terrible waste of money.

[Tigerpine]

Although I know that technically it is, I don't think of cars as assets.  I think of them as regular (albeit larger scale) disposable consumer goods.  Therefore, we have a sinking fund for the next car purchase, but we don't count on residual value from the existing car.  That's partly because, similar to @GilesMM, we always plan to keep our car for much longer than five years.

[Omy]

Sinking fund. Our plan is to buy a new car every 10 years, so we add $400 to the monthly budget when calculating our spending. And another $600 to the monthly budget for big house repairs (future roof, ac replacement, major upgrades)

[J.P. MoreGains]

I disregard this. I also don't count my vehicle in my net worth. But my number crunching is still kind of simple.

[aloevera1]

I think of car as a consumable item. It's not that different from a tent, piece of furniture or a fridge. I will use all of those things until they become unusable. Then they will get replaced.

So, no I don't depreciate it. However, I plan to have a sinking fund for "oh shit it broke" event per year. Don't know how to quantify it though because I can see how car can break at the same time as the furnace.

[Greystache]

Both of my cars are old enough to vote, and I paid less than $20K for each of them when they were new, so the annual depreciation is not something that I keep track of.  When I retired, I set aside $100K in a conservative fund that keeps up with inflation and I will tap that fund to replace big ticket items like cars, roof, HVAC, etc. if they ever die.

[GuitarStv]

If you drive a car into the ground, the car doesn't depreciate.  As long as it's moving you around, it's doing exactly the same job it was purchased for so it hasn't lost any value.

[aloevera1]

Both of my cars are old enough to vote

I'm impressed. How big is your mileage?

[bacchi]

I've also got a car old enough to vote. It has 78k miles.

A car sinking fund ($300/month) is the only thing we budget and everything else is accounted for when it happens.

[Catbert]

I disregard this. I also don't count my vehicle in my net worth. But my number crunching is still kind of simple.

What would be the purpose of depreciating it every year?  If you were including it was an "asset", sure you'd need to depreciate.  As others have said, it's a consumable item so no need to track.

[tooqk4u22]

Sinking Fund.   But you have to actually deposit the money in a separate account...not just count a monthly amount in your budget. 

When I originally started a sinking fund approach I first estimated the remaining useful life of major items (cars, HVAC, roof, etc.) and started the account with the cost to replace less any remaining amount to be amortized.  i.e. if when I purchased my house I had a 20year life roof but it was 10 years old and current cost of roof would be $10k, I would put $5k into the sinking fund account - and I did that for all major items (appliances, HVAC, furniture, cars, etc.).  This is for repairs, maintenance and or replacement only - not desired improvements. 

Deposit monthly amount and make withdrawals as expenses are incurred. Monthly amount will vary depending on how old systems are and size of house, etc.

I feel that cars are a little more difficult to budget for bc the expense is so large but same principal applies, and generally you can defer a car replacement for quite some time if needed just by regular maintenance and routine repairs.

The problem is that since I started this approach many many years ago I never withdrew money when when expenses were incurred but still was making monthly deposits.  So the account(s) now have grown to a point where these items along with travel is sort of covered by its own SWR. 



I over complicate things - this is the simplified version.........

Both of my cars are old enough to vote, and I paid less than $20K for each of them when they were new, so the annual depreciation is not something that I keep track of.  When I retired, I set aside $100K in a conservative fund that keeps up with inflation and I will tap that fund to replace big ticket items like cars, roof, HVAC, etc. if they ever die.

[Villanelle]

No.  I also don't include depreciation on my sofa or my shoes.

For all these items, I account for the eventual need to replace them, but I don't say, "well, I wore my shoes for 30 days this month, so in effect, I spent $1.36, as a portion of their total value."  Besides being complicated, you don't actually know when your car or shoes are going to die (or need major repairs) so it's just a very, very rough guess anyway.  So you might as well just use the sinking fund concept to ensure you are accounting for the future need to buy some of things you currently have, in new versions. 

Also, the numbers in the OP wouldn't be correct anyway since a car's appreciation isn't linear.  Assuming you buy a new of fairly new car, the first few years are going to be super expensive.  The last few years, less so. 

[tooqk4u22]

No.  I also don't include depreciation on my sofa or my shoes.

For all these items, I account for the eventual need to replace them, but I don't say, "well, I wore my shoes for 30 days this month, so in effect, I spent $1.36, as a portion of their total value."  Besides being complicated, you don't actually know when your car or shoes are going to die (or need major repairs) so it's just a very, very rough guess anyway.  So you might as well just use the sinking fund concept to ensure you are accounting for the future need to buy some of things you currently have, in new versions. 

Also, the numbers in the OP wouldn't be correct anyway since a car's appreciation isn't linear.  Assuming you buy a new of fairly new car, the first few years are going to be super expensive.  The last few years, less so.

And i you own it for a very long time it becomes a classic and starts to go up in value! LOL

[wenchsenior]

Although I know that technically it is, I don't think of cars as assets.  I think of them as regular (albeit larger scale) disposable consumer goods.  Therefore, we have a sinking fund for the next car purchase, but we don't count on residual value from the existing car.  That's partly because, similar to @GilesMM, we always plan to keep our car for much longer than five years.

This. I don't count them as assets. The only way I factor them into net worth is by including any car loans I have. But I do track costs related to having vehicles in my monthly budget.

[ChickenStash]

I don't calculate depreciation for my cars. Since I tend to keep them until they have near-zero value I just take the expense at the purchase. Knowing what they are worth at any given time is a useless number. I also don't count it as an asset. Granted, my cars do have actual non-zero values so I could cash them out for something if I wanted.

For future planning purposes I just keep a round number in mind that roughly matches what I'd probably spend for new (used) cars in the foreseeable future. When I get closer to FIRE I'll need to think of something for planning future car purchases - it won't be many, though.

[patchyfacialhair]

I add what would be 2 car payments to my "retirement spending" budget for planning purposes and calculations. The plan is to retire, pay cash for a new(er) car, maybe stick with just 1 car, keep it for 20 years...that budgeted 2 car payments ends up being a safety margin.

If we retire in mid-50s, that means I'm at mid-70s when the car needs to be replaced. By then, I may just lease cars so that they're easier to dispose of when I croak.

[BlueMR2]

I do not include depreciation.  I assign them asset value of the scrap and consider everything above that as a simple purchase.

[neo von retorch]

Once I owned a truck valued at $30K. I sold it and bought a car which cost me $20K. Without any record of vehicles, I was $10K richer (higher net worth) after this transaction. Can someone explain how this is possible?

Twist - you can't count vehicles as "assets" ;)

But they are assets. They are depreciating assets (in most cases).

Doesn't mean there's a right way and a wrong way to track it. Obviously lots of opinions on the most frugal/Mustachian way to own cars with minimal expense, and  if the expense is kept minimal, it doesn't hurt to have gaps in your record keeping. But if you track assets, and if necessary any offset liability from debts incurred, you can track depreciation, either on an estimated schedule, or based on online tools (e.g. KBB private party value) to get an idea of what the depreciation is costing you over time. It's more in your face then logging a large lumpy experience every 5/10/20 years.

If you've already optimized for a low costs, long-lasting vehicle that you keep for a decade or more, either method of record keeping probably works roughly the same. But if you're earlier in your learning process, it may be eye opening. e.g. "Hey I have a $30K truck but I don't need it, and I can improve my net worth by selling it and buying something less expensive but equally as useful for my specific needs." Or "hey we barely use our second car, and I can see it's worth $15K. Let's sell it." Or "this $5K motorcycle depreciates, but if I sell it, clear that space out of my garage, and invest it, it'll become an appreciating asset!"

[Greystache]

Alovera1 asked about the mileage on my two old cars, so here are the details. The oldest is a 2003 Pontiac Vibe with 165K miles. The other is a 2005 Chevy Malibu with 170K miles. Both run perfectly and don't require much more than regular maintenance. Most of the time, we don't put many miles on them, but once or twice a year we go for a three to five thousand mile road trip. Both were our regular commuters before we retired 10 years ago. I thought about getting new cars before we retired but we decided to wait until these cars died. We are still waiting.

[JAYSLOL]

I don’t really worry about depreciation, since I tend to buy when I find a great deal, hold for a long time and I buy cars that are already heavily depreciated.  One of my cars I’ve had for 22 years and has depreciated less than $10 a month while I’ve owned it.  DW’s car we got 11 years ago and has dropped maybe $25-30 a month.  It’s just such a small part of cost of ownership for me that i don’t worry about it.  I have a healthy budget for all maintenance and repairs and insurance and gas etc for our cars and I’m sure it more than covers upgrading a car every decade or so. 

[TheFrenchCat]

We run our cars into the ground, so we just sell them for scrap value when they're done.  I don't keep track of their value.  So I also have a sinking fund for the cars, just like the ones I have for electronics, house repairs and other higher ticket consumables that we don't purchase frequently. 

[Morning Glory]

I just count the whole thing as spending at the time of purchase.  I don't really care if it's lumpy from year to year.  I suppose you could smooth it out somehow if you don't have enough years of data to calculate a fire number.  You can count selling things you own as negative spending instead of income. 

[Laura33]

Depreciation is not "spending."  Depreciation affects net worth, not cash flow. 

Depreciation is entirely irrelevant to your FIRE budget.  When you are looking at your pile of assets to figure out how much the 4% rule will provide, that pile is limited to assets you will draw on to cover post-ER expenses.  You likely will not sell your car, so it should not be included in that pile.  So whether your current car is worth nothing or $100K, whether it's depreciating at $1/yr or $20,000/yr, does not matter for FIRE. 

What matters to your FIRE budget is what your future replacement cost will be and how/when to cover that cost.  If you plan to buy a $30K car every 10 years, your FIRE budget needs to include setting aside $3K/yr for that future purchase.

Note that that has absolutely nothing to do with what your current car is worth or how quickly it is depreciating.  You could own a Maserati that is depreciating five figures every year, and if your FIRE plan is ultimately to replace that with a used Yugo, the only thing that matters is how much that Yugo will cost and when.  Or vice-versa:  if you've been driving fully-depreciated junkers so that when you can retire, you can afford that dream Maserati, then you damn well better include the cost of the Maserati in your budget.

[neo von retorch]

Depreciation is entirely irrelevant to your FIRE budget.

What matters to your FIRE budget is what your future replacement cost will be and how/when to cover that cost.  If you plan to buy a $30K car every 10 years, your FIRE budget needs to include setting aside $3K/yr for that future purchase. EDITOR'S NOTE: Assuming you do not get any returned value when you sell your old car.

To go in the opposite direction of the Yugo / Maserati example, let's assume someone guys a base level Corolla every 10 years, sells the old one. In this case, depreciation is a good indicator of the future based on the past. While inflation changes the real dollars needed when buying, we'll ignore that, and say that the Corolla is always "$20K." Based on 10 years of depreciation history, the 10 year old Corolla with 120,000 miles is "always" worth about $8K. It's now quite clear that every 10 years you need $12K in your car replacement fund.

You can get that information just at time of sale (and purchase) rather than tracking depreciation over time, but I prefer tracking it because sometimes you plan one thing and end up doing another. And rather than having a $12K expense every 10 years, I see an evened out depreciation anchor pulling on my net worth. It's also a subtle indicator of owning a frugal vs. spendypants car... boy oh boy that Maserati depreciated $30K in year one, and keeps going down $10K every year after that. Do I really want to keep replacing Maserati with Maserati? (Again you'll see this that one time you go and sell/trade/buy, but I like having it show up every 3 months in my quarterly reports. Personal preference and all.) Aside from the Maserati example, you might also learn that some cars depreciate much faster or slower, and it could affect your buying decisions, because reducing depreciation will reduce your replacement cost.

So yes, assuming you calculate your replacement needs correctly, and put the right amount in a sinking fund, it'll show up as an expense and figure into your FIRE calculations, because you'll see that $1.2K annual car replacement (and/or depreciation) cost, and know that for FIRE purposes, you need $30K invested to keep buying your Corollas.

Depreciation isn't linear, so it's imperfect for that calculation, and if your sell/trade/buy transaction is really consistent, it'll be very accurate. Personally the car I bought 10 years ago is never the car I'm buying today. We did replace our CX-5 with another CX-5 but... then we decided to bring a Mastiff back into our lives, and we're starting to re-think car size when we'd prefer to have a travel crate that fits in our car, but also fits around our dog. So maybe the $28K we budget for CX-5 and the $2.2K / year (made up number) depreciation are equally bad indicators of how much we'll need for our next car. But both of them do at least keep the real world expense of car buying in front of you and accounted for (somewhat.)

[ChpBstrd]

I use informal accounting to figure a couple thousand in depreciation expenses. Yes, even old cars depreciate. Your car is worth much less after the transmission goes out or head gasket blows than it was before those events.

Overall, this question reveals flaws in our culturally normal lifestyle in the U.S. Why should a retiree need to maintain any such fast-depreciating piece of complex equipment? It's because their civilization is not walkable and has no practical public transit, right?

Why should a roof on a house last only 25 years before another five-figure amount (today's dollars) must be spent to replace the disposable asphalt/fiberglass shingles, if not because we're all unwilling to pay a little more upfront for tile, slate, or concrete shingles that last a century?

Why do we pay over ten thousand dollars to replace an HVAC every ten years, if not because our houses are too big and we do not prefer cheaper-to-replace options like mini-split heat pumps or window AC units?

I have all three types of big ticket items hanging over my head, and I'm increasingly wondering why. If we assume just $1k per year depreciation for each of my 2 cars, 1 HVAC, and 1 roof, we're talking $4k in depreciation, which necessitates saving an additional $100k to cover at a 4% WR. That's not accounting for maintenance or insurance, so maybe raise the cost and savings requirement by 50-100%. All these costs and the extra years of labor are so that things can be done one way instead of another.

[neo von retorch]

Why do we pay over ten thousand dollars to replace an HVAC every year, if not because our houses are too big and we do not prefer cheaper-to-replace options like mini-split heat pumps or window AC units?

I hope this is a typo or oversight!


Also wanted to mention, my FIRE calculations are based on twelve month trailing expenses which tends to be the most up to date and relevant calculator of how much I'll be spending going forward. You could put a sinking fund or depreciation into your expenses for this calculation. I like using KBB's estimate of my car's value for this, because it's "real" even if still only an estimate. And I don't have nearly enough real world experience of car depreciation. Our 2014 CX-5 cost us $17K (bought in 2017) and we sold it for $11K after owning it 6 years. But I don't think $1K / year is typical depreciation, or at least won't apply so well to our 2023 CX-5 (bought brand new). So I just have no real good idea what our sinking fund amount should be. But I currently have roughly one year of deprecation logs showing a decreased asset value of $2469. So for now, I'll use that in my FIRE estimates, but in ~3 years when I'm about to FIRE, that number will actually probably be a good bit lower based on going from year 4 to year 5 of car ownership. Again the lack of it being linear makes it imperfect, but I still like having it factored in this way.

[spartana]

I think of car as a consumable item. It's not that different from a tent, piece of furniture or a fridge. I will use all of those things until they become unusable. Then they will get replaced.

So, no I don't depreciate it. However, I plan to have a sinking fund for "oh shit it broke" event per year. Don't know how to quantify it though because I can see how car can break at the same time as the furnace.

This is me too. Like most things I own,  I would consider it a consumable product not a depreciating asset. One that I can sell or will be replaced eventually. I wouldn't track the depreciation on a car any more then I would anything else I owned. I also wouldn't count it as an asset. I also just have an EF "oh crap!" fund that I would use to buy a vehicle from (or any large item). I don't own a car myself but when I buy one I'll pay cash and take it from that fund. Then slowly rebuild that fund to its former level. 

[RWD]

Depreciation is not "spending."  Depreciation affects net worth, not cash flow.

Correct. I track depreciation as an accounting expense quarterly via KBB to keep a relatively accurate net worth number. It is also the only way to properly calculate ongoing vehicle ownership costs. But it isn't "spending" from a cash flow perspective.

[ChpBstrd]

Depreciation is not "spending."  Depreciation affects net worth, not cash flow.

Correct. I track depreciation as an accounting expense quarterly via KBB to keep a relatively accurate net worth number. It is also the only way to properly calculate ongoing vehicle ownership costs. But it isn't "spending" from a cash flow perspective.

I'm suspicious of this approach. Maybe you don't call it "spending" or "cash flow" but you have to call it something and account for it, or else your estimated consumption will be wrong and your long-term withdraw rate will be underestimated by tens of thousands of dollars.

Corporations have accounting rules for measuring depreciation so that investors, creditors, and governments are not deceived about the organization's financial situation. I would suggest households adopt something similar. I'm not thinking full accrual accounting, but at a minimum the completely predictable depreciation of vehicles needs to be accrued over time.

[RWD]

Depreciation is not "spending."  Depreciation affects net worth, not cash flow.

Correct. I track depreciation as an accounting expense quarterly via KBB to keep a relatively accurate net worth number. It is also the only way to properly calculate ongoing vehicle ownership costs. But it isn't "spending" from a cash flow perspective.

I'm suspicious of this approach. Maybe you don't call it "spending" or "cash flow" but you have to call it something and account for it, or else your estimated consumption will be wrong and your long-term withdraw rate will be underestimated by tens of thousands of dollars.

Corporations have accounting rules for measuring depreciation so that investors, creditors, and governments are not deceived about the organization's financial situation. I would suggest households adopt something similar. I'm not thinking full accrual accounting, but at a minimum the completely predictable depreciation of vehicles needs to be accrued over time.

I call it an expense. I use all expenses for estimating consumption/FI. Expenses include depreciation and loan interest, does not include loan principle paid. Cash flow would be the full loan payments but not depreciation. I'll only use cash flow if I can model it out for decades in cFIREsim or something. Or for short term planning (e.g. how much cash will I have on hand in X months).

[Tigerpine]

Depreciation is not "spending."  Depreciation affects net worth, not cash flow.

Correct. I track depreciation as an accounting expense quarterly via KBB to keep a relatively accurate net worth number. It is also the only way to properly calculate ongoing vehicle ownership costs. But it isn't "spending" from a cash flow perspective.

I'm suspicious of this approach. Maybe you don't call it "spending" or "cash flow" but you have to call it something and account for it, or else your estimated consumption will be wrong and your long-term withdraw rate will be underestimated by tens of thousands of dollars.

This is a good point.  From a retirement perspective, how a car figures into your net worth is of far smaller concern than what it will cost you.  One's car may be worth $5k, but that doesn't help if one needs to make repairs.  One should be more concerned about funding the next car and figuring out where that money will come from.   When purchasing the next car, money will be required to be spent, regardless of the residual value of the current car (unless you swap cars or can sell the current car for equal or more money than the price of the new car.  Not impossible, but highly unlikely under most cases.)

Therefore I think it's a cashflow problem, not a balance sheet issue.  You have to come up with the cash to pay for gas, maintenance and repairs for your current car.  That's one (or more depending on how you categorize on your budget) line item.  Likewise, one must come up with the cash for the next car somehow, independent from the previous listed costs.  That's why I have sinking fund--to make the cost visible, predictable, quantifiable, and sustained over time.

[Telecaster]

I'm suspicious of this approach. Maybe you don't call it "spending" or "cash flow" but you have to call it something and account for it, or else your estimated consumption will be wrong and your long-term withdraw rate will be underestimated by tens of thousands of dollars.

Corporations have accounting rules for measuring depreciation so that investors, creditors, and governments are not deceived about the organization's financial situation. I would suggest households adopt something similar. I'm not thinking full accrual accounting, but at a minimum the completely predictable depreciation of vehicles needs to be accrued over time.

I honestly think you are making it too hard.   At least too hard for me.   All I really care about is my liquid net worth and my future expenses.   I know a car replacement is in my future, so I need to have the necessary funds available at the time.   I can do that by either a sinking fund or simply withdrawing less (which is virtually the same thing).   

[Laura33]

Depreciation is not "spending."  Depreciation affects net worth, not cash flow.

Correct. I track depreciation as an accounting expense quarterly via KBB to keep a relatively accurate net worth number. It is also the only way to properly calculate ongoing vehicle ownership costs. But it isn't "spending" from a cash flow perspective.

I'm suspicious of this approach. Maybe you don't call it "spending" or "cash flow" but you have to call it something and account for it, or else your estimated consumption will be wrong and your long-term withdraw rate will be underestimated by tens of thousands of dollars.

Corporations have accounting rules for measuring depreciation so that investors, creditors, and governments are not deceived about the organization's financial situation. I would suggest households adopt something similar. I'm not thinking full accrual accounting, but at a minimum the completely predictable depreciation of vehicles needs to be accrued over time.

Well, we call it "net worth," and account for it in our net worth spreadsheet.  The value we attribute to each vehicle goes down when we update that spreadsheet.  But again, that spreadsheet has nothing to do with what our future transportation costs will be, and the car is not an asset I plan to liquidate to fund retirement, so I don't see how it's relevant for FIRE budget planning.

My problem with focusing on depreciation is that depreciation is backwards looking:  you are looking at changes in value of an item you have already paid for.   Budgeting, though, is inherently forward-looking.  The relevant question is what will be the cost of meeting that particular need in the future?   

Sure, what you spent in the past may give you a reasonable baseline for projecting what you might have to pay in the future.  But that's the cost of the vehicle itself and frequency of replacement -- not depreciation.  I mean, if I'm going to buy a $30K car every decade, I can take that cost and divide by 10 to figure out I need to save $3K/yr to be ready for the next replacement.  If I'm focusing on depreciation, though, well, that $30K new car might depreciate by $8K the minute I drive it off the lot, and $100 by year 9.  So does that mean I should be saving $8K for my next car in the first year, and then less each following year?  What added value does that provide over $30K divided by 10?  Why complicate your life that way?

The fact is, almost everything we buy has some value, almost all of those things have some version of end date where they must be replaced, and almost all of the values of those things depreciate between the time you buy them and the time they die/you use them.  The only difference between cars and groceries is that cars cost more up front and have a longer replacement interval.  Again:  so what?  How does their existing value or current depreciation rate affect how much you need to save for the next shopping trip or next vehicle? 

What matters in planning is how frequently you will need to replace something + how much it will cost to replace at the time you replace it.  Everything you already have is just a sunk cost.