Thursday, April 12, 2007

BMW and Car Insurance

I'm two days away from being able to drive my 3 Series Coupe! I'm picking it up on Saturday. I finalized my insurance with Geico, which took a little time, but I got an OK rate of $750 for 6 months.

Recently I had been talking about depreciation schedules for cars as an aspect of networth. In previous posts, I talked about how a car's value declines as it gets older, and so the value is never the same as you paid.

However, before I describe the depreciation schedule, I first wandered about what value to start the depreciation at. Do I start at the price I paid for it, the MSRP, the Kelly Blue Book, or what?

Many online calculators start with the purchase price as the base value. Then it subtracts a first-year deprecation value to makeup for the "Drive off the lot" discount, followed by regular annual depreciation amounts.

I don't like this method for two reasons. One, it unfairly values your car higher/lower depending on negotiations. More likely than not, you may have paid more than you can actually get for the car. Second, it does not account for other aspects of the car, such as mileage, options, and etc.

I decided instead to use the Kelly Blue Book value as the starting point, and I assume the value includes the "driven off the lot" discount. KBB gives a value of $40,700 for the car, including all options.

Given that the typical depreciation is 11% a year, I'll estimate depreciation at 12% a year, or 1% a month. In essence, I'm saying after 100 months, the car will be worthless.

How will this affect my networth? First off, the value of the car will be added to my assets, while the debt will show up on my liabilities. Next, every month, the car value will be decreased by $407.

So as I pay off the debt, my networth will get worse, which is an accurate reflection that a car is a bad investment, but a necessary one.

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