As a Certified Financial Planner® professional, I’ve been talking with clients about cost depreciation for years. The concept can be a little difficult to grasp, but it’s perhaps most clear when discussing automobiles, new cars in particular. Surely you’ve heard that when you drive your new car off the lot, it’s already depreciated—and that’s true. You take the biggest hit in the first year you own a car, during which it may lose up to one-quarter of its value.
So, you must be thinking, what does this have to do with Uber? This company has a great business model, for unlike cab companies, it doesn’t have to purchase vehicles and it has no driver payroll. Those who drive Uber cars are responsible for the capital cost (the car), insurance, gas and maintenance. They are seemingly attracted by Uber’s recruitment ads, which tout the opportunity to make a lot of money—but is that really possible?
I lease a Ford Expedition, and I’m well aware of the cost per mile I incur to drive this vehicle. Averaging it over the three-year lease, including gas, maintenance, insurance and my monthly lease payment, my out-of-pocket expenses are about 80 cents a mile (higher in the first year—perhaps over $1 a mile—and decreasing over time).
Back to Uber. The last three times I’ve used the service, I’ve been picked up in new or nearly new cars—not economy cars, either; but cars like a Lexus SUV. That got me thinking: how can these people think they’re making money based on the very real effect of cost depreciation?
Let’s say the Uber driver with a Lexus SUV bought it for $60,000 less than a year ago. It’s depreciating by more than $12,000 during this first year of ownership, and the cost to operate it is going to be at least $1 per mile.
My trip was 30 miles, so my driver’s cost—factoring in the car payment, insurance, maintenance and gas—was about $35. I paid Uber $46, and the driver probably got 40% of that, or $27. Thus, the driver lost $8 on this transaction, because he’s failed to take cost depreciation into account. If he drove a well maintained used car, it might be a different story, but that’s not his reality.
Do you wonder how cost depreciation might be affecting your financial goals? It’s worth having a discussion about it with your financial planner.
Author: Christopher Van Slyke, CFP®
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