COST DEPRECIATION, CARS, AND UBER
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).
CALCULATING THE REAL COST OF UBER
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®
Other articles filed under Austin CFP Team Posts
July 13, 2018 - Are there many important things to be done when a parent is declining in health that you don’t read about too often? Most definitely — and I’d like to share some lessons learned that might help those of you who...
May 23, 2018 - Investing seems like it should be straightforward: buy when stock is low, sell when its high. Reap the profit. Makes sense especially when you consider the big gains demonstrated by the stock market over the past couple of years. Big...
April 17, 2018 - People want a sense of security — emotionally, physically and financially. The truth of life is that we try to manage a tightrope walk between chaos and order. If somehow we can incrementally achieve some order in a life that...
February 22, 2018 - [embed]https://www.youtube.com/watch?v=f6BWDxM2edc[/embed] WorthPointe works on your schedule. Austin Financial Advisor Morgan Smith explains how he uses his tech tools to meets clients where they’re at, even if they’re laying on a beach in Bali.
February 13, 2018 - As a financial planner, I’ve certainly been getting my share of questions about the recently passed tax reform. In this article, I’ll address some of the most common concerns I’m hearing from clients, but how the changes in the tax...
- What are Options & How Risky Are They?
- Is It Smart to Invest in Cryptocurrency?