Financial Samurai

I would say this is a little extreme and takes away lifestyle. If someone makes $100k per year they can easily afford a car better than $10k. I’m not advocating buying a $50k car but limiting to 10% is taking lifestyle off the table. It also could force them into higher maintenance costs than a $20k car and end up costing more each year.

Spending about 10% PER YEAR on auto costs may be more reasonable. That includes payment, maintenance, registration, gas etc.

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Financial Samurai Reply:
October 7th, 2012 at 8:49 am

My lifestyle doesn’t change if I sit in a $5,000 car to go on camping trips vs sitting in a $20,000 car to go to the same place. Does yours really?

Spending $20k on a car while making $50k is really on the borderline for dangerous spending. It has to come down to one’s assets if such a vehicle is desired.

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gold666 Reply:
October 7th, 2012 at 11:46 am

Spending 10% per year on auto costs??? Are you insane? Someone with a $100K income who wants to work until age 65 (and still take a huge ‘lifestyle’ hit upon retirement) maybe could waste that much money on a car and get away with it, but they certainly could not be regarded as a person who is financially responsible! That’d be 10K per year! So probably at least $500 per month in payments?? And buy a new one as soon as the old one is paid off?

I am horrified.

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Hurley Reply:
October 7th, 2012 at 6:33 pm

gas, tolls, maintenance, insurance and registration alone costs us $800/month for two cars. So, without any car payment, we are spending almost $10k/year on auto. And that’s not in California and we only have 10 miles commutes and drive less than 12k miles/year on each car.

For a family of 4, that has kids and 2 cars, spending 10% of your gross income isn’t a stretch of the imagination by any means.

Plus, we give 10% and put away over 10% so I would consider us very financially responsible. However, I guess that’s only about 3% of our annual income, but 10% or 10k/year isn’t a stretch on expenses for a family of four to spend on auto costs if they make $100k/year. They just have to choose to spend less on eating out, entertainment, etc.

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I definitely like the idea of this post about people spending way to much on vehicles, but I think the 1/10th rule may be a little tough. I bought my first car in high school for $2,500 and it was a steal. The KBB was a little over $8,000 when I bought it and it had about 130k miles on it. My monthly payment was $80 a month and I was able to pay it off in 2 years. Now I can assure you in high school I wasn’t even close to making 25k a year, I was working part time at a Mcdonalds as well as being involved in sports, church a social life, yada yada. I also paid my own insurance and gas. Now I will be the first to admit I got a killer deal n my vehicle, but that was really because a friend of my parents sold that car to me.

Now don’t get me wrong, I do think people are spending WAY too much on vehicles, especially for the wrong reasons. However, if you live somewhere or are in a situation where you need a reliable vehicle I think it may be worth it to spend a little bit of extra cash on a good, reliable vehicle. I don’t think settling for a cheaper car is always the best choice because to be honest, older cars with higher mileage tend to have more problems and get worse MPGs. Paying around 8 or 9k for a car really can be worth it, even if you are not making 80 or 90k a year.

Just my personal opinion though, definitely loved this article!

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Ryan Reply:
October 6th, 2012 at 5:04 pm

I think buying a car in high school is a very different issue, since at that point your other expenses are frequently a much smaller portion of your income, and a lot of other financial issues/advice don’t really apply.

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Katie Reply:
January 20th, 2013 at 8:28 am

At the same time, most cars I see tend to be worth an extra 1-2k because as long as you shop smart you are buying reliability. It is very hard to find a reliable car for under 2-3k, and I’ve seen my boyfriend buy 1500ish cars all the time. They have yet to be a good deal.

If anything, save money while you still have a good car so that you can buy the car outright for what you would otherwise have to pay in interest. You pay more, but get a much better deal. After all, it doesn’t take a genius to figure out that you might one day have to replace your car.

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I would also say it is a bit extreme but it does offer some good thinking. I do think people spend way too much on cars but you need to really assess how you plan to use and keep the car. I wouldn’t want to buy a 10% car just to have to buy another 10% car in a couple years when I could buy maybe a 25% car and make it last 3 to 4 times as long AND enjoy it. Just a personal choice. I have cut back in other areas that others spend a lot more in.

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I violated your rule when I bought my car in 2008! I was in your lowest income bracket but bought a car similar to the ones you listed in your second-to-bottom bracket for less than 20% of my income. Honestly it wasn’t a burden at all and I paid off the small loan I took out very quickly. (Though I watched some of my peers take out car loans on the order of 100% of their income!) I didn’t have to drive far on a daily basis but in my city biking and public transport weren’t realistic options at the time. So I think you can’t draw such a hard line at those lower income levels but the 10% rule is a good thought to consider. I definitely plan to keep my car until my income shoots up and I have a need to replace it.

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Financial Samurai Reply:
October 6th, 2012 at 12:08 pm

You are forgiven since I didn’t come out with the rule until 1 year after you bought your car. Now if you read about the rule, and then went out and bought a car… well, maybe not so much. But spending 20% of your income on a car is not bad either as I note in my chart.

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The 1/10 rule is extreme but necessary! I tell people their car should be no more than 20% of their annual income. And I advise them to buy a car with cash. Cash is king. The moment you drive a car off the lot it decreases in value dramatically. Why make payments to something that decreases in value?

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My car wasn’t 10% of my income when I bought it, but it’s already depreciated (and my income has increased) to the point where it is NOW 10% of my income, so I guess in Sam’s law, I’m still doing okay!

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Financial Samurai Reply:
October 7th, 2012 at 8:50 am

Good job! And tell me, doesn’t it feel great that your car is worth less than 10% of your gross income now? Whoo hoo!

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Your rule is ok for someone who makes $80,000 plus. They can get a reliable-ish car for $8000 and up, and afford to fix and maintain it, and deal with breakdowns (missing work, rentals, etc)

For someone who makes $40,000 / year, the cars at that price range are 11 years old, with mileage from 150,000 absolute minimum to over 200,000. ( I got this from a quick look on Craigslist for Orange County CA and just looked at practical american and Japanese sedans, no old BMWs). These are cars that are mostly used up. They’ll have serious mechanical problems coming off of the lot if not in the first year. This is not reliable transportation and poor advice.

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Financial Samurai Reply:
October 6th, 2012 at 2:36 pm

I’ve had my 2000 car for the past 7 years and it has been very reliable with no beyond normal maintenance problems. It has 118k miles and is worth about $3,500.

Let me guess, you spent way more than 10%? What do you own and make?

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James Brian Reply:
October 6th, 2012 at 8:29 pm

IN 2005, on about $110,000 gross that year, I spent $22,500 on a 2 year old Land Rover Discovery with 22,000 miles on it. I still have it, it’s at 103,000 miles, this is the first year I’ve fixed anything other than brakes & tires, I spent about $1500 for smog sensors to pass CA smog. I’ll have it as my primary vehicle for another year or 2, then spend $30,000 on something I’ll drive for 8 more years (at which point I will be 60 years old)

So I spent 20% 7 years ago for a vehicle to drive for 8 years. It has been 100% reliable.

With all of that said, I would not drive, or recommend a $4000 vehicle for anyone, that’s asking to spend another $4000 in the next 2 or 3 years on serious repairs. A vehicle like that will be extremely high mileage and coming into serious repair requirements.

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Financial Samurai Reply:
October 7th, 2012 at 8:45 am

20% on gross isn’t bad at all as you can see from the commentary on my chart.

If you are age 52, I’m going to assume you have much more wealth/assets than the typical 20-40 year old who is wasting their money during the asset accumulation phase. As such, is be much more lax on the rules for sure!

Moose has been worth $4,000 or less for the past three years and has been great. Cars are well built nowadays!

My current used hatchback was 20% of my income when I bought it in 2010. But it’s got only 40K miles on it still and works almost like new. But I like this idea of the 10% rule. Wish I would’ve known about it earlier. When I buy my next car it will probably be 5+ years from now, and by then 10% of my income can probably get me something way better, like a 2 years old Accord or something. :)

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I absolutely agree with you, Sam! I don’t like making car payments at all. I also try to spend only 5% of my income on a car.

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I did this without even thinking, just spent $5900 on a 2004 Jeep Liberty with 90,000 miles. I did test drive several new cars and almost bought a new Mazda 3 for almost $25k, but in the end I paid cash from a private seller on Craigslist for the Jeep and I love it. Once I started looking at what I could buy for between $5000 and $7000, I knew I would rather take the cash I was going to use for a down payment and buy a used car.

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Financial Samurai Reply:
October 7th, 2012 at 8:53 am

Nice work Noah! Maybe subconsciously you knew about this rule and deployed it!

$5,000-$7,000 is a great sweet spot where one can find a ton of good, reliable vehicles.

Households making $50,000-$70,000 is also quite common as well.

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I completely agree with you. I can’t believe how many friends I know who have put themselves in a extreme debt because of the vehicle they own. I can honestly say I haven’t owned a vehicle in my adult years because of my nomadic lifestyle, but if I did I wouldn’t want to spend much money on it.

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Financial Samurai Reply:
October 7th, 2012 at 5:36 pm

Ahh, to be nomadic and free with minimal possessions to way you down! I love it.

Good to hear from you. I enjoy following travel blogs!

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This is really really good advice.

Interestingly, I was only just speaking to my neighbor who just came back from Afghanistan (he works for the defense force) and he was telling me he made about $50,000 from his time over there.
The first thing he did when he came back – Bought a brand new pickup/ute, which he paid $70,000 for (half on finance).

Even more disturbing is that he is quitting the defense force to work in a trade, but he can’t use his new pickup/ute, because he doesn’t want to scratch it up. So he is buying a “work pickup/ute”. God knows how much money he will need for that?

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Financial Samurai Reply:
October 7th, 2012 at 8:54 am

Wow! What kinda pickup truck costs $70,000 anyway?

Maybe he got some serious kickbacks nobody knows about?!

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No Name Guy Reply:
October 8th, 2012 at 12:26 pm

F-350 turbo diesel dualie 1 ton 4×4 jacked to the sky….or the Dodge or GM equivalent.

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Glen @ Monster Piggy Bank Reply:
October 9th, 2012 at 11:32 pm

I’m not sure what type of car it is, other than it’s a pickup.
It does however look and sounds like it goes pretty fast.

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LT Reply:
February 20th, 2013 at 5:23 pm

I grew up in a military town and saw this all the time– median incomes, brand new 50k+ cars every two years. Brand new cookie-cutter houses. Yet most families I knew had little to no money saved for their kids to go to college/would never consider private school.

Whereas my parents made 150k a year but always drove used Toyota’s and owned the same old, but nice home my entire life. But they also had enough money saved to send three kids to college and help a lot with graduate school.

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My car is probably now worth about 1-2% of my annual salary… But I don’t care. It’s pretty comfortable, doesn’t need any major repairs and will probably last until at least 200k miles. Am I doing something wrong? :)

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Financial Samurai Reply:
October 7th, 2012 at 8:56 am

Nope! You are a financial hero in the sweet spot who needs to help advocate the 1/10th rule to prevent financial detonation of our youth!

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My first car probably cost about 1% of my income, a 10-year old Nissan with 70k on the clock. Never broke down, started every time, and got me from A to B. Now that my income has drastically increased, I’m spending far less than 1% on a car (leasing drops that figure significantly). My friends have described it as a ‘fancy’ car – but you wouldn’t put it in a sports car category.

Every once in a while I think about getting something with more horsepower and less seats, but then I think about how much it costs me every time I’m not driving it, the paranoia of parking it anywhere, and the unwanted attention it attracts. Given the choice of spending more on travel costs, I’ll choose first class on the rare occasions that I fly instead of an expensive car.

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Financial Samurai Reply:
October 7th, 2012 at 5:34 pm

Excellent! 1% is a super low percentage of income on a car. What are you rolling in?

I can’t stomach paying 3-5x for first/business class unless it’s a business expense. Maybe one day though when I’m closer to death and mega millions!

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Jerry Reply:
October 7th, 2012 at 8:21 pm

Driving a leased Audi A4, which might seem to some like I’m throwing money away but if my circumstances change I can walk away – just hand the keys back and buy something second-hand with good mileage.

Business or first class might seem like an extravagance, but I only travel about twice a year and generally live a low-key lifestyle. I compare my stress levels when I fly economy vs business and there’s no contest (I hate airports with a passion). No waiting for security, no queuing to get on or off the plane, getting your bags almost immediately, the ability to use the premium airport lounges, and the comfort of a bigger seat and meals. I’m willing to pay for that. (If I flew every week, I might not pick first if paying for myself… or I might find another job).

Love the blog, keep writing!

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I don’t think simple formulas can be applied to things like cars, housing or individual categories without looking at a person’s financial situation holistically. And at $4,200, you’re going to end up with plenty of maintenance costs and no warranty to boot, so it may not be a huge savings over time. But anyway, if someone makes $50,000 but has a pretty low spend lifestyle, rents, has a steady job, etc., why not spend a bit more than $5,000 on the car, especially if they finance at 0.9%? How’s that different than if they were spending a few hundred bucks a month on something else? Under this formula, to buy a typical new car for the $24,000 cited, people should have an annual income of $240,000?

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Financial Samurai Reply:
October 7th, 2012 at 5:30 pm

Bingo! A $24,000 car is an absolute luxury, so $240,000 is a good income threshold for such luxury.

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Bridget Reply:
October 8th, 2012 at 9:06 am

you are way too hardcore. That’s crazy.

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jered Reply:
October 10th, 2012 at 9:40 am

and this only apply to America.
In east asian import tax is almost over 100% so people there usually pay over 30K for a used, okey condtioned,honda or toyota.

must make at least 5M to start considering a mercedes.
extreme. i know.

Rules or formulas work most of the time! Since I just recently bought a new car, I broke your rule. My circumstances are different than most with no debt except for a small mortgage and some very large IRA/403B/Roth IRA/Brokerage accounts . I tend to keep my cars forever and keep a low profile lifestyle. I agree 10% makes sense for many, but not all.

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Financial Samurai Reply:
October 7th, 2012 at 5:32 pm

Glad you are living it up Larry! With your situation, I definitely think it’s time for you to splurge some more. What did you buy?

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krantcents Reply:
October 8th, 2012 at 6:53 am

I bought a Toyota Prius C. The cost (dealer invoice) was about the same price I paid 17 years earlier for my Honda Accord Coupe.

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I think the 1/10 rule is a little extreme, but we’re not too far from it now. Our cars together are valued at around $20K, and we’re on track to gross around $175K for the year, I think.

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Car is one of the major expenses of any middle class family ( of course after their house). I have seen many people (my friends too ) that they spend a lot of money on buying a car and then they need to spend money on its maintenance and then blame others for not reaching the end of the month. I like new cars, but I always used car.

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I think people often spend more on a car than they can afford. I’m fortunate that I live in an area with good public transportation so I save a ton of money by not having a car! Even if I ever move to the suburbs I’m not going to buy an expensive car. As long as it’s safe and runs without breaking down, I’m happy to buy a used car without expensive bells and whistles.

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Using the 10% rule, I’d say anyone making under $50k needs to stick with a bicycle. ;) I think sticking with 1/3 of your income is more reasonable. It’s great to pay for a car with cash, but if that can’t happen, pay it off within 3 years is a reasonable goal. OR stick with bikes and public transport.

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Financial Samurai Reply:
October 8th, 2012 at 7:59 am

That’s what I’m saying! There’s nothing wrong with just having a bike or taking the bus!

You don’t need to buy a beautiful, reliable, sub $5,000 car like I have. Have nothing and like it!

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Katie Reply:
January 20th, 2013 at 8:34 am

You have to admit reliable public transportation is not common in America however. look at the Midwest!

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I own a car worth roughly 10% of my income. It’s certainly not a nice car, but it gets from A to B just fine.

I fully intend to break your rule when I need a new car. If you only want a base model car (like I do), and intend to drive it for the life of it, it makes absolutely no sense to buy used. The only cars that are showing some kind of depreciation are those that are loaded with options. Otherwise, there exists a huge disparity in prices between wear and tear and the market value of any given car.

A brand new Toyota Corolla is $17k. A 2004 with 100k miles has a KBB value of $10,000, which is absolutely ridiculous, in my view. Sorry, but depreciation expense on a car is way more than 7 cents per mile.

In years gone by it made sense to go cheap. Now, with everyone thinking that used cars are such spectacular deals, the deals are gone.

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Financial Samurai Reply:
October 8th, 2012 at 7:57 am

I understand a car is very alluring for guys who just graduate from school. I couldn’t help myself either.

I would use this rule to try and motivate you to earn more first. Why not shoot for $170,000 before buying the 17k Corolla? As soon as you try killing yourself and realize how hard it is to make bigger money, you might very well not want to waste it again!

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JT Reply:
October 8th, 2012 at 12:05 pm

Hard and fast rules are great when you don’t want to consider any other variables. If you’re in that camp, a 10% rule works great, I agree.

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Katie Reply:
January 20th, 2013 at 8:54 am

I agree. I have a Neon (paid for upfront) that we got for 10k. I have added 93k to the car over 7 years and not had to do a single repair (which would be a minimum of $200 around here, as I don’t have a good mechanic contact and am only moderately car-savvy). If I was to buy this exact car after the 93k miles, I would still pay approximately 7k for the car.

$10,000-$7,000 = $3000
$3000/93,000mi = $0.03/mi

Considering that the “cost” of milage on a car ranges from $0.30-$0.60 depending on who you ask, the depreciation value would not have made this car a better deal. I’m college age, and have been around several people who follow the 10% rule. All of them have spent around what I do over this time because they have to replace their car several times over this period. On top of that, I have had to give several of them rides when their savings car broke down. I have NEVER had a problem with my car, and have another 7 years in it before it matches the cost of a 10% car here. Over this 14 years, I have plenty of time to save for another car that is reliable. I also save myself the worry that my car will break down at an inopportune time, as well as time searching for a new car.

How does the reliability of a car factor into the 10% rule? We have icy winters and jobs that have strict penalties for tardiness/absences (approved or not), so having a car break down on me could reduce my income that year by $10k. As someone who only makes $20-30k/year, that’s a pretty hefty incentive to pay for reliability. The 10% rule seems more reasonable if you mean 10% per year (including repairs and insurance).

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I do agree that people spend WAY too much money on a vehicle & buy something out of their price range.

However, I’m inclined to disagree with the 10% rule – mostly because I think people should try to save their money a little bit at a time and then just pay cash. I paid more than 10% of my yearly income on my car (paid around $9000 & make around $45k). However, I drove my last car well past 200k miles and saved money for a newer car. For me, no car payments is the smarter financial decision. Unless it was an emergency (car exploded or something), I will never have a car payment.

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Financial Samurai Reply:
October 8th, 2012 at 8:29 am

Sure, sounds good. My default assumption of this post is that if one can’t pay cash and have money left over to live, then one can’t afford the car. Maybe the “left over” money is 6 months, or longer, depends on each.

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Our cars were purchased for $3,500 combined, and our combined income before my wife quit was about $70k, so we’re using the 1/20th rule :)

And people who say you can’t find a reliable car for under $5k are plain ignorant.

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Financial Samurai Reply:
October 8th, 2012 at 9:12 am

Uh oh, you telling Bridget down below she’s being ignorant?

1/20th rule doesn’t have as nice a ring to it than the 1/10th rule!

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Jacob @ iheartbudgets Reply:
October 8th, 2012 at 11:18 am

I am saying if you buy a car out of fear, you will spend more for “reliability”, when you are actually just ignorant of how cars work work and what cars are reliable.

I have a rul not to buy anything NEWER than 5 years, and that helps me determine reliability. Also, look at what 90′s cars are still on the road and make a mental note. Those cars outlast the others, and for good reason. Then, go about 5 years newer and look for a similar make/model with low miles.

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Financial Samurai Reply:
October 8th, 2012 at 12:20 pm

Cool. I’m just kidding. I like that rule of not buying anything newer than 5 years! You should write a post about that!

Anna Reply:
October 8th, 2012 at 11:48 am

I’m impressed. Where do you find these cars for so cheap? My husband bought a 4 year old Toyota for quite a bit more than what you paid and we’ve already had $1000s of dollars in repairs. At this point we would have been better off buying new. (For 40% of his income.)

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Financial Samurai Reply:
October 8th, 2012 at 12:17 pm

Anna, go to Craigslist. You can sort by MAX PRICE. That is the best way that’s free and easy imo.

Everyone should inspect the car and take it to a trust mechanic before you buy. Bring a friend who knows cars, kick the tires, negotiate, go for a test drive, etc. Cars are so well made nowadays, it makes the 1980′s seem like a joke!

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Jacob @ iheartbudgets Reply:
October 9th, 2012 at 8:24 am

Yup, Craigslist. And what Sam said; Get a mechanic to inspect it, or a friend who knows cars to chekc it out. Bad purchases don’t make ALL used cars bad, just that one. I am lucky enough to have a mechanic brother who can help me with this, but paying a professional $80-$100 to check out the car before purchase will definitely help weed out the issues.

Also, you need to to research on the model you are buying, i.e. search “common issues with ‘you model car’ and see what you find. If you buy a newer car, it may not be fully proven on the road just yet, so you don’t know the true reliability. For me, mid-90′s Honda Civic and Accord have lasted us 5 years already, and have many more years to go. Also, repairs/maintenance should be done at home, if possible. If you aren’t willing to put in the labor, then you will pay the big bucks, no way around that.

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Anna Reply:
October 9th, 2012 at 1:52 pm

Thank you both for your advice. I’ll keep looking.

Read “used Honda Fit” for my income and am crying now.

Thanks.

I don’t own a car and no plans to buy one though so I guess I don’t REALLY care.

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Financial Samurai Reply:
October 8th, 2012 at 9:11 am

Don’t cry. Used Honda Fits are great cars!

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Bridget Reply:
October 8th, 2012 at 9:12 am

NO! My friend has one and it’s such a POS. I don’t think I could do it =(

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A Blinkin Reply:
October 9th, 2012 at 5:52 pm

But you’re still her friend, right? I’m sure people would still like you if you were driving a Honda Fit.

Thank you for posting the hard truth! If you emplace “set in stone” rules and don’t take no for an answer 10 times out of 10 you will find a way. I truly believe that. I do not find this 1/10th rule absurd at all. Americans spend far too much on vehicles in the name of “status.”

I personally made a six figure income and I bought my 2003 Honda Civic 2 years ago at less than a tenth of my salary and it runs just fine.

If someone is not willing to purchase a vehicle on 1/10th of their income then they should save and pay for the car they want in cash.

If people were required to purchase their vehicles using cash I guarantee BMWs, Mercedes, and Range Rovers would almost be extinct on our roads!

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Financial Samurai Reply:
October 8th, 2012 at 11:06 am

Cheers mate. It always seems like the older, financially savvier, wealthier readers agree with my financial advice. I don’t know what’s up with the younger generation nowadays, or folks who say they want to achieve financial independence, or who say they want to build assets, or say they want to save money.

If you want it, do it. If you don’t want it, don’t say it b/c you’re just fooling yourself folks!

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Katie Reply:
January 20th, 2013 at 9:02 am

Many of the younger generation has had to try tips like this out of necessity, and they’ve failed. Out of my friends (a group turning 25-30) we’ve bought a total of around 12 cars. Out of these cars, most are in the 1-3k range, with a few at 5k and mine at 10k (partially a gift, partially cash). Out of them all, 4-5k cars seem to be the sweet spot, which is over the 10% rule for all of us. When we follow this rule, we get stuck with clunkers or expected to find a bus in a rural area where the only “public transportation” is a greyhound to another state.

Not everyone lives in a populated area, which seems to be the going assumption.

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Katie Reply:
January 20th, 2013 at 9:04 am

Also, keep in mind that wealthier readers can buy cars at or above the 4-5k sweet spot. I think you need to realize that there is a minimum standard that needs to be included in the equation (rather like a baseline).

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You didn’t talk at all about frequency of car buying, which could be just as important as price. If you make 50k and buy a 5k car every year, that would be worse than buying a 20k car and driving it for 10-15 years.

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Winston Reply:
October 8th, 2012 at 10:08 pm

If you have to replace $5k cars every year, you’re making bad purchases and/or taking bad advice from mechanics. An intelligently-purchased $5k car should last at least 5 years with just routine maintenance, and that’s if you drive the wheels off of it.

However, with the right skill set you can make a car last indefinitely, and it will be cheaper in the long run than purchasing another car — new or used. How?

Learn how to fix your own car.

Q: What’s a bigger rip-off than financing a car?

A: Taking one to a mechanic. Just look the hourly rate the garage charges, and then figure you’re getting charged at least double the cost on the parts — and that’s for a regular, “honest” garage. Not some shady joint!

You can learn how to perform pretty much any repair on a car using the internet. It has taken me about 12 years of studying on my own time (I’m an engineer by day), but now I can pretty confidently complete any repair my car would need besides a transmission rebuild or machine work.

Just last week, my father-in-law was quoted $900 in parts and labor (about half and half) to repair his 2004 Ford Focus with 130,000 miles at a local, trusted garage owned by a friend from his Rotary Club. After learning what the quoted repair needs were and scouting around under the hood myself to verify, I ordered the appropriate parts for $90 off of the internet. It should take me about two hours to perform the repairs once the parts arrive.

Remember folks, ignorance is expensive. To get the most value out of your used car you’ll need to get grease under your fingernails!

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Katie Reply:
January 20th, 2013 at 9:06 am

What do you do about lifting the engine block out? Honestly curious- my roomate’s car needs a timing chain replaced and we don’t know how to get the engine out without a mechanic because we don’t have the pulley.

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scbtl Reply:
April 24th, 2013 at 11:24 pm

The easiest way to get the engine block out will be to rent an engine hoist. Look around in your area for tool/equipment companies. They will have what you need, might cost you $100 a day, haven’t checked the rates. If you have the space and intend to repeat this on multiple cars, might make sense in the long run to purchase your own but probably not worth it.

How do you feel about leases, Sam?

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Financial Samurai Reply:
October 8th, 2012 at 12:20 pm

Not a fan. But, if it’s a business expense, I’m much more of a fan.

I’ve bought and sold ALL my cars and have never leased.

Lease is a guarantee to lose money, just like renting. At least with owning, you have a chance to break even or make money.

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Looks like I’ve got a long way to go before I’m allowed to have my BMW :(

My current car is right where it should be, but when i bought it it was worth 70% of my annual wage. OUCH. Bought it on payments though so the bi-weekly $74 it cost me was very managable, even at that wage. It took me two years to prepay and pay it off in full, been enjoying 4 years of no carpayments. :)

I’m not sure if I agree with sticking to the 10% rule… yes it mostly makes sense but, take me for example.. my car is worth about 2,000 and good for another 3-4 years. But, what if, in 4 years I’ve saved up 15k to drop on a 1-2 year old car (I’ll never buy actually NEW new) even though I still make $40k a year (hopefully by then I’ll be atleast double that…) I don’t think that’s neccesarily bad. It depends on your whole financial situation, income/cost of car are not the only two factors that play.

I am glad I bought my car when it was one year old, I’ve had almost zero maintenance.. had I bought my car at her current age… i’d be in for a ride. (it will be scrapmetal in another few years) I will probably repeat what I did with my current car in the future: Buy a newer car, a few years old, probably much more than 10% of my annual income but paid for in full, with cash.

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Financial Samurai Reply:
October 8th, 2012 at 9:33 pm

Yep, gotta wait for that BMW! They’re nice, but so are nice Honda Civics! :)

So your car is currently 6 years old? What type is it? I’m pretty sure it will last way more than 4 more years if you’ve taken normal care of it. I’ve had my 12 year old car for 7 years, and plan to have it for at least another 5 years!

If I made $40K and managed to save up 15K cash, there is NO WAY I am spending all my hard earned savings on a car. Absolutely no way. I’m investing it.

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My rule on a car: Set aside a fund for it. Even if I want to get a car right away, I need to save so I can spend as much cash on it and get it paid off quickly. Otherwise, even if you are able to use the 10% rule, you could still wind up wanting more.

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Well, I broke your rule back in 2006 when I was making almost nothing and getting a college degree. I was also 21, so cut me some slack :) I bought a new 2007 Scion that was paid off in 2011. Now that I’m slightly older and wiser I won’t ever make the mistake of ever buying a new car again. When you’re actually making money it’s amazing what decisions you end up making – I still regret taking on the huge car loan that didn’t allow me to save much at all during the start of my career. I’m further along in my career and making in the mid 70′s so I can safely say now that my 5 year old car is roughly 10% of my salary! Live and learn, you know.. it’s tough saving money when you’re young and everyone around you is “living it up”. I want to travel to Europe or across the USA, but I’m conceding that these things will have to wait many, many years (sadly). Not only is it hard to come up with the money but also come up with the time away from a start-up company that is very demanding! Thanks for the article, I look up to you!

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Financial Samurai Reply:
October 9th, 2012 at 7:49 pm

Nice job Melissa! You can have lotsa slack because I didn’t publicly announce the 1/10th rule until 2009!

I wish I could buy a new Scion. Will just have to keep on loving Moose! Really funny how after we start working for money we cherish money so much more.

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Katie Reply:
January 20th, 2013 at 9:09 am

Why does when you announce the rule matter? If it’s a good general rule, when it’s discovered shouldn’t matter. Was there a car boom in 2009 or something?

It seems like saying “I didn’t say spend less than you earn until 2009, so it wasn’t good advice until then”, which is why I’m asking.

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I absolutely love your car buying rule. I had NEVER heard this rule before you so I must give you all the credit.

I love it so much that I’ve told everyone I know about it (including an article on my site). The conversations have been hilarious. Most people respond with “What! That’s insane!” and I get to respond with “Oh, I thought you wanted to be wealthy. Nevermind.”

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Financial Samurai Reply:
October 9th, 2012 at 7:46 pm

Haha, awesome. To be a little bit wealthier is a choice indeed! I’ll have to check out your post.

But being wealthy or financially independent is overrated. More fun to rev the Ferrari in traffic down the main strip!

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i don’t know much about your suggestion for ppl make less than 500k but i am totally with you on the 1M above part.
Mercedes, especiall G wagon,are known for unreliable.Lambo and ferrari under normal circumstance are not supposed to be driven daily fo communte and after every 10-15k miles, you need ship them back to italy for major maintence.
i would suggest anyone with a gross annual income over 1M consider the bentley gt, porsche and maser. much less problem and much more reliable

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Although I like this post and will try to stay within the 10% rule but I do think that you get what you buy. I bought my first car for $1000 and ended up spending about $4000 in repairs and even then it only lasted me a year and a half. I’d rather have spent $5000 in the first place and then factored in a couple grand for yearly registration, licence, insurance, gas, and maintenance to still have that car today.

I do agree with the part about keeping your car until it’s worth 10% of your income.

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Financial Samurai Reply:
October 12th, 2012 at 9:38 am

That’s why I recommend people who make $25,000 or less not buy a car and just use public transportation. Buying a $2,500 car or cheaper is grounds for some problems. So essentially, if you always follow my 1/10th rule, all will be better! :)

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Staz @ EssentialFinances Reply:
October 13th, 2012 at 1:58 pm

It sure gets me thinking more closely about transportation, we all want to look good driving around but I’d rather be financially free first. Any similar rules on house buying?

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Financial Samurai Reply:
December 16th, 2012 at 11:05 am

30/30/3 rule for house buying!

Katie Reply:
January 20th, 2013 at 9:11 am

What do you do when there is no public transportation? Carpooling only gets you far when others have a schedule that works. Same with sharing cars.

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I’ve been driving a 10 year old civic with 145,000 miles on it. I now need to travel for my new job and don’t want to get stuck on the side of the road by myself day or night. So I’m looking at 3 New cars in the 21-23K range. While this breaks your rule, I intend on keeping this new car for 10 years well into the 150K miles again. Income is at 70K with $700 car allowance. I’m going to pay cash for the new car. I opted for a new car because the gap between new and used is $500-$1000. I’m interested in your opinion.

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Financial Samurai Reply:
October 12th, 2012 at 9:36 am

If you can keep it for 10 years and not waver, then I guess it’s OK. A 10 year old civic is a 2002, and those babies go until 200,000+++ with regular maintenance.

Depends on how much cash you have too. I would say if you have more than $75,000 in cash, then paying $21-23K cash is doable, but you will still feel a sting……..

So, my conclusion is… buy a $7,000 car or less. Follow my rule!

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Winston Reply:
October 15th, 2012 at 7:38 am

An ’02 Civic is just barely broken in at 145,000 miles. As the Samurai said, those cars will go (cheaply) into the 200,000+ mile range. Take it to a mechanic, have him go over it, and all should be good.

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What’s the rule on having kids? :P

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Financial Samurai Reply:
October 13th, 2012 at 10:19 pm

Make sure you want them and can afford them!

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I leased a Subaru this past March for $300 per month and I make $60,000+ per year. The car itself is $25,000. I sold my honda civic, 3rd party, for $10,000 (dealer was going to give me $7,000) and invested all of it. My next car, in three years, will probably follow the 1/5th rule.

I see your point about 1/10 rule, but the piece of mind knowing that I will not have any maintenance problems for the next three years, in a very modern and comfortable car, is worth a lot to me. I figure that once my three year lease is up (I put no money down), I will have paid just over $11k in maintenance and lease payments.

Sam, I think you ignore safety as well. Consider car accidents are the number one killer in my age group, I think it’s worth spending the money on a nice car sometimes rather than an old beater. Gas mileage is better on newer cars too.

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I bought a 2004 Infinity G35 for 36k in 2004 in cash. I am now trading it in for a new Audi Q5. Getting 6,800 usd for the trade in. Will pay 38k with trade in for the new vehicle and pay cash. I make 200k a year. While I am not following the 10% rule I do feel I have thought this through and made a conscious choice I am comfortable with. I like to keep my cars for a long time and pay cash. I usually by safe vehicles that are well rated and keep well. Been thru the process of buying cheap cars and found they cost more in the end. I think the important thing is too keep the cost of any outlays cheap so when things change you are not stressed. I have no payments and the only debt I have is a mortgage which with taxes is about 12% of my income. I think financial security is the ability to make wise choices, realize your not smarter then everyone else and SAVE. Oh yeah, and make a budget. Thanks

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Financial Samurai Reply:
December 16th, 2012 at 11:27 am

Mike, if you’re paying cash, then the 1/10th rule doesn’t have to be followed as stringently. The worst is when people can’t pay cash, and spend way more than 1/10th of their income on a car! Ridiculous!

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I graduated college little over two years ago and I’ve been determined to follow my rule regarding cars: don’t get a car. I remember growing up and all the headaches my parents had to go through keeping their car in good shape. Even my mom’s last car, which was a very nice Mazada RX-8 had its own unique issues. She eventually had to sell it at a loss due to the gas price increases. I can’t imagine how much better off she would’ve been putting that money into savings.

In the end, I am still grateful that she bought that car because it was the final lesson that taught me getting what you want isn’t always the best course of action.

Obviously, I’m fortunate to live in a city with reliable public transportation. Not everyone is in the same situation, but I think all cities should invest in it. We’ll all be better off.

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Financial Samurai Reply:
December 16th, 2012 at 11:29 am

I like that rule of not getting a car! If you don’t need a car, you will save so much money in the long run!

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Ho ho, you should see how much cars in Singapore cost and people are buying them like there is no tomorrow. ;p

I did a comparison of car prices before. If you are interested, it is here:
http://singaporeanstocksinvestor.blogspot.sg/2012/06/tea-with-ak71-new-car-for-s75000.html

What we pay for a CheryQQ in Singapore is more than what a Porsche Boxster would cost in the USA!

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Financial Samurai Reply:
November 5th, 2012 at 9:27 pm

Yep, I’m aware of what Singaporeans and other Asian countries are paying due to tax. Crazy! But, It’s because you guys are all rich! Otherwise, you wouldn’t be able to afford it!

Not capital gains taxes and 20% flat tax is the bomb!

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AK71 Reply:
December 20th, 2012 at 12:35 am

Well, it is not just the high taxes. In Singapore, we need to successfully bid for a Certificate of Entitlement (COE) in order to buy a car! The certificate now actually costs more than a 1.5 litre Japanese make (inclusive of import and other taxes)!

This will really shock you:
http://singaporeanstocksinvestor.blogspot.sg/2012/11/category-coe-hits-record-77201.html

The latest round of bidding saw the COE for engine size of 1,600cc and below almost touching $82,000. A new record! It is plain ridiculous.

Most Singaporeans are not wealthy. The median income is some $39,000 per annum…

See the statistics from the government: http://www.mom.gov.sg/statistics-publications/national-labour-market-information/statistics/Pages/earnings-wages.aspx

It is no wonder that the ruling party lost more seats in Parliament in the last election.

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Financial Samurai Reply:
December 20th, 2012 at 11:58 am

Kinda crazy that a median income of $39,000 would bid $82,000 for a 1.6 litre engine car!

At least your taxes are low and you have a good government safety net.

So, let’s say you have two otherwise identical job offers, one with a salary of 20k in a city with good public transportation, and another with a salary of 170k, but with a rule that you must buy a specific type of new car costing $19,000 .

Which would you take? According to your rule, it should be the former. Which is a laughable absurdity in my book.

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Financial Samurai Reply:
December 7th, 2012 at 1:09 pm

What kind of logic are you talking about? Neer heard of a job or anybody forcing anybody to buy a specific $19,000 car.

Look, you don’t need to justify your bad car buying decision with me. Just be angry at yourself and learn from your mistakes of you want to build your wealth.

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Nightvid Cole Reply:
December 16th, 2012 at 10:45 am

I made no such decision. In fact, I do not even own a car right now.

And I also don’t claim this happens in real life. It is a thought experiment to demonstrate the absurdity of allocating a fixed percentage of income for any specific expenditure.

If you like, pretend it’s your spouse who requires you to buy the $19k car if you get that job, rather than the employer.

I don’t think you will have a tighter budget with a salary of $170k and purchasing a $19k car than you will with a salary of $20k and no car. Can we at least agree on that?

If so, what does the 10% rule actually mean?

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Financial Samurai Reply:
December 16th, 2012 at 11:07 am

If you don’t own a car, don’t claim this happens in real life, what is the point of this conversation?

Katie Reply:
January 20th, 2013 at 9:18 am

The point of that conversation seems to be to get the flaws of this system acknowledged so a better rule can be made. The 10% rule ignores a few very important factors, which need to be mentioned before people follow this advice blindly.

Assumptions:
There is a viable public transportation system where you live.
The 10% rule applies only when you buy a car, and does not factor in insurance cost, repairs, or set a periodic time when you are able to make that purchase.
Finally, you never mentioned when the 10% rule appies. Once a year? Once every 10 years? When?

I think this is an excellent rule of thumb! Also, thanks for saying that 25% or less is still sound thinking ;) Makes me feel better about the 2004 Subaru WRX I bought a few years back for $12,000.

Right now my wife and I have only 1 car between the two of us, and it’s KBB value is about $3000 – our household income is about $74,000. Maybe unnecessarily low, but we’re saving up to quit the rat race next year and take a year long mini-retirement.

I calculated out the TCO of the Subaru, and it ended up being about $620/month amortized over the 36 months that I owned it, or about $22k spent. Like you said, imagine what you could do with that money. Either investing it, or we could be on our way around the world right now. Either way, I’d be better than the temporary fun the car bought.

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I bought a new Honda Civic when I was in college in 2002 using $6K from leftover scholarship money for down payment and the rest of $17K was a loan co-signed by my mom. I was planning to buy a used one at the time but my mom, who was influenced by my aunt who was always fearful that getting a used car would mean breaking down in the middle of nowhere, kept pushing me to buy new and I wasn’t financially smart enough to push back. I paid it off 3 years later by paying extra to the principal whenever I could. Today, I want to say I regret buying it new, but I don’t with this one. After nearly 11 years it’s still in great shape. The car has never broken down nor given me any problems even after falling into a ditch one icy day. It gets 35mpg. I’m hoping I can still drive it for another 10-15 years and then pay cash for my next car, used one this time.
I never heard of 1/10 rule before. That’s a pretty good rule and I would follow it as I make close to $75K-100K a year and $7.5K used car would be more than I need to get from A to B. However, my mom at one time made $12K/year. I don’t think I would feel safe letting her drive a $1.2K car. I would rather buy a $4K one for her so I can sleep better at night. She lives at least 10 miles from her work place. Public transportation, bicycling, or walking isn’t an option since she works night shift. I don’t live in fear, but where it concerns my family’s safety, I prefer to spend some extra money for a peace of mind.
Do you think anyone making $12K a year would be able to afford a decent car using your 1/10 rule?

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This is just bad advice. In fact its just ridiculous and unpractical
If you make 40K you should buy no more then a 4000 dollar car?
That means a 10 year old car with over 100K miles on it.
How much would your annual repair costs be to keep a car like that running?
What about the wage earner that has to rely on that 4000 dollar car to get to work everyday.
Can you take the chance that such a car will reliably get you to your job every day, day in day out?
Do you feel secure if your spouse and children have to be traveling some dark road at night in a 10 year old car with 100K plus miles.
Consider this as a better idea. 36 month lease of an entry level new car. You can find many offers for 200 per month or less. I recently saw A Honda Civic for example for 189 per month with no buydown.
You have a 189 dollars per month expense for a car with full warranty , no repair costs almost no maintenance costs, safety and dependability. Just release every three years and you can budget your transportation costs to the penny month after month.
A 4000 dollar car could well exceed the cost of a monthly lease payment in repair and maintenance costs over the same three year span.
Fact of life- Reliable automotive transportation is something many Americans can not do with out. TheCarBuyersHero can help save you with those costs

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Financial Samurai Reply:
January 29th, 2013 at 11:07 am

I would expect nothing less from someone who has a website that sells cars.

My car is currently worth about $2,500 and is 13 years old. I spend on average $500/year in maintenance since I bought it 7 years ago for $8,000. My income then was in the multiple six figures. The car has been very reliable. With roadside assistance costing $1 a month, all the better.

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I get a car allowance from an employer of $800 a month (towards a car payment and car insurance), but I have to give back whatever I don’t spend. I bought a car $0 down (with 0.9% financing) that is about 40% of my annual income plus car insurance which comes out to $700/month.

In this case, I felt I should “reach” since I want to get as much value out of the car allowance as possible, but I’m always worried about either losing the job or moving to another company where I don’t get as many benefits. Awkward situation I’m in. I don’t feel bad about it. If I had to sell the car today I would still profit from the deal so I consider it a win-win.

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Winston Reply:
February 13th, 2013 at 10:29 am

If you’re already ahead on value, what are you worried about? Nothing wrong with taking free money when it’s offered!

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I think the 1/10 rule is a little too bold for my taste. Buying a car is kind of a waste of money but it just how much of a waste depends on a few factors:

1. how good of a driver a person is… do they change lanes erratically, talk or text on the phone while driving, tailgate, or any other bad habits that would cause a person to not own the vehicle for a long period of time?
2. how well does the person maintain the vehicle… I don’t mean washing, waxing, or vacuuming. I’m talking about changing oil religiously and replacing part that should be replaced instead of delaying the process and allowing other systems to fail.
3. how comfortable do you feel in a vehicle that you’ve owned for over ten years… does the person need a new car every five years?

In my humble and personal experience, I would agree buying new is just plain stupid. The market is flooded with vehicles that are slightly used or off-lease. They can be had for nearly 2/3 of the price of a new vehicle and they rarely will have any expensive systems that need to be replaced any time soon.

I’ve owned three vehicles during my 16 years of driving experience. The first two were $3,800 and $2,900 each and were well over the 10% annual salary I had (because I was a full time college student). My current vehicle cost me $16,000 and was also well over the 10% annual salary I had when I made the purchase. Excluding my first vehicle which was more of a recreational off-road vehicle, the second vehicle that I purchased for $2,900 (about 75% of my annual salary at the time) lasted me 12 years and I was able to still sell it for $800. My current vehicle I’ve had for 11 years (I owned both vehicles simultaneously for several years) and I don’t plan on getting another vehicle for at least another four or five years.

If you maintain your vehicles, make good choices on which models to buy (do your research!), and keep them for more than five years… you really can’t go wrong!

FYI: I love cars… and my current vehicle is a smaller turbo-charged sports car. I buy the cars that I really want and can afford… I don’t just buy cars that I can afford. Seems silly to me to do the latter because most of us live in a country where mass transit isn’t taken too seriously!

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Winston Reply:
February 13th, 2013 at 10:23 am

Let me start off by saying that I’m a “car guy” too. I love cars (especially sports/performance cars, of course) and do as much of my own maintenance as I can. I am currently in the middle of swapping an engine into an old car that was never designed to hold it. Long story short, I know where you are coming from as a fellow car guy.

That being said, I think that your Item #1 is irrelevant. You may have control over your own actions (for the most part — everyone makes mistakes), but someone else’s stupid actions can destroy your vehicle just as quickly. Item #2 is also irrelevant, in my opinion. You should maintain a car religiously regardless of how much you paid for it. That’s the only way to get the most value from it in the long-term. If you do that, then Item #3 should be a non-issue.

Your main argument seems to center around the idea that “as long as you take care of your “investment,” spending more than 1/10 of your income on a car is okay.” I think you are missing Sam’s point. The real issue is not how well you take care of your car(s). You should take care of them regardless of how much they cost. The idea behind the 1/10 rule is that you don’t hamstring your finances by paying too much for one in the first place. It’s the lost opportunity cost… the other work that your money could (and should) be doing for you, rather than going toward a depreciating asset.

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I don’t agree with this 10% rule in all cases because it takes in to account only gross income. My wife and I make a little over 200K so by this rule we can only lease/buy a 20K car. But since we have zero debt, own our house outright, have fully funded the college funds for the kids, have a portfolio of over 2.6 million and continue to invest 70k a year, should I really care that I am perpetually spending approximately 1,300 dollars in leasing two BMWs. Lets not lose focus why we have worked and saved all our lives (I just turned 50). Its not for Obama to keep saying to us we don’t pay our “fair share”.

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Financial Samurai Reply:
February 17th, 2013 at 12:57 pm

It’s up to the individual. I made much more than 200k/year at 30 and spent less than 1/70th my annual income on a car purchase. I think 1/10th is very reasonable.

It also depends on what you think is enough.
For some, $2.7 million at 50 is good. For others, having to still work at 50 with anything less than $5 million is undesirable.

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John C Reply:
February 18th, 2013 at 8:50 am

I agree, it is up to the individual where and how they spend their money. Personally I don’t want to be a Warren Buffet type that spends nothing compared to his net worth.

BTW 2.7 million is my stock position. My current net worth, with house, two properties, art, and physical precious metals is a little over 5.5 million. Carry on the great job… :)

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I want to apply this logic to my life, but alas I am a car fanatic. A car is not an appliance for getting me from point A. to point B. It is a huge part of my life that I spend at least an hour a day in, and it provides me with a level of enjoyment few other things can provide. I bought enough inexpensive sports cars to learn that I would spend more time fixing them than driving them. I’ve decided to spend roughly $28,000 (out-the-door) on a new sports car, financing it over 5 years. My yearly gross is roughly $50k so the car payment will account for a large portion of my monthly income, but to me it’s worth it. I guess I won’t ever be a wealthy man, but I can look back on my life and say I had a blast in that little car!

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Financial Samurai Reply:
February 25th, 2013 at 12:23 pm

Corey, why not wait until you make $280,000 before buying a $28,000? It’ll be more gratifying and better for your financial health.

But, I’m hearing more about this YOLO term a lot of 20 something’s are chanting. Guess there is always the government and parents to take care of us. What demographic are you?

Sam

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Dan Reply:
April 24th, 2013 at 5:16 pm

Well for one very few people will ever make 6 figures. Multiple 6 figures is better than 90% of people.

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Financial Samurai Reply:
April 24th, 2013 at 5:31 pm

True. Which is why I think most people buy too much car for their own financial good.

New to this whole car buying business. 10% seems pretty difficult… Sam what do you think I can afford? Salary=$100k age=28. Not a lot of assets as I just finished paying off my school loans. Have some investments. My only expenses are: gym membership $38/mo. Cell: $60 mo. Gas: $200 mo. That’s seriously it. No dependants, rent etc. I live in Canada where taxes and car prices are higher.

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Financial Samurai Reply:
February 25th, 2013 at 8:44 pm

Hi E,

Welcome to my site. I guess it depends on how much you like cars. $100K income = $10K car. Pretty straight forward.

Take a look at this post to see how your net worth stacks up. If you stack up great, then go ahead and be a little looser. If not, then stay strong.

Sam

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Ps. Right now I’m driving a car my dad gave me. It’s about 10 years old and on its last legs =unsafe to drive.

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Winston Reply:
February 27th, 2013 at 12:02 pm

Sounds to me like you have an excellent starting point — you own a car that’s paid for! Shell out a few thousand dollars in repair costs and continue to drive the wheels off of that car. It will cost you FAR less than shelling out even bigger bucks on a new(er) car would cost.

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I agree with cars being too much money, however there is a strategy to buying a slightly used car. First, if you buy a slightly used car (around 3 years old) with about 20,000 miles on it, there won’t be maintenance issues. With an older car with 100,000 miles, you can easily put in 2k or 3k for repairs on a 4k car. That brings it to 7k. Why not just buy the 14k car with no problems and better mpg because it is newer? I got a 2009 Corolla for 15k a couple years ago.
The next part is all about inflation. When you purchased your car for 14k, used cars were usually around 4k depending. However, after my 5 year loan is up, i expect the used car prices to have risen a little. So with financing at 0%, I think it is better to get the slightly used car because when you sell it in 5 year, you won’t be getting 4k but maybe 5k.
Another point. Since you are financing the car, you don’t have to put anything down. With buying a used car from someone, you often have to give them 4k cash up front. I’d rather only pay $275 per month with no cash upfront for a good solid car that will last than a crap beater. Just my opinion!

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Financial Samurai Reply:
February 28th, 2013 at 9:41 am

Dank, no argument on buying a 3 year old car vs. a new. In fact, I much prefer it. The argument is someone spending 60% of their income on a car that is certain to depreciate and break down.

Get a 14K second hand car. Just make over $100,000 before you do so.

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Serious issues with this post. To start, someone who makes $100K per year can easily afford a $25K car. If you have good credit, interest rates are in your favor and you can probably get a loan for 0% or 1.9%. I took the 0% interest for 3 years loan on last year’s purchase of a Fiat 500C. Getting this loan meant that I had to put $5000 down, so I now have payments of $550 per month and the car will be paid off in 2 more years.

As for your examples of cars in the $100-150K salary range – Fiat 500Cs start at $23,500 new. They just entered the U.S. market in 2012, so buying a used one was not an option at the time this article was written. So, according to your rule, no one in that salary range should be buying a Fiat 500C.

I think a rule of not expending more than 10% of monthly gross income per month on car expenses is a good rule. $100K per year translates to $8333/mo, so spending $550 car payment + $200 gas + $100 insurance = $850/mo. The Fiat 500C come with a full 5-year warranty that covers maintenance, so I never have to worry about those costs. This is good finance sense in my book. Buying a $10,000 used car without a warranty and poor gas consumption is not.

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Financial Samurai Reply:
March 6th, 2013 at 11:29 am

Ana, you are welcome to justify your car buying purchase. It’s not up to me to judge you. I just hope folks who want a brand new $20,000 Fiat 500C can aim to first make $200,000 first and not regret their purchase in the future.

I’m against taking out a loan to borrow a car if you don’t have 100% of the cash to purchase the car. If you have $20,000 to pay cash, but decide to take out a 0% loan, then fine. But if you only have $10,000 in cash, and you take out a loan, something is wrong. You can’t afford the car.

Take a look at this post to see where you stack up: http://www.financialsamurai.com/2012/05/14/the-average-net-worth-for-the-above-average-person/

Or this one on savings: http://www.financialsamurai.com/2012/12/03/how-much-savings-should-i-have-accumulated-by-age/

Chances are, your car purchase is dragging you down.

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Winston Reply:
March 13th, 2013 at 12:40 pm

Ana, I see a lot of “used car fear” in many of these posts, including yours. Why do you need a warranty when you don’t have a car payment? Over the long term, car repairs on a paid-off vehicle are much cheaper than monthly car payments. Plus, the depreciation hit that you take is much smaller if you purchase a used vehicle. If this fear is because of reliability reasons, then that is something that’s within your control. Purchase vehicles with good reliability track records (another argument for going with an older used car, rather than the new, hip model), and then maintain it well. You might even find that you’re at the mechanic’s garage *less* than if you had purchased that new, unproven model!

Your comment about gas consumption does not play out either — gas mileage is mostly related to the type/size of vehicle you buy, more so than its age. A 2003 Honda Civic gets the same gas mileage as your 500c, and it has more room, will depreciate far less, will be cheaper to repair, and can be purchased for less than $5000 with many years service life left. This is just one example.

Fun anecdote:
Did you know that the 1987 Honda CRX HF (a little two-seat commuter not unlike the Fiat 500c, at least in spirit) gets 37 city/45 hwy MPG, and it’s not even a hybrid?! How? Power nothing and fewer mandated safety features mean a much lighter car. Curb weight has a huge impact on gas mileage.

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Financial Samurai,

I gross $60,000 a yr at age 27. I don’t anticipate my salary to top $100,000 while serving as a military officer. I don’t plan on remaining in the service for 30 years to earn and compete for General rank. I suppose I could demand a much higher salary with a similar position in the corporate world, but, I’m enjoying the benefits and military discounts for now. I’ve taken your advice to heart.

Here’s where I violated your 10% rule (5 years ago).

I spent $55,000 to restore a numbers matching, original 1971 ‘Cuda 440+6 which was re-appraised earlier this year and valued at $86,000. Yes, I know, it’s only worth what the next guy is willing to pay for, but the stock market over the past 5 years didn’t appeal to me. It’s currently in storage and running me $80/month and $0 deductible.

Here’s where I did after reading this article last month.

I set my alternative retirement contributions to 10% of my basic pay; sold a one year old vehicle that I purchased new for $30000 to Carmax and came out of pocket $2500 on the sell; Bought a 2000 Toyota with 82,000 miles and a clean history – paid $5700 cash; will be selling my Harley Davidson “bobber” for $7500 to a local dealer in 10 business days (I owe $5400); all in all I will have saved $637.73 a month in auto payments, and $506 annually on auto insurance. I intend to use the savings to quickly build an emergency fund which I’ve been neglecting over the last five years (thinking my new vehicle warranties would cover me).

Here’s where I violated your 10% rule after reading this article.

The Toyota was sold as-is. I decided that I might as well pay the dealer to do a complete overhaul on the vehicle. Some services were not required yet, but I needed the piece of mind. From the tires, timing belt, all fluids, soon-to-require service parts were replaced, to a $15 car wash and wax at my home, I spent and additional $1175. Total costs: $7875 and change. Now I no longer care where I park, because I can afford to replace any part on this vehicle on any given day. I feel like a burden has been lifted. Best part of it all, I started to cut-back on all other spending that I noticed were wastes:

1) Cancelled Cable TV subscription for Netflix, Hulu, and iTunes. Saved $100/month
2) Decided to subscribe to Experian to monitor my credit score more closely —after seeing how much debt I was carrying in auto payments and credit cards — I transferred $15,000 from checking to wipe out all three credit cards. I’m waiting for my 770s score to reflect my recent activities in about 60-90 days.

Great site, I’ll bookmark this one

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Financial Samurai Reply:
March 24th, 2013 at 8:43 pm

Howdy,

Good to have you here! Nice work optimizing your finances. Paying off debt, checking your credit score, and saving money on non vital service will help. Just make sure you don’t start spending more now that you’ll have more.

I’d also consider signing up for Personal Capital. They aggregate all your finances, tracks your net worth, keeps you in budget, and provides free tool for analyzing your investments. It’s free too btw.

What are your financial goals you’re striving for btw?

Regards,

Sam

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Cable TV providers are rip-offs. Netflix, Hulu, and iTunes is definitely a way to go.

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Please let me know where I am wrong in this scenario (I’m no expert):

Any car will depreciate at least $1,000 per year. The only exception is a car which is 10+ years old, in which case you are potentially going to have MAJOR repairs costing big $$$. With a used car worth $6,000, I would not feel comfortable budgeting less than $1,000 per year in maintenance/repairs. This brings the cost of ownership to about $170 per month. I realize that this is a gamble and could end up being much less, but I will assume the worst case scenario.

If I pay $40,000 to buy a new car, and can sell that car for $20,000 after six years (this is based on actual quotes and used car values), my cost of ownership is about $270 per month. In my opinion, spending what I pay for cable/internet each month ($100) is well worth the peace of mind of having a car that is reliable and makes me happy. After all, I need a car…I don’t need cable. I could easily make the sacrifice of cancelling the cable if necessary.

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Financial Samurai Reply:
March 25th, 2013 at 6:11 pm

You’ll be surprised how well made cars are from 2000 and beyond. I’ve got a 13 year old truck and the average maintenance is around $400 a year.

I say go for the $49,000 car if you make $400,000.
And if the car’s actual cost is $20,000 years later, then at least make $200,000 a year.

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Erik Reply:
March 25th, 2013 at 6:37 pm

This is the most ridiculous thing I have ever heard. There are no variables considered. By the way, why would I need to make $200,000 a year to sell a car?

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Financial Samurai Reply:
March 25th, 2013 at 7:07 pm

You don’t need $200k to sell a car. I’m suggesting you need $200,000 to buy a car if you want to build wealth. There’s a big difference.

I know so many people who make under $100,000 but spend $20,000-$30,000 on a car and then wonder why they don’t have lots of savings or financial security down the road. Now that’s ridiculous. It’s like being a ‘C’ student but thinking they deserve an ‘A’ lifestyle.

What’s your financial situation and background? Need to get some perspective.

Erik Reply:
March 26th, 2013 at 5:06 pm

Age: Late 20′s
Salary: <$100K
401k: Contribute 10% gross (current balance = 1 year salary)
Cash Savings: Contribute 20% gross (current balance = 2/3 salary)
Rent: 17% gross (do not own)

I wish I would have seen this ~ 6 months ago. Now that the deed is done though, I’ll be sticking with the advice of keeping the car for as long as possible instead of “upgrading” every few years.

I have a lot of catching up to do but I know it’s still possible. I’m closing in on 30, making > $75/year and my 401k is sitting around $40k. I’ve been reading through quite a few of your articles and while some seem a little over the top, it’s all starting to sink in. I’ve been much more of a spender than a saver for the past few years. Luckily I can change things now instead of waiting another few years.

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This is bullshit. When I made $50K a year I financed a car that cost $18K after it was all said and done. Paid it off in two years and now I am on track to make a little over 100K.

It was in no way a strain on my finances. I was able to easily pay the $250 a month auto payment, and often paid more.

My car is going to have much lower maintenance costs and last for much longer than if I had bought a $5K junker.

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Financial Samurai Reply:
April 6th, 2013 at 10:13 am

Are you sure? Read this post to see if your net worth is on track and let me know. http://www.financialsamurai.com/2012/05/14/the-average-net-worth-for-the-above-average-person/

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My wife and I make $140k/yr. We have no kids and no debt. We drive two Corollas, a 97 and a 06, both paid for in cash. Combined, they are probably worth $8k. They get us from A to B at the speed limit, have a/c and heat, cd player, airbags and anti-lock brakes, don’t use much gas, and have nice paint jobs. I really don’t see what more we might want in our cars that would cause us to spend more. In other words, I completely support your rule. Btw, we are not minimalists or hippies or socialists or anything like that – we spend plenty of money on traveling, have a nice house, etc. We just don’t see the point in paying more and getting the exact same thing.

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Financial Samurai Reply:
April 8th, 2013 at 2:34 pm

Great to hear! You are well on your way to financial prosperity if not now then soon.

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I think this is a bit extreme. I make $100k per year. I also have another $85k in cash tucked away, $85k in stocks / investments funds that i can access if needed, and $42k in retirement investments that i wouldn’t want to touch.

I’m looking at buying a $40k car (Audi A5 coupe). Now i would agree this is a bit high, but i do think your 10% rate is very conservative. Perhaps closer to 20% would be fine and that’s not assuming that you have to pay that out of one years salary. Now even if i go to 20%, i’m still breaking that rule by double. Just my thoughts.

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Financial Samurai Reply:
April 8th, 2013 at 4:44 pm

I love the Audi A5/S5! What a beauty! I thought they are more like $50-65k new? Getting a second hand coupe?

I would use the 1/10th rule as motivation to make $400,000 a year if you want a $40,000 car. If you are comfortable spending half your cash stash on a car, then go for it!

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Nice article and nice advice. It’s interesting to see the comments, because you realize how many Americans buy very expensive vehicles.

To make the point of this article even clearer, I would add that buyers should only purchase vehicles in cash. Think that new A4 isn’t that much? Pay the entire amount upfront then. No one, I believe, generally does this, but it drives home the point that, unlike a home, a car is not an investment and doesn’t make sense to finance.

One other point: I would also caution people against buying premium vehicles with high mileage. I bought a 2001 BMW a while ago with 100K miles for only $8000. I’ve put 60K miles on it, but it’s cost me $5000 in just parts. I do the work on it, so I can’t imagine what someone would fork over to a mechanic. If you buy used (cheaply), then buy a Honda, Toyota, Ford Focus, Subaru.

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Financial Samurai Reply:
April 15th, 2013 at 2:21 pm

The comments are interesting indeed. Funny how some folks get so riled up. This rule is my suggestion. Folks can do whatever they want with their money. Just don’t complain to me or the government for money if they don’t have enough or don’t want to work for 40 years after college in a job they dislike.

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Wow, what a load of crap. The bottom line is not how much you spend on your vehicle at the onset although you shouldn’t go crazy on something you know you can’t afford. I bought a truck 10 years ago, it cost me, $18,000 back then. According to this “blog” I shouldn’t have afforded that. However, I managed to pay it off in 3.5 years because I paid ahead on the principle and got a very low interest loan. After the initial 3.5yrs, (I don’t drive much), I have been averaging 6,000miles/yr. I have not had a payment in many years and other then gas/oil changes and minor regular stuff I don’t spend more than $300 to $500/yr on my vehicle. THe point is DON’T feel like you need a new car every year and take care of what you got. If you take care of your vehicle and buy to own instead of lease, there is no reason why you can’t buy whatever you want within reason. That is how you keep your costs down and have a good vehicle you can completely trust. According to this guy unless I’m a 1%’er I should resign myself to only driving the broken down leftovers of the common folk, or take the bus. I’m not rich but I’m also not a puppet, nor do I consider myself poor.

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Financial Samurai Reply:
April 15th, 2013 at 2:20 pm

What’s wrong with taking the bus? You think taking a bus is beneath you or something? I proudly take public transportation as to many other people.

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Okay, here’s me:
33 years old
salary 140K
no debt
200K in retirement
110K in savings
am currently on my 12th year driving 2002 Toyota Corrolla– guessing it’s worth around $2k at this point– will give it to my parents when I buy new car, won’t be trading in

Does the 1/10 rule apply even when there are savings/my situation?
I am trying to decide between a (loaded) Subaru Impreza at 25K (all in, after taxes etc) and a Lexus CT200h (hybrid) for 33K. Do you think it’s kosher logic that the higher cost of the Lexus is offset by the gas savings on a hybrid? I am guessing I will drive my next car for another 12 years and ovr time will save 5K+ in gas. Do you think, given my circumstances, it’s irresponsible to go for the Lexus?

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Financial Samurai Reply:
April 17th, 2013 at 11:29 pm

Sounds like you are doing great. You paying with cash or loan or lease? If you can pay with cash and feel it is a little too painful then you are probably spending too much.

Not sure if hybrids are worth the premium. A 2013 Nissan Sentra gets 39 mpg and costs $19,000 new.

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Rob Levy Reply:
April 19th, 2013 at 10:07 pm

You make $140k per year, and can’t correctly spell the name of your own car?! I need to sell stock in your company.

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What would you recommend (cash vs. loan or lease?). I can pay with cash as you can see above, but not sure what the costs/benefits are of both.

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I must suck… I just spent over 30% of my gross buying a used Lincoln.

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That moment when I make a bit over 20G per year but my car cost me over 10 grand, why? Because i SAVED for it, i didn’t finance it.. I pay less then $3,500 a year on insurance/gas/repairs (its a celica, lawl), I saved for a little over a year, just being cheap with my other expenses (my old car ate my paychecks in repairs as it was a domestic). Best decision of my life was to save my money instead of financing it, because i am sure I would of regretted it in the future.

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I violated this rule pretty bad. I make around 44k, and I bought a 370z that came out to 36k after taxes. I took out a 4 year loan to pay it off quicker, so the payments are pretty high. I was 25 at the time, and figured I would buy a nice car, pay it off, and then proceed to purchase my first house. I don’t see anything wrong with this, as I don’t plan on getting rid of the car once its payed off. Hell, I still have my 95 Civic that I purchased after graduating high school in 2004. Between the two of those, I really have no need to purchase a new car for a very long, long time.

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Financial Samurai Reply:
April 21st, 2013 at 6:50 pm

Hope you enjoy your babies. So long as you are having fun and are happy with your financial situation, that’s all that matters!

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I have a question? Is the 10% the purchase price or the payment? For instance if you finance a car and the car payment is 10% of my monthly salary. I was thinking of purchasing a car and the payment would be 15% of my salary (my rent is the same amount). Is this insane?

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Financial Samurai Reply:
April 24th, 2013 at 5:32 pm

It’s based on purchase price of a car. I’m not a fan of taking a loan to buy a depreciating asset.

Although 10% of income as payment sounds OK. How much do you save of your after tax income a year?

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Dan Reply:
April 24th, 2013 at 5:41 pm

Currently I’m saving 10% of my salary. Plus any bonuses I get (though if I bought a car I would probably use any bonuses to pay off the car). Mind you this is my current budget, any raises I get would just go into savings. To be honest I never bought a car before because I lived in the city, but now that I’m moving to the suburbs I kind of need one (though the amount I’m saving in rent is equal to the car payment).

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I have this one particular friend he drives a 30k vehicle and makes about 20-25k a year. I also know people that make NOTHING or next to it (and are on welfare and food stamps) and drive around super nice vehicles. I guess they know what they are doing, huh?

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Financial Samurai Reply:
April 26th, 2013 at 8:00 pm

Makes you wonder how they can afford them vehicles. Good thing we’ve got big government to take care of us when we run out of money!

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Little Problem with one of the things in your article:

“Your $20,000 invested in 2009 would now be worth $40,000.”

On what Planet? Where can I invest $20,000 and have it go to $40,000 in 4 years? I am currently sitting on over $400,000 getting crap for interest.

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Financial Samurai Reply:
April 28th, 2013 at 1:45 pm

Planet Earth. The S&P 500 is up well over 100% in the past four years.

This article might help you.
http://www.financialsamurai.com/2013/02/11/recommended-net-worth-allocation-mix-by-age-and-work-experience/

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Interesting article. But honestly ludicrous. A 25,000 USD car is not an “absolute luxury” that could only be afforded by someone making 250,000 USD a year. You are just extremely stingy and are highly content with a minimalistic lifestyle. Anyone can claim to be a financial guru if their advice is “dont spend any of your money on anything, no matter how much you are making”. (Obviously hyperbole by the way). Theres a difference between being an irresponsible consumerist idiot and living a comfortable lifestyle within your means. You are missing the mark in my opinion. 20-25% is a much more realistic price point.

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Financial Samurai Reply:
April 29th, 2013 at 1:31 am

Sean, whatever floats your boat. It’s your money and your financial future. This is my guideline. I decided to work hard to make enough to buy a $75,000 car, and when I did, it felt like a waste of money.

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Some people do have good luck investing, but most people, like myself, don’t. It is highly unlikely that people investing $20,000 will see their money grow to $40,000 in 4 years.

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Financial Samurai Reply:
April 29th, 2013 at 7:01 am

True. But I think the MAIN thing is that people simply don’t invest, and spend their money on things they don’t need.

You don’t have to be lucky to make a 100+ return in 4 years in the stock markets, b/c the stock market rebounded 138% from its lows.

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Winston Reply:
April 29th, 2013 at 11:47 am

One of my 401(k) retirement accounts (with a former employer) is a great illustration of just how the market has rebounded, and then some, since the crash. My account balance was about $22k before the market crash. During the economic meltdown, my company went bankrupt due to an over-leveraged buy-out. Our plant was idled and the company stopped contributing to 401(k) — as did I, since I was trying to put as much cash into the bank as possible in preparation for the layoff I saw coming. It came. I landed safely in a position with another company, but watched my 401(k) balance with my old company shrink from $22k to around $14k in March 2009. I moved my investments around within that plan, trying to get the best mix for growth on what I hoped would be a great rebound. Today, that account has a value of about $33k. I have not (and could not have) contributed anything to that account since it was valued at $22k (and then later at $14k). Pretty amazing recovery, if you ask me.

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Financial Samurai Reply:
April 29th, 2013 at 12:34 pm

Great example! Full recovery + 50% more than the peak!

I found this article quite interesting. I am a huge gearhead and an avid member of many car forums. It always intrigues me how much people spend on their cars. About 7 years ago I began a thread with a similar ‘percentage of car’ vs ‘gross annual income’. I understand in reality you can take this figure and work backwards to discover someone’s income; which was not the purpose of my exercise. I simply wanted to understand how much the average enthusiast was willing to spend on a vehicle in ratio to salary. To my surprise I received tons of ‘incorrect’ response. Most people were stating 20-25%, however the majority of responses were a percentage of their paycheck (2x a month) allocated to a car payment relative to total gross paycheck! Now you have to understand I gave a straightforward example (10k car / 50k year = 20%). Only a select few understood the exercise and their response varied from 20-90%. I was quite shocked but not surprised how most people view the affordability of a car relative to payments, not the full value of the vehicle. Often when we would have car meets it would always intrigue me how a doctor could own the same car as a discount tire tech. However, post analysis I believe the formula needs a base + percentage in order to be accurate. I mean if we say people who make 20k/yr spend 25% of their budget on food; 5k, I doubt people who make 200k/yr spend 50k on food. I know it’s not apples to apples but it’s always interesting how our spending habits operate. I’m more shocked by the guy at McDonalds wearing $150 shoes, using his $300 iPhone, with what I assume is almost a $100 monthly plan. BTW I drive a 1991 clear title/low miles NSX, which you can pat me on the back; I fell below the 10%.

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you are on to something and I have given the same advise to people, however, I am of the opinion you shouldn’t apply the 1/10th rule across all income levels. Secondly, you should take your age, your net worth and your liabilities in consideration.

30 year old professional, 100k income with a net worth of less than 100k and bunch of student loans, your rule sounds about right.
40 year old, 150k income, net worth of $500k, $ 250k mortgage, slightly different story.
35 year old, 250k income, net worth of $1,0m, $100k mortgage, why shouldn’t he be driving an M3?

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This is BS all the way, yeah is well known cars depreciate quickly and is not in any way a good investment, but is definitely one of those little things that make you happy, to drive on a proper vehicle and not a peace of crap, that actually makes me sad, humans must surround themselves with beautiful things is one of the ways to make life bearable, if you pay all your bills and at the end of the month you still have a few thousands laying around why the fuck not, proper investments have proved to be really bad investments over the last few years, so fuck it, if you can afford it get a nice car and live a little. I think the rule should go like this: from 20K to 40K a year 10% sounds about right, from 40K to 65K 20%-30%, 65K to 100K 30 % to 40 % and if you make more than that, then get what ever the fuck you want, at the end if life changes you can always go back to be miserable and ride on a 2K car, or even worst, public transit.

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Financial Samurai Reply:
May 17th, 2013 at 4:08 pm

Why not just make more to afford a nicer car?

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Make 200,000 and drive a Honda Accord…… are u fucking serious this is a retarded list you have made. i’m not making anywhere near 500,000 but M3 all day. it’s something you use everyday and i want to enjoy it

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Financial Samurai Reply:
May 20th, 2013 at 5:16 pm

Hope your M3 is pre 2003, because if you drive a new M3 worth $70,000 and don’t even make even close to $500,000 a year, then you’ve got your financial priorities out of whack. What is your age and net worth?

You can see how you are doing here: http://www.financialsamurai.com/2012/05/14/the-average-net-worth-for-the-above-average-person/

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