Cash For Clunkers = Personal Finance BOMB!

The latest development in the “Cash For Clunkers” legislation is that it may be extended for one more month until labor day. Under the program, buyers of new cars and trucks can get rebates of $3,500 to $4,500 by trading in older models that are then scrapped. Seriously though, is this multi-billion dollar government works program just money spent to appease the car lobbyists? Or is the goal really to get old cars off the streets and save the environment? The good thing is that these old cars are getting scrapped. Otherwise, if you trade in your gas guzzling SUV for a Honda Civic, you’ve NET ADDED to the world’s pollution because someone is still driving your old car, and the new Civic still emits waste!

This is what I’ve never understood about the “holier than thou” crowd who buys hybrids like the Prius. It’s great that you are driving an environmentally friendly car, but if you start looking down on non hybrid drivers with disdain, that’s hypocritical. Buying a new Toyota Prius simply adds to pollution if you don’t scrap your old car.

The only way you’re going to really make a difference is if you scrap your old car and just take public transportation and ride a bike! Again, I’m absolutely for driving a nice low emissions car, but the fact of the matter is that these cars are expensive. I’m not spending $30,000, and if you look down on someone who can’t afford the $7-10,000 premium for hybrids then shame on you!
The real problem with this legislation is that it’s giving money to people who don’t need it. If you are driving a car valued at $4,500 or less, it’s probably unlikely you can afford to buy America’s average car price of $25,000! I strongly suggest you stick with my 1/10th rule, which states that you should spend no more than 1/10th your gross income on cars. Hence, only until your income or your combined income is $250,000 should you be buying America’s averaged price car. Spending more than 10% of your gross income on a car is absolutely ludicrous if you’re serious about early retirement, savings, and investing. Say no to car debt!

Supposedly 167,000 transactions worth $667 million have gone through already. I bet that a good percentage of these transactions were made by people who overextended themselves financially to get into that shiny new $38,000 luxury automobile. The thought process is that they can “save” over 10% on the value of this luxury automobile they’re eyeing if they trade in their car. You’re not saving anything! The $3,000-$4,500 is likely the value of your car, unless you’ve got such a heap of junk that you’re getting an extra $2,000-$3,000 worth, in which case you definitely shouldn’t be buying a $25,000 car!

When this is all said and done, the government’s plan to boost the economy and improve the environment is going to backfire. There will be thousands more debtors driving depreciating assets and flushing valuable money down the drain every month.

If your gross income is not at least 10X the value of the car, and if you can’t pay cash (you don’t have to, just as long as you can), then don’t fall for this “spend more save more” trap the government is hawking!

Readers, love to hear your thoughts. I know this has nothing to do with the employment and career agenda, but it is topical, and you guys know how much I love cars!


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Updated for 2016 and beyond

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship. Sam focuses on helping readers build more income in real estate, investing, entrepreneurship, and alternative investments in order to achieve financial independence sooner, rather than later.

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  1. Resort At Squaw Creek says

    You can sure count on the politicians to spend our money. Saving, is a different story. I agree, this is another failed big government policy paid for by your tax dollars. Next up with be "Cash for Dinosaur Computers", "Cash for Fast Food Eaters" and so forth! Taxes are going to go up for all, and not just the "rich" who make over $200,000! RSC

  2. Gen Y Investor says

    This is the government at it's worst. Let's think about this… our whole economy is suffering b/c individuals, homeowners, banks have too much debt.

    Now we have a government program where the government is borrowing money it doesn't have to give to people driving clunkers so they can purchase new cars that they can't afford using debt.

    I feel like I'm living in bizzaro world

  3. RB @ RichBy30RetireBy40 says

    Bizzaro world, I like it! I think it's apparent that the no state income states are going to gain a tremendous influx of people over the next 10-20 years. If you make $500,000/yr, saving $50,000 in state taxes becomes a very pretty proposition! Washington and Nevada aren't that bad to live in at all!

    I'm amazed the government is going to saddle thousands more people with debt. You know the majority of people aren't putting down $25,000 cash for the average car when the median US income is around $50,000. To spend half of your income on your car is aggressive.

    At any rate, let's hope the economy and the stock markets keep marching higher!



  4. Anonymous says

    agree that debt is bad for everyone and it's ridiculous how much debt our government is in, past the point of no return. charlie

  5. KCLau says

    There is a similar scheme in my country, Malaysia.
    But it is only applicable if we get the national car (home made)

  6. says

    Hey KC! Good to hear from you here. Welcome to my site. Are they still going the Proton Saga route in Malaysia? Or have they developed a new national car of their ow? I can't believe taxes are so high and cars are so expensive where you live.


  7. Anonymous says

    I'm excited to live in Socialist America! It makes me want to slack and chill out. Let the government tax the rich, so they can support me and my lifestyle :)


  8. El Guapo says

    Sam, I got a kick out of this article. Mostly because I was one of those people that did the “cash for clunkers” back in 2009. I traded in my ’92 Isuzu Rodeo (215,000 miles) for the $4500 credit, which was a bunch more than the car’s value. While I appreciated the extra money, I probably should not have purchased a new car. At the time it was 33% of my annual income. We paid off the loan very fast, but I am all for the 10% rule now that I have learned more. I just bought a slightly used ford focus to replace my beater. The focus was right around 11% of my income and I made a hefty down payment. My next car will be cash.

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