The Net Worth Rule For Car Buying Guideline

Fantastic Car Sale13 year old Moose is starting to give me fits. His cruise control just died and I’m starting to worry about safety. I just spent $800 this summer on a new steering pump, timing belt, and 125,000 mile tune up so it’s disappointing to see another issue come up.

Besides the cruise control not working, the brakes are mushy, the airbags haven’t been serviced at the 10 year mark, the traction control and ABS lights are on, and a couple $220 M+S tires are balding. Oh yeah, the CD player doesn’t work either and there’s no bluetooth of course! My trusty mechanic of 12 years said Moose is operationally fine. The dashboard lights are just on due to a broken fuse lodged deep inside the control panel that makes it not worth replacing. Still, I have my doubts.

Now that I no longer have a job, I’m having a more difficult time accepting my 1/10th rule for car buying. I introduced the rule to those who still had to work for a living in order to not have to work forever for a living. It seems only fair that someone who is retired should be able to spend more than 1/10th their income on a car since they were able to cross the finish line don’t you think?

Based on the 1/10th rule for car buying, I can buy a new compact car. The problem is, I want the latest Range Rover Sport that costs $90,000! I’m not pulling in anywhere close to $900,000 a year so I’m forced to strategize and change my car buying guidelines to fit my desires. See how easy it is to justify our spending choices?

INTRODUCING THE 5% OF NET WORTH RULE FOR CAR BUYING

The 1/10th rule only accounts for one’s annual income when deciding on how much to spend on a car. Perhaps a greater barometer to determine car spending is your overall net worth. After all, if you can live in a 100% paid off $5 million mansion and live off $150,000 a year in disposable income you’re much better off than somebody who earns $300,000 a year with no assets to speak of.

Based on my net worth by income post, a 30 year old should have roughly 2X their salary in savings or overall net worth e.g. $60,000 annual income = $120,000 net worth. Hence, to keep consistent with the 1/10th rule for car buying and my net worth by income calculations, I think spending 5% or less of one’s net worth on a vehicle works very well (5% X $120,000 = $6,000 = 10% X $60,000). The net worth rule for car buying covers those who’ve retired, are temporarily out of a job, are a stay at home spouse, have a medical condition and can’t work full time and so forth.

Let’s say you worked for 40 years and accumulated a $1 million net worth by the time you are 65 through diligent savings and investments. You’re now living off roughly $60,000 a year from social security, dividends, and a pension. The 1/10th rule says you can only buy a $6,000 car which seems much too onerous for a person of your stature. It’s time to live it up a little! My net worth rule provides a guideline for the retiree to buy up to a $50,000 car instead.

Below is the net worth guideline by income chart for your review. As you can see below, a 50 year old person who makes $200,000 a year and has a $2,400,000 net worth should feel comfortable spending up to $120,000 on a sweet Porsche 911 CS instead of just $20,000 on a Honda Civic. Whether he does or not is another matter. If I’m sporting a $2.4 million net worth and $200K income, I’m still driving a $20,000 car, but that’s just frugal me.

networth-income-ratio-chart

CAR RECOMMENDATIONS BY NET WORTH AMOUNT

Cars are so much fun. I understand every single one of you who salivate over the latest model sports car or SUV. But cars are also the biggest money wasters. Nobody really needs a car that costs over $5,000. Cars built after 2000 are so much more reliable than those building in the 70s, 80s, and even 90s.

The money we spend on cars could be invested in real estate or stocks that will super charge our net worths. I’d like every car buyer to think in terms of opportunity cost when making a decision on which vehicle to get. Every time I think about plunking down $50,000 on a new BMW, I shudder to think how it could turn into $100,000 10 years later if it grows at 7.2% a year.

Basing a car buying decision on one’s net worth may actually be harder than basing a decision based on income. Our net worth is a lifetime achievement whereas income is only one year at a time. Are we really comfortable spending 1/20th of our lifetime’s work on a depreciating vehicle? Maybe, but that should certainly be the max.

Car Buying Guide Chart By Net Worth

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Photo: $100 off. What a sale! FS

Regards,

Sam

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.

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Comments

  1. Aaron says

    I have enjoyed you blog but the 1/10 rule always bothered me as completely unrealistic and frankly not properly configured for financial management. Since cars a depreciating assets that have limited usable life we should be talking about what is a acceptable yearly cost. For example if I used your 1/10th every year vs. once every 5 years I would be in a significantly different financial condition after 10 years.

    I would try to come up with a rule for yearly car expenses (the car itself, insurance, gas). I would also try and understand that many of us live in areas without any backup public transportation so a reliable car is a must or we cannot get to work. For me that means a maximum age or 10 years or 150,000 miles, there is of course some flexibility there depending on personal circumstances.

  2. says

    My net worth is almost up the zero mark but a bicycle in the Canadian winter is not practical. Yesterday I went to work when it was dark and left when it was dark and there was snow on the ground in the morning.

    I am in my late 40s and not in my 20s and am 6 or 9 months away from being debt free. How much does someone who grosses 49K per year spend on a car?

    • Winston says

      I’m sure Sam will step in and correct me if I misunderstand, but it seems like it’s an “either, or” situation. Either use the “10% of income” rule or the “5% of net worth” rule — whichever is more appropriate for where you are in life. Both approaches have the same end goal. I think that most folks will need to use the 10% rule at first, and then transition to the 5% rule.

  3. MH says

    Interesting idea. I live in Northern Virginia (outside of DC) and I can’t take a piss outside without hitting some sort of german luxury car or one those 40k suvs. Noone is following your rules :).

    Whenever I try to gear up to buy something nice like a watch I look at my portfolio and say to myself: “If I spend this 6k now, I’m losing at least 12k over the next 5-10 years, since I lose all the interest I would make over that time in P2P lending”. In other words, there is an opportunity cost to spending.

    Problem is I never end up buying anything. There has to be a balance in life, and going by net worth instead of salary seems to the trick. It allows you to reward yourself as you reach goals.

    I keep telling myself that when I reach $1million in the bank (not net worth) Ill let myself get some of the nice things I want. That’s what I tell myself anyway….

    • says

      Maybe they are all following the two car buying rules. All about STEALTH WEALTH! NOVA has some of the richest suburbs in the country with Langley, Great Falls, Mclean, and Chevy Chase in MD. Lots of people are ROLLING in dough thanks to government contract money honey.

      I’ll have a new post on financial hoarding you’ll be interested in coming up!

      • Janon says

        Some people may be floating in dough, but there are plenty who are floating on piles of debt instead. U.S. personal savings rates are low, and I would expect that keeping up appearances is a powerful motivator for spending in the upscale DC burbs. Some people can really burn through money.

  4. says

    I think what people need to be careful with is allowing themselves an additional justification to buy the more expensive car. That being said, I think the 5% rule makes sense, especially in combination with the 10% rule. That allows for both young individuals to utilize the original 10% of income rule to buy that 10 year old Honda to get themselves started on the next several years of their life. All while allowing those a bit further in life and net worth to pick up a nicer vehicle should they be in the financial situation to afford it.

  5. nbsdmp says

    Ahhh…a post near and dear to my heart. Cars are absolutely my weakness, I work in the auto industry and do so because since I was a kid I’ve drooled over them. I whole heartedly agree with your assessment of NW to car buying and it is pretty much in line with how I operate. Being a small business owner my nice daily driver is covered & it allows me to have a few toys.

    I would throw one more wrinkle into your equation or maybe ask a couple of questions:
    -I assume this is based on only having 1 super nice car?
    -I assume your rule is thinking that the person will keep the car for a while, not trade new each year?
    -What about boats?

    I sort of take the approach that my summation of frivolous non-essential toys is worth approximately (almost exactly) what your NW to value shows. Life is way to short to short sheet yourself if you’ve achieved and covered your nut. Enjoy life but have a balance!

    • says

      I like the rules to pertain to per individual income earner. If it is a household income, then very well. Have as many cars as you want under the 5% of NW Rule. Just know that costs start piling up.

      If one buys well, then they can trade well without losing too much after taxes, time, and other fees.

      Best time to own a boat is when you pick up and hand back the keys. Love sailing on the Bay w/ a friend’s boat, and rented boats for $300-$400 a day split multiple ways. Much better for sure!

      • nbsdmp says

        Fair enough…I like that rule & yes the costs definitely do pile up!

        I love your best time to own a boat analogy…and it absolutely applies for 99.97875% of the boat owners out there. I would say I’m the exception though, since I live on the water I use it all the time. My boat was probably the all time highest $ per smile value of anything I’ve ever purchased. It is kind of a way of life…like telling a person who loves sunsets and has a house right on the beach that it’s better to walk two blocks and sit on the public park bench and watch the sunset vs. sitting on your living room couch through a wall of windows each night.

      • MD says

        Why not consider leasing? The outlay is minimal (and that money not being used for a car purchase can be used for investments for the long term) and you only pay for the depreciation you use. It is akin to renting an apartment. The upside is that a huge amount of $ upfront is not required, the maintenance costs are low (versus an older vehicle), you do not lose time with a newer vehicle, whereas with an older auto, it seems like more and more of your time is spent in the repair shop and the newer vehicles tend to have better gas mileage than the older counterparts?

    • MH says

      I think net worth is houseValue – mortgage = equity, and equity is part of net worth.

      So if you could sell your house for 100k and you have 50k on your mortgage, your equity is 50k and you can add that to your net worth

  6. says

    Interesting. We just bought a car used and spent about 19% of our annual income and 9% of our net worth. So I guess we violated both of your rules. I looked at things differently during the process. First off, we had the cash already saved up and that set our upper limit. Then I made up a formula to calculate the long-term cost based on up-front cost, current mileage, insurance, taxes, etc. The one we got was a lower long-term cost than the newer models, but the curve was fairly flat because of the reliability of the model (Honda Odyssey). There were even older models with higher mileage (over 100k, often over 150k) that would have made it even cheaper, but the honest answer is we just didn’t feel comfortable that they would be in good shape. We were willing to pay a little more for something newer (a 2007 with 43k miles) that we felt had a more realistic chance of lasting 10-15 years.

    Not saying our approach was better or worse. I like rules of thumb like this to help make sure you don’t do something really dumb.

    • says

      Straight to jail for violating both rules!

      Your plan sounds fine, b/c you have a plan and you know your money strength.

      I just don’t know about spending a whopping 9% of your net worth on a car though. It just seems so much to pay for a lifetime of saving and investing, unless one hasn’t been working very long and has a low net worth.

      • says

        You make a fair point about the % of net worth, and I’ll be honest and say that I’m not entirely sure how I feel about it. We have a pretty solid net worth for our age/income, but nothing too fancy, so it’s not a high percentage simply because we have no money. I guess I view it more as a purchase over time rather than a one-time cost. I could have spent a lower % today, but maybe I would have had to replace it sooner. So it’s not a measurement you can make exactly at a single point in time. Again, the rule of thumb is helpful to make sure you don’t do something really dumb, but nothing can ever be boiled down to something so simple.

        In any case, I do like the thought process here and think it’s helpful. 9% of net worth does sound like a lot when talking about an asset that will one day be worthless. Gives me something more to consider for the next one.

      • Louise says

        I dont think you really being realist on your 5% rule. We just got the same car as Matt- a honda Odyssey -mini van- 2011- costing 25k. resale value-30k. I have 4 kids, a husband that works away from home and i live in an area that absolutely everything we do we must have a car. So from my point of view, we dont need a brand new car that will depreciate on the moment we drive out the lot, but we need a car that we can rely on it. So that being said, i have a 2 year old car, reliable, with a great gas mileage -something that older cars cant provide. Also, i do drive a lot ! I drive kids back and forth and i also go to school at night. total of 75miles/day. Our previous car was costing us way too much if you add the mechanical services plus the $100/week on gas. Our older SUV used to do 11mpg and now our mini van does 23mpg . We were spending $24 dollars/day on gas and now we do $12/day. That means half in gas a month…. so on my case i do love the fact that i have a car that does great in gas, is reliable (since i dont have a husband around to help me) and better of all- holds the price quite well.

  7. says

    Yeah I think a lot of people struggle with the 1/10th rule, especially in their younger years. I’m a fan of compact cars as long as the safety ratings are good. They’re cheaper, sporty, great on gas mileage, I think they look cool, and can fit in tiny parking spaces which cities like SF are filled with. But I can see the lure of luxury cars, especially for those people who have long commutes and go on a lot of road trips. Perhaps there should be an another rule for usage that gets factored into the 5% of net worth rule.

  8. Kevin says

    What is the rule for bikes? Some of the top of the line folding commuter bikes or road bikes can be upwards of $1500-$2500…

  9. Sambuca says

    Since I am relatively young and FI, I also use judgement that adjusts for Shiller PE10 (historic highs) and interest rates (historic lows), effective income tax rate (gone up for me), and discounted cashflow (solid job, expecting to work 10 more years until the kids start college). You can always justify spending as little as possible on a depreciating asset, but when you’re older, money doesn’t have the same ‘bang for the buck’. I have fond memories of cruising in my Supra with the targa top down 10 years ago that I wouldn’t trade for another million in the bank now, no kidding. I drive a fun Mini Cooper S, although I could afford and justify (and sometimes think about) an R8, because I’m not trying to turn heads or impress women, just happy to out-accelerate traffic and get good parking spots that SUVs have to pass up. Maybe you can do a future post that takes some of this into account, since your background is Finance and mine isn’t….

    • says

      You’re right about money not having the same bang for the buck when we are older. I’ve got a post on how to cure financial hoarding I think you’ll enjoy.

      Who cares if you’re 60 and driving a Porsche 911 Turbo? You deserve it by then!

  10. JNEW says

    Sam

    I am just not feeling it. Let me tell you why.

    Lets say I am retired with a $1.5M net worth. My $500K house is paid for and I have a $1M portfolio. Generally accepted guidelines say to take no more than 4-5% of my portfolio out to live on each year. That’s $50K/ annum on the high end. If I take another $50K out to buy a car I have violated this rule, decreased my future “income” based on the lower balance, and increased the chances I will outlive my assets.

    I think I would be more comfortable with a rule that states you can spend 5% of your NET WORTH — only to the extent it exceeds the amount you need to generate a “livable ” income.

    So, If I am retired and comfortable living on $50K / annum- I must “put aside” $1M in net worth at 5% to generate this income (less I guess if interest rates are higher). If my Net Worth is actually $3M– I can spend 5% of the additional $2M on a new car ($100K in this case)

    Thoughts.

  11. says

    A good alternative to those people not earning an income. The only problem I can see is, say that people buy a new car on average every 6 years, then the retiree who is break-even on income and expenses then reduces their net wealth (and therefore their income) by 5% every 6 years.

    That said, if retirement starts at 60, its probably not too much of a problem…

  12. JW says

    What about Tesla?!

    Gotta support the “home Bay” super car!

    I always enjoy your perspective on financial matters, it’s refreshing to see the here’s-what’s-possible point of view of sound financial diligence and management against the usual coupon clipping advice.

    So what will you do with Moose? Donate it for a modest tax deduction?

    • says

      How could I forget?! I have included the Tesla S in the $75,000 range of the chart.

      I think when it comes time to sell Moose, I’ll give it a go on CL, and then if that’s too much of a hassle after two weeks then I’ll donate it for sure. What are you sporting now?

      • JW says

        a 2008 JKU Jeep Wrangler…with about 4 payments left. I’m happily counting the days until this until my car payment disappears, and frees up capital to devote to paying down other debt. It’ll be the first step in my personal, snow-ball debt reduction effort.

        He/She (i need a name i guess) has nearly 70,000 miles and I plan to keep it going for as long as it will last me.

  13. JayCeezy says

    I would like to see a government program for transportation assistance, with a progressive scale like the Federal Tax rate. The bottom 47% of taxpayers would get a free car, and the top 8% of taxpayers would pay for those cars as well as their own. ObamaCar, anyone!

    That was a joke! Seriously, for me in 37 years of car ownership driving a total of 665,000 miles, I owned four cars paying a total of $36,130. I drive it ’til the sound system is worth more than the car itself.

    Some people have jobs where they need to present a certain image, and need a luxury car less than 3 years old. If you live in SF and want to blend with the Twitterati, you might need a Range Rover. FS, you have made your bones with Moose and now deserve to feed your Range Rover monkey! I think Moose would want you to. Enjoy!

  14. Maverick says

    Oh no, I’m in trouble. I have a confession. I’m addicted to wheels. 4 cars, 2 trucks, 3 cycles, 2 trailers, and a tractor. I’m stockpiling for the “cylinder” wars! Seriously, if you can budget for it, long term, get it. But for me that means I do all repairs and i only insure a few at a time (rotating them from the road to storage). Also, collector car insurance can be used on newer vehicles if you limit the miles.

      • Maverick says

        Pole barn.

        Don’t give up on Moose. At 125K, Moose (who I always assumed is an Explorer) is still young…I wouldn’t expect to get rid of a daily driver until 200K at least. Former coworker (Engineer), still drives a manual trans Explorer at 235K…it’s not pretty, some accessories don’t work, but engine is fine and passes state emissions which is key.

        Ah, wheels, my passion since youth. I like to read Autoblog.com often. I believe everybody needs a hobby. It’s not that expensive if you acquire tools over many years and have space to store/work on them. [ICE - suck, squeeze, bang, blow.]

        Just stay away from exotics cars, boats and airplanes. IMO, it’s best to know other people who own these and ask you to join them for a ride on these models of transportation.

        Never get front wheel drive. From an engineering perspective, wheels should NOT rotate and be powered at the same time (torque steer). Today there is no reason to accept FWD with traction control being available on rear wheel drive.

        And don’t get me started on how unreliable most of the vehicles on your list are; I’d never own a BMW, Audi, Range Rover, etc. They are like the most beautiful woman in your graduating class. To later cost their owners a fortune in maintenance! :)

        • says

          I hear ya. Mechanically, everything works well. It’s just all the electrical gremlins are starting to pile up. I long for the days of the 1950s muscle cars. Sweet engine sounds and fuel smells, no electronics!

          Thanks for the tip on FWD. I have AWD.

          Don’t knock the fine ladies. They’ve evolved!

  15. Kristy says

    Luckily, my husband and I do not care about cars. I drive the “nicer” car right now and only because I wanted something safe to carpool the kids around. I have a 2008 Chrysler Town and Country Minivan (don’t be jealous). My husband is currently driving a 1999 Ford cop car…I can’t remember the name right now. He bought it in the spring for $3,000 and it had 45,000 miles on it. We will both drive the cars we have now until they die. In the 11 years we have been married, we have NEVER had a car payment. We do not like them so we save up for cars.

    I don’t understand the draw that people have to purchase the newest, nicest thing on the market. Cars depreciate as soon as you drive it off the lot. I do understand it if you are into cars though. We are all into something, right?

    • says

      Yeah, a lot of guys and some girls are really into cars. We fellas grow up dreaming of that sweet ride with the lovely lady in our passenger seat. It’s kinda like this in all of Asia too actually.

      Love affair with the automobile!

  16. says

    I like part of the rule, since 5% isn’t a huge portion of someone’s net worth. But maybe there ought to be a cap since a car’s depreciation is a bottom line sort of thing: it’s losing a certain amount of money regardless of what other assets you have. You feel the pain relative to your assets, but the loss is the loss regardless. Since we know cars lose money I think a reasonable cap for retirees ($50k? $30k? $20k?) might be in order.

    • says

      Nah, no cap because it wouldn’t make sense to restrict anybody in this free world, especially a retiree with $5 million net worth wanting to buy a car more expensive than $50,000.

      At the end of the day, the Net Worth Rule is just a guideline. I think it’s a good one that will save/make people lots of money over the long run.

  17. Jason says

    I never got into cars, but people do have to have reliable transportation. In my book, even top-end reliability can be had for less than 15-20k.

    As for the 5% net worth rule, it should only be applied to the financially independent. (I think that was the implication…) But, I still like the 10%-income rule better.

    Doesn’t matter for me, though – I’m sticking with my old beater as long as it continues to pass smog tests. I dread the day when I’ll have to look for something new.

  18. says

    Sam, you know I love these posts. I haven’t spent over $3,000 on a car in 10 years, and most of my cars last AT LEAST 7 years. Just sold my Civic that I had for 7 years. Bought it at $2,000, sold at $1,400. Less than $100 a year for that purchase :)

    5% of our net worth would put us on the lower end (just starting to climb the net worth chart), but even when I’m halfway to a million, I don’t see spending $25k on a car. Way more important things in my life to put my money toward.

    And all this is coming from an EXTREME car enthusiast, who happens to have many higher priorities. Ahh well, no 335i for me.

  19. Ace says

    Hey Sam,

    I don’t think the networth formula really works with automobiles. You need to look at monthly cash flow. You have to figure that if you don’t own relatively new, you will be paying pricy mechanical bills (unless you do your own repairs).

    This all depends on individual circumstance and geography. Some folks live in places with excellent public transportation (Chicago, New York, etc.), and may not need to own a car. These folks just rent when the occasional automotive need comes up.

    Most other folks need at least one automobile. If you are not towing boats on the weekends, a basic reliable vehicle such as a Toyota Camry or Honda Civic would work fine. Low cost (both fuel & maintenance). Low cash flow (whether lease, loan, or check).

    You can always buy two year old bling at a reduced price (BMW, etc.), but maintenance costs can get high unless you enjoy turning your own wrenches.

    For a guy like you, whom doesn’t do his own maintenance, and probably doesn’t drive much; I’d say a 30 month lease on a low cost car would be best.

      • Chris says

        There is one more option to consider for those making more than $100k in states with high electric car Tax Credits like GA – leasing an electric car such as a Nissan Leaf – when you factor in the credits – it’s virtually a free car (especially if you get the lower end model) and when combined with no maintenance, no gas, HOV access it becomes difficult to justify the purchase or leasing of any other gas car. Even though you don’t own the car you’re not really paying anything other than insurance to use it.

  20. says

    Sam,

    Great post! I couldn’t agree more. Although I don’t think I’ve ever written about it publicly, I’ve always imagined 5% of NW being a fantastic barometer. I actually have a little over 1% of my net worth invested in my 1997 Frugalmobile, and it feels wonderful!

    Best wishes.

  21. Ace says

    I’d like to add a thought….. I own an airplane….. I’m pretty well off.

    I would likely never purchase a really expensive automobile. Beyond the fact that automobiles are a decaying asset (unless they are collector vehicles), I think it is unwise to outwardly display wealth.

    I prefer a car which can be parked anywhere and no one will pay attention to me.

  22. erik says

    sam. been reading you for 6 months. good stuff. i worked at UBS for 10 years and then bolted to kansas. same deal as you. don’t give up on the moose. pay the money and fix it. it is the creep that will kill you.

  23. AaronB says

    I love following you blog, but this is a first time post. I am still feeling a little guilty about my new car and figured you could relate. I’m 26 years old and my company just bought me a low mileage 2008 Mercedes S65. I am one of the 4 owners but own the smallest %, It cost close to 25% of my annual income and 12% of my net worth. But I have done a good job of rationalizing it, I am 26 single and save half my income pre-tax income. I figure its a once in a lifetime opportunity to own a 200k car and it really wasn’t cash out of my pocket although it kind of was. I also got a great price on it where I could probably sell it for 10k more than I bought it for, its not going to cost me much to drive it for 3-4 years an sell it with depreciation.

    • says

      S65 is sweet! Black with 20″ Brabus wheels perhaps? I was just looking at an older S550 myself yesterday for fun.

      At 26 and single that is prime to enjoy a fancy car. Most bang for your buck. After a while, the women want to know whether you rent or own and the car becomes less of a status symbol though fyi.

      So how much did this bad boy cost you?

      • AaronB says

        Its black but just with the stock 19″s. It was 55k with taxes and the extended warranty. It only had 38,000 miles. I live in large Mid-westen city you do not see many cars on this level. I feel like when I go out to California I see a lot more nice cars.

        • says

          Nice. What love to know how you got to a $220,000 income and $500,000 NW at 26! Perhaps a brief synopsis here and a larger post to share with the community?

          I’ve always believed there’s a lot more money out there than people know or think and you are a great example especially living in the mid-west.

          Thanks!

          (You can start a new thread or respond to a previous email since threading stops at 3)

  24. says

    Personally, I don’t think anyone should ever spend more than $20,000 for a car. It’s such a waste of money! The most I have ever spent on a vehicle is $6,000 and it was a way worse vehicle than my trusty $2,500 Honda Civic that I still have today. I don’t care about what others think about me. I’m more content to watch my net worth grow and spend my money on relationships and experiences.

    • says

      Yeah, I’m having a hard time justifying paying more than a $20,000 for a car as well. HOWEVER, I think after your NW is over $5 million…. I say go crazy and spend whatever if you really like cars. The NW rule says $250,000 car for $5 million, so I think $100,000 or 2% of NW seems reasonable.

  25. Ace says

    My thinking about this is that it’s not so much the price of the vehicle, but how long you keep it.

    Back again to cash flow. Yes… You can purchase a 15 or 20 year old vehicle, but it will be badly worn (and likely corroded). And then you constantly risk unplanned negative cash flow events through expensive repairs. Or worse, waste your valuable time constantly shopping for replacement used vehicles as opposed to doing more productive activities which actually increase your wealth.

    I think purchasing new or maybe a few years old is better. And for many people, get the extended warranty. And then do regular proper maintenance while keeping the vehicle for at least a decade.

    I think planning around a fixed monthly transportation cash flow is the best way to go.

  26. says

    I also think it depends on where you live and how good your repair skills are. Yertle, my 99 Civic, broke down this week 70 miles from home. Luckily, I found a friend to fix it and it wasn’t a serious repair, but if he hadn’t been around, that would have meant a tow and God knows what in repair bills. Little things keep popping up that would be easy for a good mechanic, which we are not. I think Yertle is ready to go to a new owner, and we’ll drive our better cars, even if it means more in gas.

    I would not pay for a luxury car no matter how much money we had. People just don’t have those here, and we’d stick out like sore thumbs. Interestingly enough, our US Congressman lives down the road from me, and he used to drive a Jag until he started running for office. He changed to a Ford F-150, and has been driving similar vehicles ever since. I’ll be curious to see what he drives when his political career is over.

  27. AaronB says

    I am not the best writer so I doubt I could put together a larger post that made sense. It was lot of hard work and luck to summarize. It kind of funny how things have worked out so far because its completely different that what I had planned doing when I graduated school for the first time.

  28. Jon says

    Under your old rule I was allowed a new F-150. Under your new rule I’m allowed a new Maserati Quattroporto. I’m pretty sure my wife won’t be buying into the new rule. Do you have some more ammo for me?

    • says

      A lot of 20-something year olds use the term You Only live Once (#YOLO) for justifying all their spending. See how your wife takes it.

      Do you guys still work or are kicking back nowadays?

      Offer foot massages too. Women seem to love them.

  29. says

    You know, the lower the % of net worth you spend, the better. 5% is a great maximum. Ideally, 1-2% would be the expenditure, but it would tough for many I imagine. To me, the biggest thing as a parent is safety; it’s not worth compromising. The brand name, etc I don’t care about at all any more.

    I have a multi-millionaire friend with a 12 year old car that has over 150k miles. The guy started out years ago buying a car that cost as much as what he made in a year – a sweet BMW. Now, much older and quite successful, he values freedom and independence more than cars. He gets it.

  30. moshennik says

    I have had an issue with your first rule, and have even a larger issue with your second rule.
    Here is why:
    1) Car by itself is not an expense, it’s a depreciating asset, hence comparing it to income does not make sense.
    2) Car is not an investment, so calculating it as a percentage of net worth does not make sense either.

    What does make sense it calculating true annual cost of ownership and comparing it to income.
    Depreciation is only one aspect to look at, also cost of insurance, fuel, repairs, service, tires, etc… and don’t forget to calculate costs of rental, if you car is old and need to spend time in a shop. (those are all tangible costs and could be easily figured out).
    Now, there are also intangibles, such is pleasure and enjoyment derived from driving а nicer/newer car, etc. To some people it’s not worth anything to others it’s worth a lot.

    Why the price of purchase is not relevant: I buy 1-2 year old cars from dealers auction, and sell them 2-3 years later. My depreciation+tax typically runs 3-4/k per year on $50,000 ride. Comparing this to buying the a car brand new (for the same $) and trading back to a dealer would run you probably $10k/year.

    Clearly while the initial price paid is exactly the same annual cost of ownership is very different.

    • says

      Ok, whatever works for you. Seems very complicated to me. My rule encourages people to calculate their net worth and think about car purchases in relation to wealth. What is your net worth?

      • moshennik says

        Looking at all expenses associated with car ownership is too complicated? Or looking at depreciation is too complicated?

        My net worth is just under $2m.. most of it in RE.

        • says

          To expenses, b/c there are multi variables. The more variables you have, the more complicated things get.

          If you propose a guideline that is overly complicated, nobody will end up doing it. I’d love to see a post from you on your recommended car buying guideline if you don’t mind. I’ll post it up here and we can see how it goes. Feel free to shoot me an e-mail. Thanks!

  31. says

    Based on your chart, I am not spending enough on a car! I have no regrets though. I rather see my net worth increase than drive a jazzy car. Besides, I did it with a Mercedes, BMW , Audi and Nissan (Datsun) 300z in my younger days. Some time ago, I was going to satisfy my fantasy of getting an exotic car (Porsche, Ferrari etc) by renting it for the weekend when I turned forty years old. I never did because I thought it was a waste ($500-1,000) of money.

  32. says

    We bought my car in cash. Paid $13K for it. It was a 2007 Honda Civic. At the moment we used a little over half our savings. We had no other cash. Should we have not paid in cash? Maybe, but it feels great knowing we don’t owe any money on it.

    • says

      It certainly does feel good not having a car payment.

      I love Honda Civics. They run forever and are so economical. If I had $26,000 cash, I would be too afraid to spend half of it on a car. I’d wait for my raises and promos to come in and build at least $100K liquidity somewhere in cash and stocks and buy a $5K car instead. But that’s just me! I’m risk averse.

  33. says

    I love Mazda 5′s so I plan on getting a 5 year old model when my 175,000+ mile Corolla finally kicks the bucket. It’s one of the best milage 6 passenger cars out there.

    My only issue with a “rule” about buying a car is when someone makes more money, having a rule might encourage them to get more car than they need.

  34. Jamie says

    I’m glad many people here drive older super cheap cars. But some people LOVE cars. I’m one of them. They get a rush and real pleasure from driving performance cars and it’s not just A to B for them. So since we’ll all be dead one day, driving around in a $6K Civic isn’t how they want to spend the time they have here. Versus a $25K GTI which makes everyday driving fun. And the difference in cost is worth it to many.

    I’m not saying going into tons of debt. But there’s more to life than just making sure you have a nest egg to retire. You gotta have some fun in your life. And if driving is fun to you, drive a fun car.

    I earn $108K/yr. Have about $150K in savings/investments. Net worth with 401Ks and equity in my rental property maybe $250K total. I paid cash for my $15K slightly used 2yr old car. But if I spent double that for a kick arse V8 Mustang, I don’t think there would be too much negative consequences honestly. I’m just too cheap to do it.

  35. says

    Now I see why I keep getting wealthier. I’m a millionaire with my eye on a hundred-thousandaire’s car. I’ll feel pretty good spending under 1% of my NW on a new used car. Whenever these 13 year old Hondas die, that is.

  36. TommyP says

    I just found you site and really enjoy it, lots of good food for thought. Using your 5% rule I can buy something up to 45K, but will only likely spend 30K (I’m thinking about a 2013 Honda Accord V6; BMW 3 series; or Merc C250). Do you recommend paying cash, or can I finance part if not all? Thanks!

  37. Bill says

    Too many people attach too much meaning to cars. For every rich guy with a fancy car, there are ten posers with a mountain of debt. Don’t judge people by their cars – you’ll probably be wrong.

    What ever happened to common sense? Spend what you can easily afford on a car, and that’s it. There are so many better ways to spend money – houses, raising children, education, travel, etc. Debt is for rubes!

  38. Rob says

    While both of the car buying rules you’ve come up with are good, I’m not sure it makes sense to speak in terms of buying price. Better instead to think in terms of operating costs as a percentage of your income. That can include all of the following: maintenance, depreciation, gas, insurance, lease cost, government fees, etc. There are so many variables that can go into how much a car costs you, so this is an equalizer. I’m going to say a reasonable percentage is no more than 10% of your income. If you make 50k, that could allow you to lease a Honda accord for around 250 a month, and pay for insurance and gas. Seems reasonable. Or you coud even buy an 87 Porsche 911, suffer no depreciation, but spend more in gas and repairs. At 200k, you can afford an M3 for example. Personally, I try to shoot for 5% but even that might be too limiting.

  39. MisterDuck says

    I think this article is misguided in a couple respects:

    1. Safety is important. Your net worth doesn’t matter if you die at age 30 in some clunker car.
    2. There is really no good reason to pay more than 30k for a car unless you have money to blow. Even then….it’s a questionable purchase. There are few money pits in this world quite like automobiles.

    Honestly, best deal for cars right now is a new Civic: 20k gets you a car with best in class safety, good economy and proven reliability. For family movers, there’s mini-van options around 30k. For “upscale” cars, there’s also plenty of good options in 30k. Anything past 30k is merely usurping someone’s long-term financial goals.

  40. Clint says

    Gotta say that I stumbled across this website via 20something’s blog and I am loving it! Even though I haven’t read all the comments on this article yet I will post something that I have always thought, why not just save up and pay cash for a car? I always buy a slightly used car (usually 30k or less) so the other guy takes the hit. Then I drive it into the ground while I save cash for another slightly used car. Usually takes about 10-15 years to kill the car and doesn’t hurt my net worth in the slightest. Mind you I’m not buying 30k cars either (all have been under 20k at this point).

  41. Wookie says

    Yeah, I have to say a Vanquish just seems like stupid money. You did say I could spend less…

    I actually have a slightly different spin on vehicle values. In the last 5-6 years, I’ve enjoyed taking my cars to High Performance Driving Events at the major race tracks up and down the West coast. The two cars I use are worth about $15 – 20K each now, 5-7 years of depreciation later. While I could afford something like an Audi RS5 (using the NW rule, not the 10% of income rule), for the time being I fixate on the possibility of a total loss at the race track. I rationalize to myself that I can afford to ‘eat’ a $20K total loss, but a $75K total loss on an RS5 would really hurt.

    Great site you have here. Just stumbled onto it this week doing a Google search on ‘mark to market’ inheritance rules on rental property (still don’t have the answer to that one).

    • says

      Welcome to my site! Funny you got here from a mark to market rental property search rule.

      I so have a large real estate category if you scroll down and to the right. In some post commentary we talk about this, but I forget wish. Try searching in my tool bar as well.

      Cheers

  42. Marius says

    Stumbled upon this page by accident and it always amuses me to read about car prices abroad.

    Where i live (Norway) a dirt cheap 7 year old family car with 60.000 miles on the meter will set you back around 28.000$. A modest new car will set you back around 50K, and the car you want to drive your family around in (ex volkswagen passat, Toyota Avensis … ) starts at 80.000$.
    When you consider that the average salary is around 57.000$ and we pay around 55% tax(including 25% VAT) the 1/10 rule doesn’t even start to make sense. Cars here are in all meanings of the word completely senseless (but absolutely necessary)

    Greetings from the cold north
    Marius

      • Marius says

        Yeah, It’s not to bad. But car prices here are absolutely ridiculous. I guess that’s why me and many Norwegians envy your car prices (and laugh when you complain about them ;)). You know that gasoline (95 octane) is about 9,33$ per gallon at the moment?

        But then again if I become severely ill at this moment, undergo surgery and can’t work for 12 months it won’t cost me a penny and I’ll still get my salary (albeit not from my employer)

        A bit of topic this so I’ll end now… :)

        Regards

  43. Mel says

    Hmmm, I stumbled here by accident too. I have had this fascination lately with the cost of depreciation and mechanical issues. I spent countless hours when I decided to sell my 9 year old Honda Accord (I owned it for 3 years and replaced only the cv joints in all that time) trying to find something that would do as well for me as it did. I paid $7k for it and sold it 3 years and 50k miles later for $5800. I am now hooked on this urge to drive something that will pay me back as well as the Honda did. I fell for my husband’s desire for me to drive a Cadillac SRX 2004 with really low miles but after driving it for a few months I was so nervous about it dropping value that I sold it for $300 more than I paid for it and instead bought an 8 year old 4Runner. I’ve had the 4Runner a month now and I have looked up the book value at least once a week. I think I am addicted in a different way.. but I think I got a good enough deal on this 4Runner that I can keep it awhile without risk of it depreciating on me too much. The thought of buying a new car or anything close to a new car just makes me sick. All I can think about is how much money would be just driven away into nothing.

  44. Heywood says

    I have a 1990 Toyota 4×4 pickup I bought new for $16,500
    Currently it has 309,896 miles and counting.
    I expect to be able to get 2 or 3 more years out of it before
    something breaks that is too expensive to justify fixing.

  45. Mark says

    The part that is missing here is that for most people a car is a necessity, so it is a continuous part of living expenses, whether you have a car payment or not. Personally, I can’t tolerate a beater car – hassles of repairs drives me nuts. My NW is $1.5M (plus the value of my retirement annuity and other income sources) and I make $150K per year in salary. I have a $1M retirement portfolio and could retire in in 7 years at age 56 (though I will do consulting work on the side). My wife and I both drive mid-range Lexus vehicles and feel worth every penny, both bought new. The safety features alone (10 airbags!) make it worth the price of admission – I like idea of my daughter having an airbag in the rear seat. I’m a follower of the Millionaire Next Door, Suze Orman, Jane Bryant Quinn, etc. and follow these philosophies to a large extent. Everyone always focuses on depreciation of a car, but what about everything else that depreciates? When you buy a $65 pair of jeans at the Gap they are worth zero the moment you wear them – now THAT is depreciation! When you buy that huge LED TV for $3K at Best Buy it is basically worth nothing after you take it home! Even a car bought new with 100K miles on it will have residual value! I prefer a balanced approach to looking at Income vs. NW. Income is what you live on and NW/Expenses is how long you can live with no income! So, as long as your NW covers your planned lifestyle (Expense) when you retire, spend up your Income to the extent that you don’t effect NW/Expenses ratio in a manner that compromises your long term goals. Concerning a car, you have to compare apples to apples – meaning, you can’t compare a new Lexus to a used Toyota, and so on. Do the math on a used vs. new car for the same exact car (e.g., used 2011 Camry vs. new 2014 Camry – same exact model and features). By the time you factor in repair risks, no warranty, finance rates, less features, etc., you will find your used car savings are relatively minor compared to the benefit of the new car. This is true, unless, of course, you buy a clunker with high miles – you really are taking your chances at that point. New is also a no brainer when you plan to keep the car for a long time. Concerning the topic of this discussion, I think 5% of NW is a good rule of thumb, but it really does depend on the specifics of an individual’s situation. For example, IF you have $2M NW but no income, then you would want to spend much less on a car! Bottom line, have balanced financial plan that works towards worthy goals (no debt, pay for our kids college, advance society, etc.). And remember that your money will not follow you into the grave!

    • says

      Well said, although you are speaking as someone with a relatively high net worth of $1.5-$2 million eventually. You’re not the worry here, although you don’t mention your income.

      The worry is the 20-30 something year old who makes $30,000-$150,000 a year with less than 3x income in assets who is splurging on a $30,000+ automobile. This is a disaster for one’s finances.

      See: The Net Worth Rule For Car Buying (For Those Who Can Actually Afford Their Cars)

  46. Nathan says

    The wife and I aren’t within your rules, but…..

    The car payment on our luxury SUV costs less than 6% of our take home, we can pay it off at any time and we still save about 40% of our take home and that doesn’t include retirement savings that adds another 10-12%.

    Ultimately it’s less a function of what you spend on a particular item, and more your overall savings rate. We save so much and are working on growing our incomes so our car habit isn’t hurting us IMO

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