The 1/10th Rule For Car Buying Everyone Must Follow

Old Car In EstoniaAfter introducing the 1/10th rule for car buying in 2009, some people changed the way they went about purchasing a car. Meanwhile, many more complained my rule was too onerous for the typical income earner.

I watched in horror as a total of 690,000 new vehicles averaging $24,000 each were sold under the Cash For Clunkers program in 2009. The government’s $4,000 rebate for trading in your car ended up hurting hundred of thousands of people’s finances instead! Your $20,000 invested in 2009 in the S&P 500 index would now be worth over $45,000!

Buying too much car is one of the easiest and biggest financial mistakes someone can make. Besides the purchase price of a car, you’ve got to also pay car insurance, maintenance, parking tickets, and traffic tickets. When you add everything up, I’m pretty sure you’ll be shocked at how much it really costs to own a car and barf!

The 1/10th rule for car buying is simple. Spend no more than 1/10th your gross annual income on the purchase price of a car. If you make the median per capita income of ~$42,000 a year, limit your vehicle purchase price to $4,200 if you must buy one. Absolutely do not go and spend the median car price of $24,000!

A median income earner buying the median priced car is financially absurd. Who spends 60% of their gross salary on the purchase price of a car? Worse yet, who spends 75% of their net income after 20% taxes on a car?

WHY YOU SHOULDN’T SPEND MORE THAN 10% OF GROSS ON A CAR

1) Maintenance costs: We’ve got auto insurance, maintenance, parking tickets, and traffic tickets. Furthermore, the thrill of owning a new or new used car lasts for only several months, but the pain of paying the same car payment lasts for years.

2) Opportunity cost. When you buy a car you lose the opportunity of investing your money in assets that will likely grow and pay you dividends in the future. Everybody knows to save early and often to allow for the effects of compounding. Buying too much car is like negative compounding! Imagine how much money you would have accumulated if you invested $300-$500 a month in the stock market over the past three years instead of paying for a car? Probably around $15,000-$30,000!

3) Stress. When you pay more than 1/10th your income for a car, you will become more stressed. The stress you feel from not wanting to park your car in a crowded lot is completely because you cannot afford your car! If you are within 1/10th of your income, you drive and park stress free. You stop caring about door dings, bumper scrapes, even break ins. Stress kills folks.

4) Makes you want more. The nicer your car, the nicer your other things. You start thinking stupid thoughts like: I’ve got to buy a matching chronometer watch, driving shoes, and outfit. You start paying $20 for valet because you want people to see you come out of your car instead of park for free. Having nice things makes you want to have nice everything!

5) Makes you feel stupid. Deep down, you know that if you can’t pay cash for your car and have money left over, you can’t afford the car. Each payment you make is a reminder how foolish you are with your money. Why would you want to be reminded every single month of being dumb?

IF YOU’VE ALREADY MADE THE MISTAKE

Look, everybody makes dumb financial moves all the time. The important thing is to recognize your mistake, stop, and fix it! Here are some things you can do if you’ve bought too much car already.

1) Own your car until it becomes worth 10% of your income or less. This is the simplest solution if you’ve spent too much. Drive your car for as long as possible until the market value is worth less than 10% of your gross annual income.

2) Bite the bullet and sell your car. If you’ve spent anything more than 1/5th your gross annual income on a car, I’d sell it. It’s making you poor. Even if you have to take a little bit of a hit, I think it’s worth getting rid of your vehicle. Don’t trade it into the dealer because you’ll get railroaded. Instead, try negotiating via Craigslist.

3) Punish yourself. If you don’t punish yourself, then you will repeat your mistake and feel fine with what you have now. For the life of your car loan, take away a food you love to eat such as chocolate. If you are a coffee addict, swear never to drink that stuff again! Save more of your income after taxes and feel the squeeze so that you realize how ridiculous your car spending is.

RECOMMENDED CARS BY INCOME (TASTES MAY DIFFER) 

1/10th Rule For Car Buying Chart

Cars built in the 1990′s and beyond are so much more reliable than those built prior. If you are serious about improving your finances, consider buying a car with less options, and less electronics to deal with. The more you have loaded in your car, the more maintenance headaches you will have in the future.

Financial Status Based On Your Car Spending Habit Chart

THE CHOICE IS YOURS

Treat the 1/10th rule of car buying like a game. You will be surprised to find how many different type of cars you can buy with 1/10th your income if you make over $25,000 a year.

If you want a $30,000 car, get motivated by the 1/10th rule to figure out a way to make $300,000 a year. If you can’t get motivated, then fine. Just don’t think you can afford much more. Think about your future and the future of your family. A car is simply there to take you reliably from point A to point B. If you’re thinking about prestige and impressing others, don’t be silly. Owning a nice property is way more impressive because at least you can potentially make some money from the asset!

One of the worst combos is owning a car that you purchased for much more than 1/10th your gross income and renting. You now have two of your largest expenses sucking money away from you every single month. Think about all the wealthy people you know, or the millionaires next door. Chances are, the majority of them own their homes and drive used cars that don’t come close to 50% of their gross income.

If you want to achieve financial independence and not have to worry about material things stressing you out, follow my rule. If you want to detonate your finances and end up working longer than you want for the sake of a nicer ride, then go spend more than you can afford. One life to live right? All is good!

Recommendations To Protect And Grow Your Wealth

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Best,

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. Michael says

    So I struggle with this theory. I agree that taking on more consumer debt that you can handle is definitely a bad decision. I also understand that the 1/10th of gross income is a guidepost meant to get you thinking about how you allocate your hard earned dollars. That being said, I think there is a argument to be made for the utility for your dollars. What I mean by that if I receive more than a proportional level of utility from my car then i should tilt the % of gross towards those items that increase my total utility.

    For example if I make 100k a year the rule would suggest 10k for a car, financed over 60 month at historically low rates means I pay less than 200$ a month for the car payment. However I figure I get roughly 2X as much utility for this item vs other non essential monthly items….cable, internet, shopping, dining out etc. Therefore I can allocate a higher % of gross.

    That being said, I drive a 05 Nissan altima worth less than $4k and I make well into the six figures…

    • Morgan F says

      Well said, Michael. That’s why I am buying a $35k car on a $50K income :) With a hefty down payment, of course. I appreciate the need to have a good million+ invested by the time I retire; but that doesn’t mean I can’t live a little while I am young, too! And believe me, I’ve earned it- “it” being the right to give myself a nice thing. For some people, a car is more than just a car.

      • Bud Mor says

        Obviously the title of this piece is ridiculous. If someone is making $500K, I don’t see why they’d limit themselves to 10%. They’d still have more money than a person earning $400K who decides not to buy a car at all.
        Further if “everyone” did follow this rule, most people followed this rule, then the demand for $5K cars would go through the roof making them too expensive for the rule. It would also decimate new car sales, which would over time effect the used car prices, making them more expensive.
        Also the rule is badly explained. If it said 10% per year, or 10% every x-years, it could have some validity. What if one paid $13K for a cheap new car, and kept it for 12-years; as opposed to someone who only paid $3K, but the cars clapped out after 3-years?
        Having said all that the underlying (but badly explained) good sense in this article of being careful about how much you spend on a depreciating asset is directed at exactly someone like you Mr. Morgan F. i.e. generally speaking, buying a $35K car on a $50K income is idiotic.

        • says

          I’ve made over $500,000 a year for several years and stuck by the 1/10th rule. At $500,000 you have to pay about $180,000-$200,000 in taxes. It is not pretty.

          Not everybody will follow my rule, but I hope my community will follow my rule and let other people have fun with their finances.

          • Bud Mor says

            But surely that is the point; it is easy to stick to the 1/10 rule if you make $500K. If you make the median US wage you get to spend just under $6K. Plus in life, if you are in that bracket, you will always have a shitty car. Even if you manage to double your wage, you still end up with a shitty car.
            Plus if you spend $50K on a car; it could easily last over a decade with few problems. If you pay $6K it most likely won’t last a decade.
            As I said before the rule is not fully worked out. For financial advice it is very poor. Wanting to have a simple rule is no excuse for not putting in more complex details.
            The obvious issue is how often do I get to spend 1/10th of my income.
            How about if I did it every year and traded in my old car, I could work my up to a nice car over several years?
            How does it make sense to compare someone on $50K with practically no disposable income; to someone earning $500K who has loads of disposable income?
            A percentage per annum spending on a car, which one could save, would make much more sense.
            Last year we made about $300K, but the year before we only made $52K. This year will be between the two. What should I do–cherry pick the year, pick the lowest, take an average?

            I agree with the idea of not overspending on cars; and the 1/10 rule is a good place to start a discussion; but it is too simplistic as is.

            • MK says

              “Last year we made about $300K, but the year before we only made $52K. This year will be between the two. What should I do–cherry pick the year, pick the lowest, take an average?”

              GIven that your income seems highly variable, you should probably be very conservative.

              “Plus in life, if you are in that bracket, you will always have a shitty car”

              It’s a car. It gets from from point A to point B. Almost any care you buy these days will fulfill that function adequately.

              Of course, if your car is also your hobby, spend more on it as your hobby. But that means seriously spending less on something else. Ultimately, what matters is your savings rate and hitting your retirement targets: http://usatoday30.usatoday.com/money/business/story/2012/09/12/fidelity-issues-new-retirement-savings-guidelines/57756922/1

              Are you on track with your retirement savings? Great, then feel free to spend a little extra for your car if you really enjoy it, keeping in mind that what you spend today would be worth 10x as much in retirement.

    • Michael F says

      This is just he kind of ridiculous rule that makes sense to someone who gets to buy a $50,000 car using it. A $40,000 per year accounting clerk who buys a $4,000 car is buying all sorts of trouble. They break, which angers the boss who thinks he is paying you sufficiently to have reliable transportation. They throw a rod or the transmission goes out and suddenly you need to spend another $4,000 to fix or buy another car that will likely break, too. A scooter might make sense in LA’ but let’s put our samurai on one for 15 miles, in January in Chicago.

      Next, a car is not an asset, it is a personal expense. Relating it’s purchase price to income is silly. It’s monthly cost should be related to income. The general rule set by the mortgage industry is 28% max for your housing costs and most financial advisors suggest 25%. They generally put a max on transportation costs at 15% and suggest 12% as reasonable expense. For our clerk above, that is monthly total of $400 and after insurance, gas and maintenance, a car payment of about $225. On a lease (10k .miles per year) that will get you a nice Toyota or Honda, new, that you can trust.

      I remember being young, poor and driving junkers. They were the biggest stressor in my life. I could never be sure that I would get to places on time or at all. I would suddenly find myself with a repair bill I could no afford but had to pay. Often I would find myself on the side of the road 10 miles from home and not enough money to pay for a tow. So I would write a rubber check and scramble to get the money for it before it hit my bank.

      I agree with you that building personal wealth is important, but buying a crappy car is a lousy way to do it. For young people seriously reduce the bars and concerts and get a part time job. And don’t have children until you are established. That will do much more for your financial future than dropping $100 per month (maybe) out of your budget by buying a crappy car.

      • says

        Michael, cars are much more reliable now than when you were growing up. If they weren’t, they would go out of business.

        I bought my car used for $8,000 in 2005 and it is worth maybe $3,000 today and still going strong.

        This ain’t the 70s and 80s where cars broke down left and right.

        • Caleb Boulier says

          Cars are more reliable now but the doesn’t mean they don’t break down and need maintenance! I have only owned cars from the late 80s and 90s so this is my point of reference. I bought a new car in 2012, I probably bought way more car then I should of but I have also invested 0$ into the car since 2012 (maintenance is taken care of by warranty, oil changes covered, etc). Since I started driving in 1995 I haven’t EVER gone 2 years without maintenance, repair costs, some years that was well into the thousands. I agree that paying interest out over multiple years is mostly ridiculous and there are MANY people driving way more car then they should, but you have to look at everything. My sister is a perfect example she has a 1997 Nissan that she has had for years, at this point the car is 1/10th her income and is paid off yet she puts about $1000-$1200 into the car yearly for repairs – not to mention the stress. Constantly worrying about your “cheap” vehicle is not going to help eliminate your stressors. I think there is a happy medium somewhere there. I do agree that most people have cars to get from point A to point B, but I really like my car as well. It’s more then transportation, it makes me feel better and I enjoy driving it. This is probably only a small percentage of people driving that feel this same way which is why I think where applicable people should not be driving anyway (public and alternative transportation would suit them better)

  2. Gordon Sutcliffe says

    It would be good to see the reasoning behind this 1/10th rule. I can’t see how it benefits anybody except to serve the American obsession of turning pots of money into bigger pots of money (the blogger shows a strong aversion to anything that depreciates not because of the effect on your actual financial health, which is what is really important, but simply because you missed the opportunity to turn that money into more money). That’s how this article reads.

    If you earn a good income and are not a slave to the stock exchange, I fail to see how spending a more sizeable chunk of cash on a car is going to hurt you financially. Indeed, if I earn $200,000 a year, apparently I should aspire to a Hyundai Genesis, despite this amount being in the “rich” income bracket.

    But if I earn post-tax $200,000 a year, and my living costs are, say, $50,000 a year, I could happily go out and buy an Aston Martin with the savings from that year and get back to saving/investing from there onwards. Even if you put aside $20,000 a year for running costs, you’re still saving $130,000 a year. So where’s the financial faux-pas here?

    There are people like the blogger who are not affected by the attraction of driving a nice car, which is great, but that does not mean everybody else should have to deprive themselves based on an arbitrary rule made up by people who want you to live to their standards.

  3. Gordon Sutcliffe says

    Thanks for the links.

    I think basically this rule ceases to be relevant after a certain upper threshold. The idea that somebody earning $500,000 a year after tax is being financially irresponsible by buying a Bentley is obviously idiotic.

    Whoever came up with the rule probably didn’t think it through that far. Sure, if you make $50,000 a year a car purchase will stretch you, because your budget is already tight, but at higher earning levels if you’ve still got $400,000 left over after all your living costs where is the logic in depriving yourself? Just so you can watch the numbers go up in your bank account a bit more than if you hadn’t bought a car? What’s the point in earning hundreds of thousands if you’re not going to use it?

    Money should never be an end in itself.

    • says

      Do you speak from experience? When I made $500,000, I had about $325,000 after tax. You are saying I should be comfortable buying a $150,000 Bentley? This is the type of spending that keeps people in the rat race for way too long.

      Instead, I saved and invested about $225,000 of the $325,000 every year, drove a sub $50,000 car and enjoyed the money elsewhere.

      Please tell me what your after tax income is after $500,000, your age, occupation and net worth so I can get an idea of where you are coming from.

      Thanks!

    • MK says

      “The idea that somebody earning $500,000 a year after tax is being financially irresponsible by buying a Bentley is obviously idiotic.”

      Not at all. After all, many of his other expenses also scale, and he may have expenses someone who makes less doesn’t even have.

      Of course, many people making $500k/year reason just like you do, and they end up poor and in debt despite their high incomes.

  4. Gordon Sutcliffe says

    I would invite you to read the second sentence more closely where it says “after tax”.

    In any case, one of the flaws with the 1/10th rule is that it disregards the fact that your earnings come every year, a sensible car owner will keep their car for years. So if you keep your car for, say, 5 years, using your figures you’ve earned $1.6 million after tax in that time, and spent $150,000 + running costs (let’s say $100,000) – resale value (say, $65,000) = $185,000. I think that means you’ve spent about 11.5% of your earnings over that period on an asset that is a big part of your life in social, pleasure and utility terms.

    Your living costs might come to about $300,000 in that period, so that leaves you with a saving of $1,115,000 in a 5-year period.

    For one of the most important assets in your household for work, social, pleasure, and freedom, I’d take that deal any day, thank you very much!

  5. Brice says

    I am an enthusiast. I know much about cars and how to mod them. It is an expensive hobby, but extremely satisfying.

    Worrying about parking in a crowded lot or tight spaces does not mean you can not afford the car, it means you respect your things and are happy with your riches and not piss poor, morally.

    Now, I am young (19 to be exact) and have probably driven more cars than most people on this page because of acquaintances (dealerships, shops, customization shops), targa trophy rallies and one gumball 3000 rally plus my dad is into cars as well.

    Ultimately, what I am saying without having to type a ten paragraph paper is to spend your money on what makes you happy. It doesn’t matter if you make 150,000 a year or 500,000 a year. If you want a nice, fast, 911S, go get it. :)

    • J.MVolvoman says

      Hi,

      I liked the article a lot and I am reading through the comments and I am wondering what kind of jobs you do? I am sorry to say but, if you are earning 500,000 $ a year. before or after tax does not seem to matter to me, then I am quite sure you can afford yourself a nice car and not worry about the parking bills.. am I wrong?

      though for most people in the USA or anywhere else in the world like me, living in Finland, do not earn over 200.000 $ or EUR, or even close to that.

      I earn 30.000 EUR a year, with a normal office job which requires a Bachelor Education (Economics) the salary incl. my bonus by the way. anyway I have the small impression you are all doing something wrong, comparing a normal office man’s rule with a rich man’s salary. 1/10th is of course not meant for the people with a salary of 500.000 $

      just to be clear, I drive a Volvo XC90 from 2006. 145.000km on the counter, paying 400 euro Trafi (roadtax) and around 1600 EUR insurance. I drive it around my home town, drinking 15L/100km with a benzine price of 1,68 (25 EUR a week) at the moment of writing. (parking is for free) so average I pay 3310 EUR on just tax, insurance and benzine. (think average 700 euro check up and small repair bills a year) so around 4000 EUR a year which I spend on my car. (Volvo XC90 Automatic, 2.5 7 seat) I have no kids yet, but planning on 2 in upcoming 6 years + I drive my grandparents to the supermarket.

      now, we can say that this 4000 EUR a year, is a waste of money. and Yes it is, but that goes for all cars. as the value of a car doesnt go up, it goes down, its like that in the USA, in Europe or in Asia and in 6 years time I have spend 24000 EUR on a car. (excl buying price)

      now, just an inside of our life, (wife and I) we own a house, pay bills (such as phone, internet, water etc.) and incl car we spend around 1700 euro a month (incl. 250 EUR saving for tax bills/repairs and 100 EUR benzine costs) now we have around 1800 euro left to spend on food and activities.

      what does this say about my life? am I stretching my budget to much? I think not (government pays for education and daycare incase we get kids) we enjoy our car, and I enjoy every ride of it. I must say yes I could have got a cheaper car not a problem, but on the other hand, I think you live only once and as long as you do not bring others within your life in danger with your finances, you will be fine.

      Regards

      J.M

      • says

        Welcome to my site from Finland JM! Hope you subscribe and stick around.

        Those who make $500K+ can afford a nice $50K+ car for sure. Very consistent with the 1/10th rule.

        To answer your question, it all depends on how much more is left in the bank, and your net worth. Saving money more money should feel like an active process. If you don’t feel any type of pain or scrunch saving money, I don’t think you’re saving enough.

  6. Nick says

    I understand how this can be seen as good advice.
    However I will not live according to any of it.
    I alone make upwards of 200,000 annually.
    I do not want to sound arrogant but I feel it is needed for my example.
    I have been, and always will be, a petrol-head.
    Back in the 70s I built my Impala from stock to street king.
    Currently, I own a Dodge Viper SRT-10 (paid in cash), Dodge Challenger (Cash – Daily Driver), as well as an F-350 (paid in cash).
    My home is paid for, granted it was only 450,000.
    One thing you need to do if you want to be well off in the future is save 20% of every pay check and either invest it or put it into a savings account with interest.
    Start when you are 18 or so and just getting your foot in the door so you can plan ahead and force it into a habit.
    With everything paid off and have built a sizable portfolio, I am going to retire at 55 and have enough to live off of and still be able to pay for my grand child to go to college.

    • Nick says

      I forgot to add a few details.
      My wife makes, as much as I hate to say it as a man, more than me.
      She is a physician making 275,000 annually.
      Together we make around 460,000 annually from our employment alone. With investments into businesses, stocks, and flipping we can make more than 500,000 yet we are both getting to old to flip goods anymore.
      She drives a Maserati and a Range Rover. She likes imports, I still love her though.
      She agreed with me that living in an estate isn’t important as long as we both are comfortable and together. However she has been talking about moving and finding a place for retirement.

      • says

        I think if you are a multi-millionaire and have your debt under control with a wife who is a physician that can take care of the family, then you’ve definitely got the green light to go wild!

  7. Mark says

    Interesting read, but I must say I disagree with much of it. I see offhand two big problems with this article. The first assumes that users are buying a car and then spends the next few years paying it off. So, if thats the case, how long are they to spend making payments? Since we are talking about how much to pay up front, I think its much more important to say how much you will pay later since thats where the majority of the car will be paid for. How much per month for how many months? Actually, this is what lands millions of people in financial trouble – only looking at the cost right now and ignoring the cost down the road. Also, what if you have money saved up and can afford more than just 10% or a down payment? I would think it would make a difference if someone has 10K, 100K, or $1 million in the bank when it comes time to buy a car.
    The other problem is that it just isnt really realistic. This chart shows that in order to buy the cheapest of the new cars available today, you need to make at least $100K, and the chart goes on from there. There just arent enough people making that kind of money to supply the rest of the population with their used cars. Further, when I look at the average new cars listed between $150-250K, there are even fewer of these people. Beyond that, the average American, in the $25-50K range, cant even afford a car not potentially requiring major repairs in the near term. Cars from 2005 (at the newest end of the spectrum) are 9 years old; a quick search for $4000 cars on the internet revealed most such cars are actually 12-13 years old. These are cars with between 108,000 and 135,000 miles on them on average, though they could also be much higher. At that point, I’d be afraid of them breaking down and costing maybe 5% of your annual income just to get them running again. Seriously, if within 1 year you end up spending 15% of your gross income to buy a car and then get it fixed, wouldnt you be better off spending that 15% on the cost instead?

  8. Loohoo says

    Buying $4500 used cars…..you forgot that you’d be buying another jalopy $4500 used car every 4 years, versus paying $25K for one that will last 15 years. Add in the lost work time from babysitting all the extra repairs of a $4500 used car.

    No doubt, Americans need to save far more and spend far less, but enough with the hyperbole of $50K/yr nurses in $4500 beaters.

    • Saliormoon says

      I think people are confused about the value of the car and the reliability of the car. My husband bought a car that was worth $3K when he was 19 and drove it for 10 years! The key is to take some time to find a used car with proper maintenance record (and do a good job to maintain your car after the purchase).

      By working through college, not buying new cars etc we have a healthy personal balance sheet. BTW we are both in our mid-late 20s. The key is to understand what’s your priority.

  9. GM says

    I have always bought new (since my first couple of cars), while my best friend has always bought old used cars such as you mention. Over the years, the amount of times he has broken down (on the freeway with the family) with different cars, didn’t have a car he could “Trust” to go on a long drive holiday with. In fact in his latest, he just paid $2800 to put a new transmission in (that would have been covered generally for the first 10 years on most power train warranties).

    Also, just because you haven’t had a problem with your latest car doesn’t mean that reflects the bulk of the older used cars out there. That’s like saying you haven’t gotten lung cancer smoking so everyone should smoke.

  10. Ben says

    Turns out I did this EXACTLY last year. I make $135k and bought a used car for $13,500. This same car was $35k new and only had 65k miles.

    It’s all paid off, unlike any of my previous cars that clocked in closer to 30-50% of gross (when that number was smaller).

    It could be more exact if we did a ratio based on disposable income after expenses. I just got married and have no housing expense (lucky me!) even though we will have to move soon. So I have the expenses I had in college and no debt payments. No student debt. I could definitely go past this threshold where someone with a mortgage and such maybe shouldn’t. But yeah, I’m hanging onto my 10% car and saving like a madman!

  11. Joe says

    Let’s say over a 10 year period, you drive 100,000 miles. The average speed of a car, factoring in highway driving, city driving, waiting at stop lights, maneuvering in and out of parking spaces, sitting in you car waiting for someone, eating, etc., is less than 25 mph. At 25 mph, it takes 4000 hours to travel 100,000 miles. With the average work week being 40 hours/week x (52 weeks – 2 weeks holidays – 3 weeks vacation + sick) = 1880 hours. So, you are sitting in your car for those 100,000 miles, an equivalent of 2 years and 2 months at work.

    If you can find a cheap car that is not a disaster to sit in, safe , truly economical, and that you over all enjoy being in and driving, go for it. If public transportation totally meets your needs, go for it. If not, I don’t see how punishing yourself for 10 years is saving you anything in the big picture, well beyond electronic digits. If I am 30 times more likely to be badly injured or killed in a 2000 Chevy Tahoe than a new Chevy Traverse, probably not a good decision to go with the Tahoe. If I get chronic back pain from driving a 2001 Honda Civic instead of a new Civic, probably not a good investment.

    • says

      Sure, I think a car 30X safer and one that doesn’t give you chronic back pain is worth buying over one that doesn’t.

      I also think flying private is more enjoyable than flying economy commercial.

      It’s whatever you prefer.

  12. Slking 91 says

    It must be nice to have made a comfortable living. That’s awesome. I hope one day I can live as comfortable as well. I could only imagine how less stressful of a life you have compared to me. Unfortunately my credit is whack, student loans and medical bills, and I’ve never touched a credit card in my life. I work part time at a small town grocery store and another job just 8 hrs a week. Making around or less than 800 a month. Not to mention I have a 1 year old. I do not receive assistance what so ever. I go to school as well. It’s not that I don’t want to do better, but I never realized how much I needed a vehicle to have more possibilities. I spent what I call an arm and a leg 4500 to get my license back after 2 years for a $100 speeding ticket, long story short… Mom offered to pay as a graduation present and forgot too. Pulled over and handed a driving under suspension. Thought to pay speeding ticket, but in all reality I had to pay for everything. Not much I could do when I was living 300 miles away from the nearest relative. Had to quit school, job, and move back home. Driving home I got pulled over again. Barred my license. It’s pretty embarrassing having a baby and have to ask for rides. So with this joyful rant coming to an end, times can be tough and unbearable. I think it’s amazing how some people can build a fortune or even be blessed to take over a family business. Something like that. I cant wait to overcome this mess I’m in. I play the lottery weekly, in last resort high hopes I win! Haha. Can’t win if you don’t play. Right?! Have a terrific day I enjoyed reading the back and fourth comments. Thanks for the laugh :)

  13. Steve says

    I have a question. I just recently graduated from college and started my job (28 years old), making roughly 60k before taxes. I need to buy a car and I’ve been doing a lot of research. I’ve read this article saying 10% and I’ve read another saying 20-35% and another saying 50%, lol. I have a 50k college debt which I will be starting to pay off soon, my gf owns a great house so I don’t have any living expenses, and I am looking to buy a new car. Originally I was planning on spending 30-40k as this will be my first car and want a nice, new car I’ve been wanting for a long time. I have 8k saved up which I was going to put down as a down payment regardless of how much I spend. Other notes: We have no children at the moment, gf has no debt and really high credit score, we’re planning on getting married within the next 2 years, and I do (more than likely) want to get my masters (or PhD) before I hit 32 (which will require me to stop working for 2 years :/). Is it really, really bad if I spend 30-40k on a car at this time?

    Thanks

    • says

      Please listen to my advice.

      If you have $8,000 saved up, you are $32,000-$22,000 short of affording a car.

      Go for a used $6 k car. Chances are HIGH with your debt level and savings and impending car payment you will regret not following my rule.

  14. Marcus says

    This is sound advice, wish I read this article a year ago when I bought my motorcycle. It cost me $7.5 k but I make $31 k a year. After the note and insurance, I’m out a little over $300 a month and that’s extra money I wish I could be saving to invest.

  15. Henry says

    I do understand the point you are making, but I got to disagree. (Surprised?!?!) I admit, there is some personal experience that goes into this. But give me a chance.

    Bad luck. Yeah, my family has terrible luck with used cars. My father has owned a good amount of used cars. Five of which he bought from strangers. Each one of them, he has spent as much fixing them as he did purchasing them. Possibly more. A lot more. Not to mention the amount of work hours he missed because some part in there isn’t working properly. The good side of this? My dad learned how to fix cars by watching people fix it.

    So then there’s the great idea to buy a car from a family friend who you know takes good care of there car. Here’s the tricky part. Honda CRV with 110,000 miles. Toyota Previa with 70,000 miles on it. Ford Escort with 90,000 miles. What do they have in common? They were all totaled in rear end accidents. How? I have no idea. Once again, shitty luck strikes and remains undefeated.

    What ended up working for my dad was buying a Toyota Camry (base model) new out the door. As of today, the car is 15 years old and has 260,000 miles on it. As of today, it has never broken down once. It’s still going strong.

    When time came for me to get a car, I got a new Toyota Corolla. In a little less than two years, I was hit by a drunk driver and the car was considered total. My insurance ended up paying me about 1500 short of the amount I paid to take the car out of the dealership. Got real lucky there.

    Here’s where I’m going with this. SAFETY. My Corolla was T-boned on the passenger side. It was supposed to be totaled. The frame was bent, the airbags came out, axel and suspension screwed. SEVEN MONTHS after the accident, I’m coming out of the grocery store and I see a grey Corolla that looks strangely familiar. I saw the driver get out of the car so I went up to them. Guess what? Turns out to be my old car that was supposed to be total.

    Like many cars that are considered totaled, they’re sold at auctions. A body shop ended up buying that heap of trash metal and bent its frame back into position, replaced some parts, and gave the passenger side of the car a new paint job. They didn’t bother doing anything to the driver side because the way I recognized my car was the little dent a skateboarder left on the door when they smashed into it two weeks after I bought my car.

    I told the guy driving my old car, or his new car, that I was the previous owner and what happened to the car. At first, he was at disbelief because he bought the car with a “clean” title. I showed him the photos of the car accident that I still had on my cell phone. Needless to say, the dude was really pissed off.

  16. Steve says

    I think that this is sound advice for the average consumer. My buddy works as an insurance adjuster and a claim hit his desk a couple months back where a 2 month old Mercedes CLS was totaled. Upon meeting the owner and giving him the adjustment for the claim the owner said that it wouldnt even pay for the car(he was paying $1400/month and the claim covered about 70% of the cars cost due to depreciation of a new car off the lot.) He was paying close to 50% his after tax income each month for a car he shouldn’t be driving and living in a one bedroom apartment.

    My fiancee and I are both 25 years old and combined make ~150k/year from our traditional jobs. I work nights and by day I am also a trader. Last year I made 200k profit off of investments after taxes we used the money to pay for our wedding(coming next March 43k affair), I bought a 550i GT 83k with options and tax(cash), and we bought a house(her grandmothers house we took out a 30 year mortgage for only 100k, it needed work so we took 20k cash and put it into the house and the rest went to her aunts and uncles who had a share of the house) The result is that we pay about 820/month + utilities + taxes which comes out to about 2200, but we have 2 legal apartments in the house with separate entrances kitchen and bathrooms that generate $1000/month each. So our biggest expense is my fiancee’s students loans which come out to 1400/month. Meaning that at 25 after taxes our cost of living(including student loans) is about 39% of our income we save 10%/year and currently have 6 months after tax income saved and invest the rest. I have friends that have similar incomes, but don’t invest and are struggling between student loans, an apartment, and that 600/month car they had to buy that equates to 30-40% of their total income.

    Having a budget and sticking to it is important and while my car is currently worth 90% of my after tax income it was purchased on money that I do not consider ‘income’. We live off of our traditional incomes with budgets and the investment profits turn into extras like a trip, a car, a wedding, an extension on the house whatever it may be; still not touching our incomes. Once her student loans are paid off I plan to retire to day trading and we are planning on starting a family in about 3 years so that she and I can have our nights together again and I will be a stay at home dad, trader.

  17. Adam says

    Oh boy…this article makes me depress :( but i will say that i somewhat agree with Financial Samurai. My opinion is that this 1/10 theory applies more when your income is on the lower end of the totem pole. The more money you make, the more chances you have to make bad financial decisions and still be able to achieve “financial freedom”.

    Having said that, i will share my example. I think i’m pretty low on the income side of things at the moment ($180,000 before tax in a good year). Just recently bought a 600k house (not in cash…have a monthly mortgage payment). I have a financed 2013 honda accord (about 7k left on the lease). Am married and expecting our first baby in a couple of months. I wouldn’t say that I live large. We are very modest…i think. We don’t vacation on exotic islands, eat in high end restaurants, or buy super expensive clothes. We do take a modest vacation a year (approx. 3-4k vacation). I’d like to think that we are very financially sound but i still wonder sometimes. Having said all that, i do have an obsession problem. Once i get obsessed with something i find ways to do it even if it means (sometimes) that i will have to make some poor financial decisions.

    Example # 1

    As i mentioned that we recently bought a 600k house. Mind you that i was not making 180k for the past couple of years. In fact, the year we bought the house my income was 120k. My income just got bumped up to 180k. Having said that, after buying the house, we didn’t have much left over. Having been in the house for 2 months, i couldn’t stand the empty finished basement so I got obsessed with the idea to put a home theater down there. 2 months later, i ended up spending approx. 13k and got my home theater. I can certainly say that we will never go to the cinema to watch a movie again. I thought of it as an investment in house. My older brother didn’t share the same mentality. He found it unnecessary at the moment. To each their own i guess. I will say that I see his point as well but i was obsessed and did it. I guess i could have saved or invested the 13k for our future instead of something material that we enjoy every now and then. It does give my house a wow factor that i very much appreciate when we have family and friends over.

    AND NOW, i’m obsessed with a new car (we have one car at the moment). The car i’m obsessed with is not cheap and comes with a 62k price tag. I’m not looking to buy though. I will lease it. The only thing that is holding me back is the fact that i will essentially pay half the price of the car during the lease term and not have any ownership in it. According to you (financial samurai), this is like throwing money down the drain…i assume. I would not counter you. It’s almost like throwing money down the drain. The satisfaction i would get is to enjoy this car for 3-4 years. Deep down inside i know it’s not a smart decision but remember the obsession sometimes leads me to make not so smart decisions. I may hold off or i may go and get it next week. I’m very confused but reading this article re-assures me that i’d be making a huge mistake by leasing a 62k car at this point in my life. Perhaps a $5k used car is the way to go….or no car since we reeeeally don’t need a second car as i work from home. hmmm…..

    One last thing i will mention is that i don’t invest my money. Not really knowledgeable in that department. So for me, any money that i set aside just sits in my savings which is not a bad thing but it doesn’t grow at a rate of 8% or more :)

    • says

      I understand the obsession well as I had it in my 20s with seven different cars!

      What about a sweet 18K used car? 62K is expensive, especially since you’ve already got a car on a 180K gross income.

    • Steve says

      Congrats on your upcoming child I would suggest that you consider just having one car or 2 cheaper cars. Many people don’t realize the cost of having a new child. If your current car is a lease I would suggest buying after as by leasing you’re doing dealerships the favor of paying the depreciation on the car without getting anything after the 3 years. You say on a good year you are making 180k does that mean it can come back to 120k next year? Investments are a huge benefit while you have extra money sitting right now you can increase your income. I am the Steve that made a lot in stocks last year and bought a house. I day trade with high risk stocks, but with your family starting off look for more stable investments and try to avoid the flashy cars(I know I know coming from the guy that bought a brand new 550i GT). My fiancée drives an 18k car and it’s a nice safe little car look for a nice certified used car or a used car that you can get an extended warranty on in the 18k that is baby friendly and safe. A larger backseat can be a benefit since your wife can sit in the back with the baby if need be. Consider getting the 62k car down the line when it won’t be a huge income investment and not one where you’re paying 700+ a month just to lease it. Good luck and I hope everything works out smoothly for you and your wife.

  18. Phat says

    Perfectly said author. I have always had similar situations and burnt a lot of cash on cars not knowing how much is too much.
    I believe 1/10th is a great measure, which was the answer I was looking for.
    FYI.. I’m lower middle class income range – 50k per year. Thanks

  19. SNengr says

    I purchased a new truck a few years out of college at nearly 50% of my gross salary, ouch. $20K was in cash, the remaining loan was paid off in about 2 years. 11 years later I am still driving the same truck. My wife’s car was purchased with cash 8 years ago at about 18% of our combined income. She is also still driving it. Both vehicles are “value” models, no bells and whistles. We have had ZERO unexpected maintenance on both vehicles. We missed out on some investment opportunity, but does the length of ownership count for nothing? I think you are missing a component to your equation.

    I agree with the intent of your 1/10th rule, on average, Americans own way too much car. Your chart makes me laugh to think about all our friends and colleagues (100-200k earners) flaming about owning a Corolla instead of an Audi.

    Your rule is a little extreme for lower income people. If you have the discipline of owning a car for longer periods of time, a more flexible rule would accomplish the same thing.

    I suggest amending your rule to “You shouldn’t BORROW more than 1/10th of your gross on a car”. This way you can argue to all the naysayers, prove you can be financially responsible enough to save for “more” car. After saving, I think a lot of people will be reluctant to let go of that hard earned pile of cash.

    We are expecting our second baby and will need to upgrade BOTH vehicles. I am getting ready to drop about $70K cash on 2 new vehicles by the end of the year, ouch again. (28% of income). If we own them for a minimum of 10 years, the cost per year is manageable.

  20. Fred says

    I can’t quite decide what to do. Recently divorced and I have $70K cash sitting at like 2% interest at a bank from the sale of the house. I now live at mom’s and pay $500 per month rent. Soon my mom will sell this house and I will buy a new house using the equity for a down payment. I will be the owner and assume the mortgage. Mom will live with me, widowed – cant leave her alone, even if I re-marry. So looking at like $2,000 per month carrying costs including mortgage and hydro, etc. I earn about $75K and contribute a combined with my employer 12% per month to a pension plan.

    I want to to buy a 2015 Duacti Diavel at $20K. Yes I can invest $20K and make money – but, would it really be a sin to spend that money on the bike, in cash, and enjoy the bike and life? I would have $50K cash left, in addition to pension savings.

    What would you say about this purchase, given that it is in cash?

  21. Zulfiqar says

    I agree with FS wholeheartedly. I wish I knew what I know about buying cars 6 years ago when bought a Mustang GT conv. For 32k on a 60k after tax salary.

    Everything he wrote about, from the stress of the car payments every month, to small dings and scratches on the car, I’m a living proof of that. I finally paid it off and traded it in for a used Toyota Camery hybrid last year, paid 5k in price difference but at least I have no car payments now and I don’t think I’ll be buying another car for the next 10 years, I’m done.

  22. Gurren says

    Hi

    I loved the article and will follow some of the guidelines listed. But I have a question about buying the cars.

    Do you recommend paying for the car in cash up front or using the car payment approach?

    Depending on your above answer, why do you recommend this?

    Thanks for the advice. Really helps as I’m a young reader.

    -G

    • says

      Hi Gurren,

      The post is here to encourage people to spend less than they make. Using the 1/10th rule helps that. Getting a loan that’s not a 0% interest loan doesn’t make sense on depreciating asset. If you stick to the 1/10th rule, pay cash or get a 0% loan it doesn’t matter too much, b/c 1/10th your income should be low enough to keep your monetarily safe from disaster.

      Don’t forget to subscribe to my e-mail feed!

      Regards,

      Sam

  23. ben says

    Instead of a hard and fast 1/10th rule, why not also select a vehicle based on “economic” characteristics such as lowest operating cost over time and ability to retain value?

    Turns out my first stated criteria, is identical to a person trying to make a living as a TAXI driver. Basically to max profits as a TAXI operator one should seek the lowest operating cost over time.

    thetruthaboutcars.com/2010/03/curbside-classic-1977-mercedes-240d-diesel-w123/

    autoblog.com/2014/05/12/morocco-mercedes-cab-trade/

    The problem with vehicle that operates efficiently as a TAXI is it lacks appeal or said another way, an economical basic sedan just isn’t a babe magnetic! There are some sedans like a BMW 540 that can have primal appeal and be perceived as a drivers car. Problem with the 540 I found out from personal experience is they are not only costly to purchase but also to maintain. Since you’re also from California and market wise, ya might be aware that this state has a public pension problem:

    city-journal.org/2013/23_1_calpers.html

    anyway as related to the car issue, ya might have hit a pot hole (I’m down in San Diego and have in a BMW), the interesting thing is I have a feeling that deferred maintenance such as repairing roads is going to be more of a problem in the future because underfunded pensions are next year (June 2015) are going to have to be official put on a balance sheet since the accounting rules are changing:

    articles.latimes.com/2014/apr/09/opinion/la-oe-fritz-pension-liability-california-20140410

    One thing about high end cars, like a modern high performance BMW is the tires are low profile and alignment problems happen a car hits a pothole. With “well built” older cars like old diesel benzes, the tires aren’t low profite so hitting a pothole does not cause as much damage.

    In order to meet my second stated criteria of retaining value, a car must have some kind of style that appeals. With modern cars, the basic lines of a car are optimized to have the least wind resistance. Back in 70′s and earlier, cars had distinctive profiles.

    Long story short instead of purchasing a new car that only depreciates, why not leverage your money and hire a local mechanic to fix up an older car that might appreciate. Here is a link to hipsters do just that:

    mercedesmotoring.com

    Note my own personal story is I got rid of BMW that was costing me 7k in annual maintenance. I was kinda inspired seeing what the hipsters had accomplished, so recently jumped on a “local” opportunity when a mercedes 300cd that was in immaculate condition was listed on eBay and paid just over 14k for a vehicle that might even appreciate in the future.

  24. Chriva says

    Sam, I generally agree with your guidelines, my wife and I net well over 200k post tax most years and we own 8 and 9 year old cars which are reliable and are probably optimistically worth about 10k each at current market value. I love seeing my ad valorem tax bills decline every year and have pulled the collision insurance on one as I can easily replace the car if necessary. Both my wife and I own our own respective businesses so we are able to take the IRS mileage deduction on each car as a business expense (which nearly outweighs the tax and insurance costs in our Federal and State tax bracket). At the 33% Fed tax bracket or above if you have your own business you could actually own extremely cheap cars and see a net positive on a tax basis if you drive for business quite a bit.

    However, there are some interesting alternatives to your guidelines when it comes to electric vehicles. In Georgia you can essentially lease a Nissan Leaf for nearly free when you account for the State tax credit (not to mention fuel savings and virtually no maintenance) – yes the mandatory insurance costs will go up but it really works out to nearly a wash for driving a new vehicle. While I generally prefer owning cars and buying them outright – in the case of leasing a Nissan Leaf there is no cheaper car to own on a per use / annual basis. To put it as simply as possible, in states that offer as generous electric car tax credits as Georgia, it actually makes more sense to lease an electric vehicle than buy a cheap ICE car. Of course you’ve got to be able to live with limitations of an electric vehicle (limited optimistic 80-90 range) but if that works for you – you get use of a 32K new car for a fraction of owning an ICE clunker.

  25. Abhishek says

    These guidelines are really interesting but as an Indian I find them extreme.Here in India we have a lot of taxes compared to the US,the gas is so expensive,not just gas but every costs in running a car is higher compared to the US.A gallon of petrol costs $4.8

    But the rules are different. A person can spend up to 3-year-salary on a car and 20-year-salary on his house.

    Though I like these guidelines,I have a question.Does everyone who own a car in the US earn as much as they should according to the car they own as mentioned above?

    • says

      Not at all, which is why there is such a retirement crisis in America. We Americans spend like there’s not tomorrow and don’t save enough for our future. Americans love their cars.

      • Abhishek says

        Thank you for your reply.I like to state some of my experiences.All my friends’ parents with an annual income of around $35,000 own a house which is now worth around $210,000.Almost all of them after the economic boom in India purchased luxury automobiles worth more than $50,000 and they all have secured retirement plans and a pretty good monthly income of around $3,000.and they live peacefully with really rich lifestyle.don’t mistake for cost of living,they are almost same in fact after the boom they became higher.

        Here in India we have a lust for luxury vehicles,according to the last survey Luxury Automobiles were in 3rd position of top imports with Crude Oil and Gold in 1st and 2nd position respectively,Though we don’t have good roads and face frustrating traffic.But a lot of efforts have been taken to build new roadways around cities.

        In America where you have better driving conditions is it not dangerous if a person spends 50% of his annual income in a car which he wants to own?

        Final question-
        A person can own a house which is worth his 10-year-salary and car which is worth his 3-year-salary,along with reasonable Bank Balance and safe & secured retirement plans?
        theses are the simple rules which we use in India well not everyone but at least the middle-class.Are these rules applicable in USA?
        why I ask this question is,when we people in India have successfully accomplished our life goals whilst following these rules I mentioned,why can’t the people of United States a country which is portrayed as a superior country to us do it?

        • SNengr says

          I am not sure about India’s financial culture, I know they typically save more than Americans, but math does not lie. If ANYONE spent 10 year salary on a house and 3 years on a car, their finances would be in ruin.

          For example:

          The average American family has a salary of $51k. Their home would be $510k and drive a $153K car. That is $663K that would need to be saved or borrowed! Lump that into a 30 year loan at 5% and the principal and interest alone would add up to $41k a year. That is more than the take home salary after taxes.

          Sorry Abhishek, your simple rules are mathematically impossible. It does not matter if you make $100 or $100 million per year, the math is the same.

    • Bud Mor says

      The cheapest I can find gas here in California is $4 and it can go as high as $4.50–not too much different to India; although average incomes in the Bay Area are probably somewhat higher than India.

  26. Dan says

    This is radical. This would make many people feel poorer. Imagine making 100k+ and driving a Honda Fit. This goes against everything every American (and would-be American) has been told. It’s not like people are paying full price on purchase. Most people stretch it out for a few years.

    Suppose I make $50K/yr and plan on keeping my car for 5 years. Can’t I buy a $20k car without worry? Taking everything into account the cost would end up being around $5k-$7k a year depending on how much driving you do and on where you live.

    I do agree with you that we spend far too much on cars. Wasted money that could be more smartly handled. But in this car-obsessed hemisphere of ours your theory ain’t gonna fly very high.

    Having said that I’m never buying a new car again.

    • Dennis says

      While older cars “cost” less, they may cost more to own. Suppose you buy a 5 yo car, out of warranty for $30k and sell it 5 years later for $10k. It only cost $3K per year, but you’ll have to pay for everything that breaks; and the older the car, the more that breaks. I spend 2K/year for maintenance on my 10yo BMW.

  27. Dennis says

    This is bad advice. Here is some good advice: Don’t scrimp on items that you enjoy every day, which includes but is not limited to: Your TV, your Mattress and your Car. The concept here also doesn’t distinguish between disposable and gross income. The idea that someone making 500K per year with $2M in the bank should drive a BMW 328 to keep within these bounds is preposterous. Also, a Car is a 10 year purchase; an $80K car will cost you 7,200 a year if you keep it 10 years (and sell it for $8K). I’d argue that the cost per year should be 1/10th of your DISPOSABLE income. If you make $42K you have little or no disposable income. If you make $300K you have enough to justify a $100K car without much risk.

  28. JimPunkrockford says

    really good article. lots of dumb comments “..millionaires can afford better cars…” are missing the point. plus it seems like a lot of folks reading your page make a lot of money.

    I found your page here because i am having trouble fitting my head around the simple fact that average new car prices do not match average wages. the ratio is way off. kudos to you for putting a number on it 1/10! i love it.

      • SNengr says

        Your comparison is skewed. The average NEW vehicle price is $31k, and the average American family earns $51k. Your assumption is that every American is buying a new vehicle. That being said, I think an inordinate amount of the middle class purchase new cars as status symbols and it destroys their long term savings.
        I have been lucky enough (or worked hard enough) to break out of the “Middle Class” and I still cringe at the price tags on all vehicles new and used.

  29. Helios says

    After reading the post and most comments along with input from friends and family I’m stuck in a dilemma .

    Right now I drive a 93′ BMW which I love and is very reliable I spend about 200+ IN regular maintenance a year and it hasn’t given any problems I’ve had it for 2 years bought it for a little under 2k. I am starting to notice that the clutch is starting to give out and I suspect that it still has the original one since the mileage is 118k, the previous owner kept documentation and clutch isn’t mentioned at all. the parts and labor for when it does give out will be approx half the value of the car. Also since I’m 21 with the attention span of an ant I’m bored and want a new car.

    Just recently I’ve set my sights on a car that is around 10K everyone says that I can afford it and woud be a good way to build credit. I recently started a job making 25k a year with promising ways to get raises quickly but not in any substantial form (2-4k raise in the first year) and have very low financial responsibility.

    I don’t know what to do with my money and putting all my eggs in one basket or investing and losing because the people I gave the money to weren’t on their toes sounds risky to me . If I buy the car I know I’ll have a hell of a lot of fun in it, and I’ll thuroughly enjoy every penny. I feel like if I buy a pos car as my next onr I’ll go crazy from having to deal with the mentality that I have a pos car.

    Might seem like an easy choice to some of you but growing up in the situation where I didn’t get anything I wanted is, for some reason or another, making this decision tougher than I’d like it to be.

    Any input is appreciated. Sorry for the huge wall of txt

    • Wookie says

      Have you considered replacing the clutch yourself, maybe with help from a more-skilled friend? Saves money, increases your understanding (and interest) in your BMW.

      That’s a typical activity for a low-ish income car enthusiast. Keeps it interesting, gets you involved in the enthusiast community, and you didn’t drop half your income on a car.

  30. Melissa says

    This is not realistic.

    If you make less than $25,000, but you work in an area that does not have reliable public transportation or bicycle lanes (which is most places in the U.S.), how are you going to get to work every day so you can keep your $25K job? You’re going to buy a car. Carpools aren’t always feasible either, since poor people often know other poor people who don’t have cars and/or they can’t rely on another person’s goodwill to drive them to work every day.

    I mean, I can understand the concept – we probably don’t need to buy as much car as we buy, on average. But suggesting that low-income people try to make do without a car just compounds the problems they already have.

  31. Stacy says

    So, analyze this one: I make $80K/yr. drive my vehicles for 13-15 years, have a commute of 85 miles per day, and have NO credit debt except a mortgage and my car payment. I feel I can justify buying a new car that gets 15 mpg more (remember LONG COMMUTE) and has no more maintenance issues, rather than 10% I jumped to 20%. I’d like your feedback.

    Thanks and thanks for the great website.

  32. SNengr says

    If your sister puts $1000 to $1200 into maintenance per year, that is only 3 months worth of new car payments. What does your sister do with the other $3,600 she saves by not having a car payment. I think having an extra $3,600 in your pocket per year would eliminate at least as many stressors as a moderately reliable car.

  33. Quizzical says

    Can you translate that 1/10th rule to a per annum rule instead? Buying a new car every year that’s 1/10th my income is the same as buying a car costing my full income lasting 10 years.

    Also, for a family making $200K/yr with $400K in assets, are we considered well off (wife is 26 and I’m 30)? If so, can I afford a used 4 series bimmer ($60K after tax)?? :)

    Thanks!

  34. Brandon says

    I’m new to the site and I just wanted to say that, thus far, I love what I’ve read. I agree with the premise of this article. I’ve seen far too many of my friends and family finish college or grad school, get their first job paying decent money and immediately lock themselves down to a $400/month car payment for the next 5-6 years, failing to realize how little return they get on that investment, besides the status of having a new car.

    With that being said, I do identify with some of the comments above that the 10% rule, as a hard and fast guidelines, may be too restrictive. I lived off of graduate stipends for several years after college and was constantly juggling car repairs. I bought a “new” car in the $5000 range two years ago, which did fall in line with the 10% rule as I make right around $50,000, but was still constantly paying for $300-400 repairs in addition to maintenance associated with a car that has 100,000 miles.

    From this perspective, it’s been a great stress relief to buy a new car and not have to worry about constant maintenance and repair bills. I stuck with a modest car, a 2012 Hyundai with 25,000 miles that cost $13,000. I had saved up to pay cash for the car and hope to get 7-10 years out of it. Based on the 10% rule, I almost tripled what I should spend, but the car will likely last 3-4 times as long, with likely less maintenance/repairs, than another $5000 car would. I totally agree that people spend way too much money on cars that is a terrible investment, but I fear that sticking to such a restrictive percentage, on a modest income, would leave people like me buying a car every few years and perpetually having unexpected breakdowns and repairs to deal with.

  35. Frank says

    this article hit one of my hobby horses – my net worth is over $3M, increased last year by over $700k – and I drive a 1991 Honda Civic worth about $1k – guess that means my car rule is 1/700 at the moment.

    Bought second-hand in as-new condition in 2003 for $5k which I thought was top dollar back then, it needs brake seals sometime but is otherwise perfectly maintained and runs sweet as a top.

    People driving shiny new cars can feel free to mock my choice, but I recall from working in real estate sales that most guys in suits and shiny new cars had car loans, no money in the bank, and net worth in minus figures.

    I’ve been frugal in my lifestyle, and as a result the other day when I worked out a new thing I read about – Investment Wealth Ratio (income-earning assets on total assets) – or how much of my assets were earning an income – recommended to be above 55% – mine worked out to be 84% – which may be why my net worth increased 27% last year.

    I like a tip I gave to a work colleague when he was thinking of buying a car – ‘buy the cheapest car your ego can afford’ …

    otherwise – “We spend money that we do not have, on things we do not need, to impress people who do not care.” – Will Smith

    I think ‘keeping up with the Joneses’ has generally been found to be a cause of hedonic treadmill dissatisfaction and never quite having enough.

    I like the story – ‘At a party given by a billionaire on Shelter Island, Kurt Vonnegut tells his friend, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history.

    Heller said, “Yes, but I have something he will never have: Enough.” ‘

  36. nate says

    So your saying I have to make between $150-$200 thousand a year to drive a Civic? You are a blooming fool I will say don’t buy more than you can afford but that’s just insane.

    • says

      Indeed. What’s wrong with making $150-200K first or buying a second hand Civic for $5,000-$7,000? Their reliability is legendary.

      I may be a fool, but at least I don’t have to work any longer for money. Freedom is priceless and the 1/10th rule is one of the things I’ve discovered to share with others who want financial freedom sooner, rather than later.

      • Zane says

        I live in Colorado, and a Civic is not even going to get me out of the driveway in January.

        Also, if you have a vehicle with less than 200 horsepower, and you plan to drive it on Interstates where speed limits are 75 mph (and actual speeds are about 85 mph) – then you are taking your life into your hands with a cheap vehicle.

        If you make less than $200,000 per year, but you still value your personal safety, and you want reliable transportation and a modicum of comfort – then you need to find a old, used car that has new tires, new brakes, a new timing belt, a new water pump, a new fuel pump, a new power steering pump, a new air conditioner condenser, a new transmission, a new catalytic converter, and a new muffler.

        Or you could just spend a reasonable amount of money ($20,000-$30,000) and get something that is going to fit your needs and will last much longer.

        • Tim Frohlick says

          Zane, Getting a new car for around $25,000 every ten to fifteen years is a great idea. If one is retired then it is possible to put under 2000 miles a year on the vehicle. Most of my buddies keep a car for 50,000 miles and then trade it in. They have realized that car repair is for dummies. The ten percent of income is something I did in my youth. If you have a net worth of one to three million dollars and expect to live only another twenty to thirty years, then splurge. TJF

  37. E says

    So I have a question. I fully agree that the sole purpose of a vehicle (at least for me), is to “take you reliably from Point A to point B”. Yes if you make over lets say 150,000K a year then it is reasonably easy to find a reliable car for 10% of your income but anything under that and it gets harder. You can definitely get reliable used cars for under 10K but at some point there is a trade off between the original price of the car and the amount you end up paying in repairs and how quickly after purchase you begin making those repairs. For example, someone making the national average income of 42,000, spends 4200 on a car. If they are really lucky they might get 18 mnths- 2 yrs without having to put too much money into it but after that it quickly becomes a sinkhole. On the other hand if they spent lets say 10K on a car (~ 25%), they could probably get something used with a decent warranty and have a least a few years of relative reliability (dependent on make/model of course!). I really don’t know that much about cars so my numbers are probably off but you get the point. I think there is a case to be made for paying more than 10% so that you can save in the, sometimes not so distant, future on maintenance costs. I always buy used cars but am confronted with this dilemma every time. Is it financially more advantageous to buy cheap but end up paying more in maintenance sooner or buy more expensive and pay less in maintenance. I’ve tried to come up with some magic number of what is the optimal price to spend on a car. (Assuming you really don’t give crap what it looks like and just want to spend as little as possible)
    Any thoughts?

    • says

      Hi E, I’m not sure what your question is.

      But I drive a $2,500 car and make much more than $25,000 a year. He’s been great for 10 years now, and he’s 14 years old. Go Moose!

  38. Shawn says

    Getting rid of my $20K sports car and buying a car only worth $5K last year was one of the best things I ever did. I finally crossed over into a positive net worth just this month for the first time since being an adult. Not only that but my stress levels have nearly disappeared by getting rid of the performance car and other useless consuming debts/bills like cable.

    It is amazing how reliable a $5k can be, all I have to do is gas her up and change the oil a every so often.

    • Bud Mor says

      This strategy makes more sense to me than the 1/10th rule. You can get a runner for under $5K, but if you want a decent car that is versatile in its abilities and uses (e.g. commuting 30 miles a day, plus the odd 400 mile trip) then you probably ought to be looking at the $5K cars.

      Buy $5K cars until you are rich, then up the price somewhat.

  39. D-Rock says

    This doesn’t makes sense without considering operating costs. I have ALWAYS followed this rule, and the most expensive car I have ever bought was $4K after being out of school for several years. But I can’t count how many cars I’ve bought and run into the ground because they were a cheap POS. Focusing soley on purchase price is leaving out a huge portion of the equation. I followed this advice before ever reading it and I agree with most of the comments on here that it does not work in most cases. 1/10 of your YEARLY income to OWN/OPERATE (purchase, maintain, insure, gas is too much of a variable to include) a vehicle makes way more sense (and is also quite frugal if you ask me). If it exceeds that, sell it and figure out how to make it work.

    I like the concept, but this idea only works in a vacuum.

  40. Zane says

    If you are like most NORMAL people and are in the $100K-$200K income bracket, you can easily afford a mid-level Audi or BMW and still invest plenty for retirement if you have the ability to set priorities and exercise a bit of self-discipline in other areas of your life.

    I’m 47 and make $110K per year (not counting my wife’s income). I have been investing at least $2000 per month for 12 years and just passed the $500K mark. I also have more than $60,000 in personal savings (including my wife’s savings).

    Here’s a typical budget for me.

    Monthly Income: $6850
    Monthly House Payment/Escrow: $1700
    Monthly Utilities and Insurance: $720
    Monthly Groceries (for 3 people): $700
    Monthly Spending Allowance: $1000 (usually less)
    Auto Fuel/Oil/Maintenance: $500
    Monthly Investments: $2230 (usually more)

    By the time I retire, I will have well over $1 million, and I will be able to draw an annual pension of around $70,000. My wife should have more than $600,000 and will draw an annual pension of around $60,000.

    I am buying a new Acura TLX next month. After taxes, it should set me back around $52,000.

  41. Fun in the Sun says

    Great blog, I recently started reading it, and you provide financial literacy which really should be taught in middle school.

    I moved to the US 10 years ago, and was just shocked at how much the average person spent on a car. Being in my early 20′s at the time, I had no peers in Australia with new cars, but suddenly many here who earned as little as $20k, had brand new cars.

    I have only owned a car when I needed to commute to work in a car. I sat down about 2 years ago, when I owned a car and wasn’t using it to commute to work. I discovered that I had effectively spent $500 per time I had driven the car over a 6 month period. The average distance of each trip had been 15 miles. I quickly sold the car, bought another investment property, and haven’t needed another car since. With property booming at the time, those dumb 6 months cost me in excess of $30k in net worth.

    The 1/10th rule is a fantastic starting point, but I think it could be expanded upon. A car depreciates every year, especially in the first 1-3 years. This is probably the largest cost involved in owning a car. A brand new civic/corolla at $20k, will cost more in the first 3 years, than a 3yr old BMW at $20k. I think the true cost of a car is the sum of;
    Car depreciation for current year (you can sell your car at any time, it is an asset, but is depreciating).
    + insurance
    + parking costs (or what you could let your parking space for)
    + car payment / lost investment cost (ie I would consider a $20k paid cash car, to cost $1500k per year in lost investment opportunities).

    What proportion of annual income do you recommend spending on using the above cost formula? I think anything over 1/15th of gross income is excessive unless you consider it a hobby.

    Saying you will own a car bought new today for 10+ years, just means you are paying today’s money, to subsidize your costs in 10 years time. On a $30k car bought new today, compared to a $100k investment property ($20k deposit, financed 80% for 30yr loan and buy $10k car with change), you are close to $100k better off with the property in 10 years time.

  42. Ryan says

    I’m just going to disregard this rule as nonsense, here’s why: Buying a car has many variables such as maintenance cost, fuel efficiency, resale value, etc etc. A wise investment in a car comes from a lot of research into those factors. Like it or not, a car is a status symbol. I make $60k gross a year. If i were to roll up to a client meeting in a beater car I bought for $6k, they wouldn’t want to do business with me because they would think I am not successful enough to buy a respectable vehicle. Lets also discuss the length of ownership. A $30k car can be a wise investment if you drive it for 15 years, but a terrible idea if you keep trading up every 2 years.

    The nice thing about the American car market is that there are options for every need level. If your needs are a reliable vehicle, than anything under 10k is a bust. If you need a truck or van for your work/life than you’re spending at least $20k on something reliable. If all you need is a ride to get you to and from your POS min wage job, go for the clunker.

    I feel like $30k is the line between practical vehicle and luxury purchase. No average person should spend more than $30k unless they can justify it as a hobby or interest and account for it accordingly.

    In conclusion, i don’t believe that a simple rule does car buying justice. You would be doing a better service encouraging people to evaluate their needs and not succumb to the glitz of a luxury vehicle, making a sound purchase.

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