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 $50,000 today given the stock markets are now at record highs!

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 that now costs $32,000 in 2015 is financially absurd. Who spends ~72% of their gross salary on the purchase price of a car? Worse yet, after you pay a 20% effective tax rate on your median $42,000 gross income, you’re now spending around 95% of your net income on a car! That’s crazy and a sure path to financial mediocrity. Don’t expect the government or your rich Uncle to bail you out.

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 Car Buying Chart Recommendation For 2015

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 FOR GREAT WEALTH 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

Manage Your Finances In One Place: The best way to become financially independent is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 25+ difference accounts (brokerage, multiple banks, 401K, etc) to manage my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing and how my net worth is progressing. I can also see how much I’m spending every month. An excellent feature is their 401k Fee Analyzer which highlighted $1,700 a year in fees I had no idea I was paying. There is no better financial tool online that has helped me more to achieve financial freedom.

Check for lower insurance rates. Auto insurance is the second biggest expense to owning your car. Esurance is the leading online market place to help you find the most affordable and reliable auto insurance. They get you comparison quotes to make sure you’re getting the best deal. You can easily purchase auto insurance straight from their website if you like what you see. It is very important that everyone gets at least basic liability car insurance. You can total your car and be fine. But if you total someone else’s car and injure them, they can go after you for ALL your assets and wipe you out! Check for a better auto insurance quote via Esurance today.

Updated on 2/26/2015 to include all the latest and greatest cars out there. I recently got a 2015 Honda Fit and love it as a city resident with limited parking. In three years, I’m looking to take down the latest Range Rover Sport if gas prices stay depressed.

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. Sam focuses on helping readers build more income in real estate, investing, entrepreneurship, and alternative investments in order to achieve financial independence sooner, rather than later.

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Comments

  1. Bains says

    I was about to buy a used BMW xdrive 535 for about 35k but i accidentally read your article(the night before going to the dealer) and followed your advice and instead bought a used accord for 16k and the remaining money is sitting pretty in my 401k.
    -Thanks

      • DemandSider says

        If you are in Minnesota, put a max price of $2000 to $5000 dollars in to “cars and trucks” search in Craigslist. Find a car below 70,000 miles with little to no rust and some kind of fuel injection. If you find something older that is carbureted but is almost mint (you will find one), make sure you know how to start it in all weather. Older people drive Crown Vics, Caprices, Continentals, Acclaims, Shadows, Spirits, etc., and they tend to put few miles on their cars and baby them. Do the math on your annual mileage and fuel use to see if a low mileage yet safe V6 or V8 is feasible. Foreign cars tend to be way too expensive for the mileage.

    • BEN says

      While I’m also glad you didn’t spend 35k on a used BMW… please tell me you did not take a loan out of your 401k. Your comment suggested that you were going to pull money out to buy a car which is not a great way to save for retirement.

      • Winston says

        That’s not how I read it at all. I think he means that the money he didn’t spend on the Bimmer ($35k – $16k = $19k) is going INTO his 401k.

    • ron says

      buying I new car for $30000 and keeping it for 10 years cost $3000 per year, so I only need to make $30000/yr to afford it? or am I way off?

  2. Shyam says

    While i think that many of FS’s nuggets of wisdom are right, I think this car rule thing, especially buying the used car suggestion is ‘soul deadening’. I have bought both new cars and used cars in my 25years of working and now that I am 50, I can say with a few years of wisdom under my grey hair that the joy of buying a new car is like falling in love. Yes it may last only for 3 months but those 3 months are worth it. Buy a new car I’d say even if you need to tighten up on other things for a few months BUT use it till it becomes 10% of your annual income as he says.

    • Mauricio says

      I bought two new vehicles in six months and traded the first one in on the second and did’nt too bad. I actually did fairly well but both vehicles just made me sick. I’d open the garage door (from the house) and curse, cry or both. I did’nt need another car (especially new), I already had one that I bought new but was about 8-9 years old at the time. I had a POS live in girlfriend with no job and no vehicle amd I wanted her to her a job. No excuses about transportation.

      Second one I got because I could barely get in and out of it it was so low. I’m not tall amd I’m not fat. Second one I knew before I got it I would be putting $5K in it to get it where it is now. Can’t buy em’ like this. I found this article because I want both vehicles gone and I may have just been talked into fixing up the older one and selling the newer one. I would lose $5K on it but again, it’s too small.

      I find this solid advice. You may be able to go 15% with no kids and things going well at work. Most people should probably not exceed the 10% rule. I’m very long-wave bi-polar. Meaning I get depressed a few times a year and manic a few times a year, about twice each annually. I KNOW HOW TO PISS $ AWAY!

      I know more than one retired millionaire under 50 years old that will not buy a new car. They say it’s the worst investment you can make. They have boats and second and third homes but refuse to buy a new car. A clean, newer, low mileage vehicle is the way to go.

      Thanks for the article! I bookmarked your site and already sent my brother and sisters a link to this article.

  3. Retireded says

    Buying awesome used cars is another art of being cheap. I drive a lexus LS, according to that chart I should make half to a million a year. But I bought a 12 year old one in great shape with reasonable miles for $5200 from a lexus dealership. That’s my second Lexus V8 and I’m in my mid 20’s. Blows the doors off buying a brand new piece of junk, and more reliable. You are taking a much greater risk with the German makes as they are much less reliable. Most people looking for a cheap reliable car buys civics, corollas hyundais etc, so there are no deals on them and in my opinion are excessively expensive used.
    Deals on larger luxury vehicles that burn a bit more fuel are a dime a dozen compared to small cars, and the gas difference between my car and a civic is negligible (IMO).
    Just like anything else, if you know the car market, you will always drive a great car as deals are ubiquitous.
    Other than ignorance, I’ve never understood why the average joe would want a new car, spend $18000 on a new kia rio or he could buy a 6 year old LS460 that cost like $80000+ just a few years before, and will outlast the newer car 9 times out of ten.

    • Drew says

      Because a 6 year old LS460 will have more expensive problems sooner “9 times out of 10″ than a brand new Kia Rio that will carry a warranty for at least the next few years.

      Buying used luxury cars is a great idea if you want the feeling of luxury without the price tag imo. But don’t try to make the argument that a 6-year old luxury car is more reliable than brand new car because that simply isn’t true.

      And also one thing that never changes is the cost of maintenance/repairs on luxury cars. It will always cost more to fix a car with an $80k MSRP than a car with an $18k MSRP.

      • says

        9/10 tims, Drew has no idea what he is talking about.

        Ask anyone familiar with Lexus, and they will tell you they, even though they are luxury vehicles with big V8 engines, are more reliable than alot, if not most cars out on the road.

        Mass produced, plastic junk like Kia Rio’s don’t hold up for nothing. You can scour the classifieds and find tons of high mileage Lexus LS’s and GS’s, but how many high mileage Kia Rio’s and the like will you find?

        That “warranty” also isn’t as reliable as it seems, as everyone who’s been to a dealership knows what to expect when they start going in there for the service work, and for serious problems that “should” be covered on the warranty. If you don’t mind playing phone tag with the service and dealership managers, mechanics, regional headquarters, all to just get what you thought the warranty would give you effortlessly, then go right ahead and play the games every dealership plays.

        They don’t make money on the sales of new cars. They make it by bleeding you every time you step into their service centers from then on out. The manufacturer already has your money they need once you pull it out the lot.

        Unless you are completely financially secure for years to come, there is NO reason to buy a brand new or within 2 year old car from the manufacturer’s dealership. It’s nothing but never ending hassles and games with them, and you automatically literally lose 10-25% of the value driving it off the lot.

        • will says

          this is ridiculous. a person can easily own a 5 series bmw by spending approx 1-4k in the first months to have it more solidified, newer cooling systems/hoses, etc. their engines will run to 500k with proper bmw maintenance schedules. dont expect a luxury german car to run like a camry, they just dont work like that period.

    • German Driver says

      I for one did not follow the 1/10 rule, I never heard of it before and since I keep my cars forever how does this factor into the rule?

      I believe in spending a little more to get something nice and I know will last longer. In the long run you are saving money when you don’t have to replace or repair it as you do with cheap made items (this is my mindset with everything). Also never pay interest on anything, do without and save until you can buy what you want. Using this idea since a young age I was able to build a new home and be totally debt free in my mid 30’s. I see it all the time with people around me, my one expensive item outlast 3-4 of their budget items, after several year they are spending 2-3x more and still have a cheap item they will need to replace again.

      Back to the cars, Don’t be afraid of old German cars. I have been driving German cars for over 20 years and still have the first one I ever bought. They have all been problem free, you just have to take care of them and do all the maintenance as recommended. Also wash, wax and detail them often, inside and out, including the motor, trunk and wheel areas, all my cars look like they just came off the showroom floor. Also if you are a DIY type of person you will find they are some of the easiest cars to work on. Doing your own maintenance on any car or around the home will save you money. For parts only use OEM or brand name performance part, prices are less then most domestic cars.

      As for how long will they last. I currently own 5 German models, sport and luxury, I bought them all used and paid cash for all of them. I have a car from the mid 80’s that get over 40 mpg, 2 from the 70’s that start and run like new (yes they were fuel injected in the 70′) as for our daily drivers my wife has a 2001 VW with over 300k miles (said she is excited to be on the way to 500k) and I drive a 1999 Audi with over 200k miles.

      If you keep your car is in great shape you might not have that feeling of wanting something different. If you do you can upgrade the radio, get a new set of wheels or change the color with a vinyl wrap for very little cost.

      An added plus of keeping your cars and keeping them nice is that my 70’s and 80’s models are worth 2-3x what I paid for them. That’s an investment you can enjoy!

  4. Jay says

    Preach!!! Thanks! I absolutely needed to read this.

    All in all, wonderful site. I’m turning 24 next month, have just over $10,000 in the bank. I’m getting antsy as to what to do about my money/lack of money. Your blog is really helping. :)

    • Jake says

      $10k is a good start but I hope you’ve been investing it not just leaving it in a bank account losing value every year. You’re young enough that you can manage the risks of the market. Put it into an S&P 500 index fund, ideally Vanguard since they have the lowest load (fees). That $10k may very well become about $500k by 65 years old. I assume you are in the 10% or 15% tax brackets, if so a Roth IRA would be perfect.

  5. Jake says

    I don’t like this 1/10th rule. It does nothing to account for how long you hold the vehicle. If Chuck earns $50k/yr and buys a car for $5k every three years but Steve earns $40k/yr and buys a car for $10k and keeps it for 10 years, who is the winner here?

      • Jake says

        Please re-read the comment. I’m assuming you keep any car, be it $1k or $100k for 10 years. The point was that the amount you spend on a car should not be a percentage of your annual income but the best ROI. I drive my cars for 10 years. I spend a higher percentage than the article recommends yet over a 10 year span spend less than someone who could be following this guidance..

        • Bud Mor says

          Actually Jake, you should probably re-read your own comment. You did actually say that the $5K car would only be kept for 3-years while the $10K car would last 10-years; not both for 10-years.

          And I think you raise a very fair question, but I’m not sure how one can answer it. I’m sure there must be the information out there that can estimate the life of a good $5K car compared to a good $10K car.

          I did hear somewhere (maybe here) that the sweet spot in terms of age and depreciation is to buy a car that is 4-years old. Autotrader.com has over 500 cars for sale nationally that are 2010 or more recent, with fewer than 30K miles, costing $10K or less.

  6. Joe says

    Too many people think they have the right answer for how much car you buy, or how much house you buy, or how much you should spend on an engagement ring, or how much to spend on an annual family vacation and they are all wrong… It’s how much car AND house AND ring AND vacation you can afford. Let me explain…

    I created a promise to my wife and myself shortly after graduating college and getting my first job. I swore that I would never have a monthly mortgage payment greater than 15% of my gross income. If we need a bigger/more expensive house I will have to wait. Because my saary has increased since buying my home I still make payments equal to 15% of my income so that I’m paying off more of the principle.

    For a car I made the commitment to never buy a car unless I have the money in the bank to pay it off. We will probably be buying my wife a car late 2015 and plan to spend about $30k but I aready have that in the bank and Toyota and Honda usually have .9% interest rates, meaning I will still be making money off my money (my investments averaged 13.5% this year, so whil making car payments I anticipate about 12.5%)

    My final rule is around saving money. Between 401k, 401k employer match, IRA, general long term emergency savings, etc. I need to save a minimum of 25% of my gross income.

    Banks will tell you it’s okay to have debt to income ratios of 55%, but that will just buy you a poor life. My current DTI is about 14% and I couldn’t be happier!!

    • says

      I like the thought process of all that stuff! That’s thinking holistically. Good work.

      Holistic thinking is one of the key cornerstones of Personal Capital, where I manage my wealth for free. It’s all about looking at one’s worth from a top down perspective and then making decisions to optimize one’s finances. You should check it out. My net worth has really taken a turn for the better once I started tracking it online.

  7. futureheartdoc says

    Hi
    I came across your site randomly, but the advice seems very sound.
    currently i’m in my fellowship and training to become a cardiologist, and will be done in 2.5 years. as most people know, salary in fellowship is around 50-60K a year.
    I already have $150K saved up in an account ($150,000).
    I’m planning on buying a new car within the next 12 months or so. i was initially looking at a brand new lexus LS (~80K) or a lexus RX (~$60K). i would most likely pay half in cash using my savings and pay the rest in monthly installments. is that a sound decision to make or am i setting myself up for disaster? i’m asking because after reading your article i’m starting to have second thoughts. and yes, currently my salary is around 50-60K but when i’m done in 2.5 years my salary will be $250K at the absolute lowest (i believe median salary is around 300-400K and rising).
    thanks.

    • Joe says

      First off, I wouldn’t buy a car based off the salary I HOPE to receive. I’ve known several people who went to school to become doctors and either didn’t like it and had to quit or couldn’t find a job. Wait until you get a job to see what payments you can afford.

      Secondly, assuming you buy the car regardless, I think how much you put down depends on the interest rate you can get. It looks like Lexus offers a 0.9% interest on most of their vehicles. If you can get that rate I would put down AS LITTLE AS POSSIBLE and invest the rest of your money somewhere low risk where you can get a minimum of 5% return. That means you’ll be making 4% per year return on that money.

    • Winston says

      Forget projected future earnings. You don’t buy a $30k car just because you may be making $300k+ *someday*. You make $50-$60k *now*, you buy a $5k-$6k car *now*. And a $60k – $80k Lexus?! That’s 100%+ of your GROSS EARNINGS IN A YEAR. That is foolish.

      Do you have any debt (especially med school debt, which I know can be high)? If you have no debt, then congratulations! You now get to buy a car based on 5% of your net worth. 5% * $150k = $7,500.

    • Ranger That!!! says

      I’m a weapons enthusiast. I don’t buy brand new SCARs or ACRs, and I don’t spend all my money on restored Panzers either.

  8. Chase says

    This rule does not take into account the entirety of someone’s circumstances. A single person making $50k living in a smaller town can afford alot more for a car than someone making $50k with two kids in a big city. The first person mostly likely has tons of disposable income, whereas the second most likely has none. The first person could save to buy a $30k car without even trying, whereas the second would have to pinch and save.

    In addition, some people have longer commutes than others. People living in large cities can take buses, trains, etc, but people living in small towns may commute 50+ miles a day. They may be forced to spend more than 10% of their income to get something reliable that gets good gas mileage.

    In addition, we all spend money on things that are personal luxuries to us. We east out at restaurants, invest in hobbies, go on vacations. For some people owning and driving is enjoyable. They may spend 20-30% of their salary on a car, but its because that car is more than just transportation. They’re willing to go out to eat less, to go on fewer vacations, because they find owning the car more enjoyable than those other things.

    Its all about balance and looking at the whole picture.

    • says

      I would say a single person making $50K in a smaller town should be even MORE disciplined in saving money. If s/he starts spending aggressively now, the bad habits will cary on and really weigh down his/her wealth accumulating abilities.

      But again, my 1/10th rule is just a guideline. It’s not the end all, be all rule. But it is something that I believe will help plenty of people build more wealth over time.

  9. LCOLLINSDC says

    My guess is that this rule is for the excessively frugal individual or someone with little to no savings. There is no return on investment when talking about a car unless you’re talking about the intangible return of gratification from owning a vehicle you thoroughly enjoy or the amount of convenience it provides. You’re not going to get any money back out of it that is equal to or greater than what you paid for it and put in to it.

    I bought a challenger hellcat after saving $150k while still investing in my 401k. My family was upset because I’m young (28), but the satisfaction of owning this vehicle has been well worth it. It is definitely a car I will have for the rest of my life. I only drive it about 6k miles a year and baby it.

    Could my money have gone elsewhere? Sure. But I’m not going to wait until I’m old to decide I want to enjoy life. Plus I’ll probably never have a job that pays $650k (the hellcat was $65k). I still have access to first time home buyer programs and probably will keep that until I’m in my early thirties. I live in an area where houses are very expensive so that wasn’t a viable option for me. I also have no debt so that was not a burden on my shoulders when I made the purchase.

    If you’re still paying loans or you don’t have much in savings then this rule is definitely something you should consider. If you have a decent amount of savings and a decent salary, maybe consider something a little less frugal. You shouldn’t spend more than you can afford even with credit. However, don’t be afraid to spend on yourself. You can plan all you want for the future, but what if the stock market crashes, what if you get sick and can’t do things you enjoy, or what if you die? Was never buying something nice that you would have enjoyed for those years worth it?

    Be smart with your money, know the consequences of your actions, don’t be afraid to enjoy the finer things in life, but don’t be a fool. I may have a job that pays well and a $65k car, but I also have 2 roommates, only eat out once a week, and buy everything on Craigslist or somewhere on sale. Spending once isn’t going to ruin your financial future, but doing it on a regular basis is guaranteed failure.

    • says

      Whatever makes you happy mate. What is your net worth currently?

      Check out my post: The Average Net Worth For The Above Average Person. This is the #1 article in Google when someone searches for average net worth.

      My only fear is like many of us who end up working for 10-15 years, we start burning out. And when we no longer want to work, we begin to regret the overconsumption we made when young that robs us of freedom and opportunity when we are tired.

  10. Carbuyer says

    Interesting article. I have a friend with a salary of $1 million a year, with a net worth of $10m. Do you think he could afford a lamborghini aventador (400-450k) or a bentley flying spur (250k) or a rolls royce (400-500k)? He has two kids and their college is paid for.

  11. GuessWho says

    Great read! I’ve been working as a dentist for three years, and I just bought a new Accord with a pretty nice down payment that I saved for two years. I plan to keep this car for years to come, hoping that I can drive it until it reaches 300k (like my last Honda did)!

    Glad that I’ve read this article, because lots of my dental school friends are riddled with loan debt, but are out purchasing BMWs and Audis. I just want to be happy doing what I do, minus the headache of paying 500+ a month for a car payment over six years…

  12. Eduardo Delgado-Mendoza says

    Interesting article, but honestly, this is ridiculous advice! I mean really?!
    A doctor making 250,000+ a year is going to be driving around a in a god-damn Honda Accord?!!
    you must be kidding!
    This is the worst advice I’ve ever heard. if you make 100k a year, save like 10-20% of the car’s cost for down payment, and paying the rest in monthly payments for 5 years, there is NO way you couldn’t afford a 60k-80k car, that is if you insist on buying new. Personally, I would let a 100k+ Audi RS7 depreciate 50k after 3-4 years, then i would buy it. The person who buys knew will always take the BIGGEST hit. Unless your paying mortage for like a 3,000,000 dollar house, which is stupid in it’s own way as well. Just my 2 cents.

    • says

      What’s wrong with a Honda Accord? It is SWEET!

      The doctor who joined medical school in 2000 thought she was going to make $400,000 upon graduation. Now they are starting work at $200,000 with lots of debt.

      You’re telling me they should now go ahead and buy a $60,000-$80,000 car, which requires $100,000 in GROSS income to earn?

      Perhaps you should read, “The Average Net Worth For The Above Average Person“. Do you mind sharing your age, income, and net worth so we have perspective on where you are coming from?

      thx

    • Jake says

      I don’t know.. I have a friend who is a partner in his law firm making around $200k. As far as I know, he still drives the same Toyota Scion xb he had in college 10 years ago. Would you rather look rich or be rich?

    • snegnr says

      Eduardo,

      Statistically, doctors are the second worst financial managers of any “highly paid” profession. (Athletes are #1). Your hypothetical doctor is probably not a good example for smart financial decisions.
      My wife and I are both engineers and together we make well over $250,000. We just splurged on a brand new Mazda SUV $28K. We paid cash for the car and our house is paid off. I drive an 11 year old truck. But we would not have the same financial strength if we took out huge car loans and drove Audi’s.
      I hope someday the average American figures out that car debt is the WORST type of debt. It completely wrecks your monthly cash flow and wealth building. I think it’s even worse than credit card debt! At least credit cards will limit an individual’s stupidity. You can walk into a dealership and go into $80K car debt in 15 minutes.

  13. D-Rock says

    I just started the best paying job I have ever had and I am currently driving a $685 full size v8 winter beater station wagon (anybody in in the Great Lakes region feels my pain right about now). 131k (maybe 231k) and it keeps on chugging 17mpg at a time. It is under 1/100th of my salary, I think I deserve a cookie.

    Of course, this doesn’t account for how much the rest of my cars “initial purchase price” have been over the years. I’ve never exceeded the 1/10 per year rule, but I wouldn’t recommend it to the faint of heart.

    Long live GM muscle!

  14. Raymond Tayse says

    Ok, let me get this straight…

    I make $130,000 a year and average a 3% cost of living pay raise per year for the last 11 years. I also have had promotions but my yearly cost of living increase is 3%. I’m not going to get into the fact that this barely accounts for inflation as in 10 years things will cost more, but hey you are buying the car at the beginning of this theoretical 10 year plan and the cost will not change for this 10 year span.

    So in 10 years, I will make $1.49 million, so this theoretical $13,000 car will be .872% of my 10 year gross income. Amortized out (even though paying cash up front) it would cost exactly $25 a week. So you are saying that my car should cost me less than going to the movies with my girlfriend each week?

    For you a car may just be a means of getting from point A to point B. For many of us that spend more than an hour (I am about 1.5 hours a day round trip) in our car every day for 48 weeks a year; our car is a second home. I like having a nice car with all the amenities available to me, and those features mean much more to me than what I would spend on a trip to the movies.

    Now, I do not own a $13,000 car. I own a $50,000 car (on purchase 5 years ago), and is currently worth ~20,000 today. At that rate of depreciation there will be approximately $8000 in equity at the 10 year mark. This puts me at ~$80 a week for my car over the 10 year span. and I think the additional $55 a wee was one of my best investments. By investment, I do not mean from a fiscal point of view, rather a quality of life point of view.

    Sorry mate, there is a difference between being fiscally responsible and just being a penny pincher. Quality of life matters to many of us. I will not go into details, but I had someone taken from me well before their time. I do not advocate spending like you are about to die, but if you are simply living so that you build a bank account, you are not really living.

    Not everyone gets enjoyment from a car, and those people should indeed buy the cheapest rust bucket they can find. For those of us who get a lot of enjoyment from our car, your 10% rule is not logical at all.

    • Aribarra says

      This is how I think of it too. I’ve been a real estate agent for 10, It has always been crucial for me to have a luxurious late-model car to drive buyers around in when showing houses. In 2007 I bought a 2004 Mercedes E320 that had an MSRP of $51,000 for $26,000, I sold in in 2010 for $9,000. In 2010 I bought a 2008 BMW 750Li that had an MSRP of $98,000 for $41,000. I sold it in Jan 2014 for $25,000. In Jan 2014 I bought a 2012 BMW 750Li with an MSRP of $103,500 for $47,500 which I still drive right now and it is still worth $42,000.

      26k – 9k + 41k – 25k + 47.5k – 42k = 38.5k.

      $38,500 total I’ve spent on cars in 92 months which comes out to around $420/mo for fantastic luxury cars with all the bells and whistles on them. You can barely lease the cheapest BMW or Mercedes for that price and I’ve been driving the much more higher end models for years on that price. I don’t make close to $385,000 a year so I guess I’m not following the 10k rule but I think its safe to say I’m winning.

    • Oliver says

      All rules that people don’t like are excessive. Though, actually you mean arbitrary not excessive.

      Making $30,000 and buying a $3K car instead of a $6K car is actually probably a bigger saving than for a person making $90,000 buying a $9K car instead of an $18K car.

      The point of the article is that a car is incredible money suck at any income level (both as an immediate lost opportunity cost and an ongoing running cost). So, spend less on it.

  15. Jamie says

    My family income is about $700K/year and only small mortgage debt which should be gone by age 40. My 12 year old Honda (worth about $2K) is getting long in the tooth and I’m concerned re: safety now that I have 2 kids. The other car is a 2013 Subaru for which we paid cash ~40K.

    I’m fairly frugal – I couldn’t imagine spending $70K on a car (or is it 5% each for 2 cars?), but definitely need a safer upgrade to my old clunker…

    So would you recommend that our 2nd car cost $30K to total ? (ie. 10% for both cars)
    Thanks!

  16. German Driver says

    Jamie, when it comes to your family and safety I say forget the rules and buy what you feel is the safest for yourself. If something happens you’d choose a life over $$$ any day.

  17. LG says

    Let’s not over-analyze what has been suggested as a good rule-of-thumb for the average consumer. The 1/10 advice is solid – make your adjustments for your particular circumstance from there.

  18. Ljubo Radic says

    I came across this blog while looking for a total cost of ownership figures, as I am thinking about buying a new car.

    The one thing I see missing, both in the article and comments, is that the maintenance cost of an older/used car is not taken into account.
    According to the 1/10th rule, a person or family making 60k$ annually should buy a 6k$ car … but that is an old car and will require maintenance in order to remain reliable.

    Is there a web site that has information on maintenance cost (of different brands/models) beyond 5 years? Preferably until 15 years, as I would like to keep a paid off car as long as possible. :)

      • Ljubo Radic says

        Well, that is why I am searching for large datasets.
        Both cars I had required several times more in the similar timeframe, though I was erring on the side of caution/reliability.

  19. Shawn says

    I purchased a $5K Hyundai Elantra out right well over a year ago with 130K miles. I only spent $125 on repairs so far. The passenger headlight wire became loose.

    On average I spend around $150 a month on my car, which is just gas and full coverage insurance. My last car was a performance car (07 Subaru STI) which was $20K I was easily dropping between $500-700 a month. This was for car payment, insurance, and gas.

    I took the savings from downgrading and was able to pay off the rest of my consumer debt within a year. Plan on driving the Hyundai for 2-4 more years hopefully. I also plan on putting the extra income to work in an index fund along with a few other things.

    7-15 years from now if I’ve planned everything alright and have a little luck, hopefully I’ll be in a position to buy a similar car to my Subaru out right without thinking about.

  20. Cody says

    I would have to disagree with this in the sense that SO many cars in the $5000 range (based on $50,000 salary obviously) are very unreliable. a $5000 car will most likely have very high miles and/or be 10+ years old, which equates to more repairs. I think INITIALLY when in your early 20s, having a cheap car like that while reducing other debt and establishing your career makes perfect sense. over the life of that initial car, saving up for a car over the 5 year ownership, for example, allows you to buy something maybe at the 25 – 40% of your income level, which will (typically) be much more reliable for the long term. 10% just seems too low for a legitimate day to day, high-use vehicle that you’re wanting to last.

    Also, this doesn’t apply to folks like me who are car enthusiasts and see a car as more than just a chunk of metal on wheels :)

    • Shawn says

      I know what you mean about car enthusiasts seeing a car as more than a chunk of metal. Besides the STi I also owned a 06 Evo IX and an Eagle TSi Talon for a short period of time. They were all a blast but all of these cars set me back by constantly maintaining or modifying them. They were also all 30% or less of my income (bought the TSi outright).

      A lot of the people I met with GTR’s, Lambo’s, etc. all did so by being patient and getting that financial foundation down first. Even if they financed or leased the vehicle that had enough cash to buy their car many times over if they ever wanted.

      Our plan is to take the extra cash freed up by having a Hyundai, no consumer debt, and decent paying jobs and use it towards buying and completely paying off rental properties. Then at some point using the assets to pay for the fun toys, that’s the plan at least.

      The hardest part is being patient, it’ll prob. take the wife and I 10-15 years to get to that point. By then we’ll be able to look at buying something a little more exotic than a 4 banger turbo and do so with cash.

  21. Adam says

    I don’t usually comment but the ridiculousness of this article has left me with no other option. According to the article anyone who makes $25,000 or less should not even own a car.. I’m not sure if the person who wrote this lived in a city or just made 100k a year at age 17 but that insanely impracticable. How can you even get around. And THEN used cars up to 75k.. I agree spending half of your income on a car is ridiculous but thats why they have car loans. Spending half your salary is equivalent to 10% of it a year for 5 years.. most new cars will make it 8-10 years before needing serious maintenance AND they have a warranty. The most important thing about car buying is buying something you are happy with because you’ll have to drive it everyday and I’d rather have payments on a car that I’m happy with than no payments on something without A/C

      • Grimoire says

        I really wish for public transit(I so loathe driving), but the vast majority of the US lacks such. When my car recently wouldn’t start I got to do the 10 miles to the nearest rental place to my home on foot(the repair shop was in the opposite direction and the tow folks like to make it clear they aren’t taxis, They’ll drop you off if it is on the way, but otherwise you are outta luck, particularly in winter when they are busy).

        Back when I was still unemployed and job hunting the average commute I was looking at was close to 45 minutes to an hour one way(which is about double the average commute in my area, most people try to move closer to their jobs). And I don’t even live in a particularly rural area, in fact I live in town, just not many jobs, particularly not after the economy tanked(not much population density, but compared to some areas in the states we are packed). So tell me my good fellow How someone is going to manage the equivalent of an 45 minute drive without a car or access to public transit(that would be about a 30 mile trip, so at least 10’ish hours walking for the average person or 3’ish hours on a bicycle if I recall base speeds correctly right)? I have heard there is a taxi service around here, but I imagine that would bleed you dry real fast. Even if halved for the average commute of my area, that is still quite a few hours spent in transit.

        The bike might be doable, but I would wonder if those extra hours each day couldn’t be better spent. Say you got overtime instead of commute time? That would be a lot of extra money each year. Of course most employers wouldn’t give that much overtime. And even ignoring time. Ice and snow and sleet. I got snowed on in late March on my walk to the rental place. What do you think February is like? Frequently Below Zero for one. And the snows are bad enough(though infrequent thankfully) that you are considered insane if you don’t own a big truck or SUV for the winter. So yeah, a lot of people up here own a summer car and then their snow truck(often with a plow) so they can get to work in winter.

        And the problem with cheap cars is the chance of scoring a lemon. The lower you go, the higher your chance. And unless you are mechanically inclined you really don’t want to end up with a lemon(had a co-worker go through two cars that way. Both had very major failures that would cost more than the car was worth to fix on pretty much the first day she had it). A lot of the cars running around 2.5-3k would require significant work to run reliably(I know, I had to go car hunting not much more than a year ago due to my old junker finally dying or at least choking. It would technically still run as long as you don’t need to go more than 10 or so miles in a single burst). I ended up going with a roughly 5k car(once plates, first 6 months insurance, taxes, etc were all on it) car rather than play mechanical roulette. My mechanical skills are equivalent to a D&D’s Barbarian’s skill in literacy.

        • says

          Wow, I’m impressed you walked 10 miles! Sounds like a scene out of a movie :)

          If you can walk 10 miles, then you can definitely bike 10 miles. That would be like a walk in the park in comparison.

          I hear you on freezing winter weather for months a year. $5K for a vehicle sounds very reasonable. I drove a $8K vehicle purchased used back in 2005, and drove it until 2014. For the last five years, it was probably only worth $3-4K.

          I enjoy your writing! Thx for sharing.

  22. Raymond Tayse says

    It is not about having something against public transportation. It is about the accessibility of public transportation in a vast majority of the United States.

    I just live in the Bay Area California (east bay to be more persistence). I decided to Google a couple routes via Google maps using public transportation versus using my car.

    Work:

    32 minutes via car
    67 minutes via public transportation (walking to nearest bus station, taking BART, taking another bus, then walking over a mile to work).

    Grocery store:

    5 minutes via car
    21 minutes via public transportation (walking to nearest bus station, transferring bus because there is no direct route to the store, walking to the store about a block)

    Maybe you live in an area where public transportation is vastly superior to mine. Maybe you do not care about how much your personal time costs. Either way, your advise is only applicable to those who live in very specific areas and or do not care about their time. The majority of America is Rural or at minimum in the Suburbs. Anyone living in one of these areas should own a car as soon as physically possible for a variety of reasons in my opinion.

  23. Mike says

    Hi as any 18 year old, smart financial decisions aren’t the first thing I think about when it comes to buying a car. Buying a car for only 1/10th ratio proves that the only reason you need a car is to get from point A to point B. There’s a ton of people out there as myself who spend 40-60% of our income on a car. It’s not the smartest financial decision to make and im aware of that, but car enthusiasts like myself set priorities on cars higher then what a typical car owner probably would. I think it really depends on how you prioritize things. It also depends on your own life because everyone is different. I’m lucky to have parents that do practically everything to give me the best life possible by providing me with necessities to the finer things in life. For me a bmw m3 is not a car any average joe gets to go from one place to another. Cars like those are bought by people with a passion that truly care about what they drive. It’s not what I NEED but I think when your young and crazy you’ll make stupid financial choices early without realizing, but one day I can look back to myself and say I made the best of it ,but hey that’s just me.

    • Ryan says

      I disagree. When you’re young you should be saving as much as you can. The power of time and compounding interest can mean hundreds of thousands more for you, maybe millions, in the future. Take advantage of the situation you’re in right now having very few expenses and save what you can. When you get older its much harder to save with so many more expenses (kids, house, loans, etc).

      But I will agree with you on one thing- most people need a car. A car is a tool to make money. You need it to get to work to make more money. A reliable car is insurance against losing your job and wasting time and money in a repair shop. A reliable car doesn’t and shouldn’t be a luxury purchase though. If you’ve got to spend 5 grand on a reliable car when you’re only making 30k, you’ve got to do that to get a job and get ahead. If you’re blessed with having public transportation that’s great, but make sure to weigh in the extra time that those transit systems take when you decide to buy a car. As they say, time is money.

      The people you see driving around nice cars are doing so because they can take out a lease on it then write those expenses off as “business” expenses. Avoid the temptation to “keep up with the Jones'” because there will always be someone with something newer than you, better than you. Spend your money on experiences, vacations, trips with friends and loved ones- you’ll get more satisfaction out of that in life.

  24. Dave says

    I think the 10% rule is pretty solid, though may be a tough pill to swallow for a lot of folks, unless the average household income hit $240K/year when I wasn’t looking. I have a couple of follow-up questions/comments:

    1. Clearly, spending 10% of income on a new car, and then trading it in for a new car at 10% of your income every year, would not be a good application of this rule. How long should I go between buying cars?

    2. Is there a sweet spot for value in a used car based on how old it is? I.e. A new car depreciates the most in it’s first year (plus you’ve paid sales tax on it), so getting a car a couple years old makes sense. At some point, however, reliability becomes an issue, which is why buying a 20-year-old car might not be smart. Basically, I’m trying to find out at what age a car’s depreciation becomes linear for the subsequent ~5 years (or however long we should own a car).

    3. Perhaps a better question, which encompasses both #1 and #2, is how much should I spend on a car per year? E.g. Would 2% of gross income on car expenses (in perpetuity) make sense? Total cost would include car payments (or equivalent pro-rated amounts if paying cash) and maintenance costs (to penalize buying a too-old clunker), and maybe insurance.

    Thanks for the info, and congrats on the successful blog and side-gig with Personal Capital (I use their app and have chatted with their advisors – good folks).

    Dave

    • JosephD says

      Hi Dave,
      After researching multiple blogs including this one here are my opinions followed by how I plan to proceed.

      1: Go as long as reasonable without buying a replacement car. Take that 10% monthly and set it aside in an investment to gather some interest or pay off high interest debts.

      2: The sweet spot is a minimum of 3-4 years. http://www.edmunds.com/car-buying/how-fast-does-my-new-car-lose-value-infographic.html If I can get a well maintained four year old car with less than 60k miles that is at or below Kelley Blue Book fair market value and get it to last 6+ years I call that a win.

      3: Ideally 10% or less of net monthly gross income goes to paying for transportation. If the vehicle is reliable save the remainder to build wealth.

      This is where I plan to diverge from the 1/10 rule.

      a. I currently own a 14 year old Nissan X-Terra which has some major engine problems and will probably cost well over 10% to properly repair and maintain. It is worth less than 10% of my income and still runs – barely.

      b. If and when it dies I “have to” buy a replacement. I live in East Los Angeles County and 2.8 mile walk with my bad hip to and from a bus stop to work 5 days a week is not a sustainable and can lead to permanent injury.

      c. A $5,500 is ideal and I’m looking, However I plan to keep the vehicle for 7+ years. I have no desire to spend 10+% every year to maintain an aging vehicle. (I might get lucky and find a 7 year old Honda at that price.)

      Before reading this post I was planning on a $18k – 24k new car (total cost out the door) and ideally would keep that vehicle for at least 10 years.

      If it doesn’t get damaged. A big assumption as each car I’ve owned has incurred some damage over that time and a body shop to repair.

      After reading this post I’m planning to compromise in the following ways.

      Saving 20% every month preparing a down payment that will make my financing less than 5% of my net monthly income over a 48 month loan.

      A $16K 2-3 year old car out the door will require a $8,500 down payment to stay within my 5% goal. Anything more expensive will require a down payment of well over 50%.

      Taking the 1/10 rule into account and modifying it really puts perspective on the real cost. 30% of my income seems reasonable while spreading the remaining 50% over 4 years with. While I’m saving that mythical $5,500 car may actually show up.

      Originally, planned to finance a new car at over $400 a month. Now I can free up the difference and apply it to building investments and savings.

  25. Jimmy says

    Here’s the thing. the percentage of gross income idea is solid, but if you save money specifically for it, then it’s not so bad. I had the cash (slightly over the 10 percent rule but not too much), but the credit union offered 2.71 percent.. I took their money and put mine in dividend stocks paying between 2.0 and 3.4 percent. I could be wrong.. Doesn’t seem like a ‘huge’ risk though. And I was getting the full coverage 100/300/100 2.5k deductible insurance on it anyway…..

  26. Benji says

    Since when is buying a nice car about the image? It’s about the experience. I bought a car that cost me about 50% of my annual income, that might sound like a lot to many of the readers here. The thing is though, I get a lot of enjoyment out of my ride. I use it to participate in track days and autocross events on a regular basis. I’m not sure I would be a very happy person without it, some of you might find enjoyment in saving massive amounts of money for retirement. Me on the other hand, I’m quiet content putting away 15% for retirement, splurging on a car, and budgeting like crazy everywhere else. It’s what makes me happy and I wouldn’t change it.

  27. Eddie says

    I have liked your rule for years now and got a chance to apply it to my recent car purchase. Had to replace my wife’s car because it was hit and totaled by someone without insurance. Ended up buying a 2008 Lexus ES350 from a private seller well under 10% of our annual income. My wife loves it. Your rule is great but it falls apart at the very low income ranges… Public transportation isn’t always an option and not everyone is willing to move away from family and friends to have access to better job opportunities.

  28. Marcos says

    I went overboard on my first new car. I splurged on a $34k Toyota 4-Runner. I paid it off in about 3 months to avoid interest. I was making a considerable salary back then as a consultant, but it was still about 1/5 of my annual salary. I’ve now had the truck just over 15 years. Still driving it!

    Seems like it has been a good investment for me… since I haven’t had a car payment in 15 years and my insurance goes down every year. I no longer carry collision on it either… so that helps keep costs low. And it still looks and rides good. I love it.

    Just wondering if I’ve been wrong all these years in thinking it was a good investment.

    • says

      Nice job Marco holding it for 15 years! I love them old 4Runners.

      I guess it depends on what you would have done with the $34,000. Invest? Buy a property, etc.

      But, the main reason for the 1/10th rule is to protect the middle glass from desire and blowing up their cash flow and retirement.

      • Marcos says

        Yeah after I posted I ran some calculators. It seems if I had taken 20k and invested it for 15 years is be sitting on $70k right now.

        I should have nabbed a 7-8 year old 4-Runner and still been driving it today. With 70 grand in the bank! Dang it!

  29. RX says

    You will realize when you get old that you have your money in the bank and never used it in right way. Car is not to take you from point A to point B. Drive a corvette, Audi R8, 911 and you will realize…may be you won’t…Something is seriously wrong with you…see a doc as soon as you can!

    • Wookie says

      1. Day to day, driving a slow car fast is more fun than driving a fast car slow.

      2. Cheap and cheerful doesn’t have to be boring. Drive an old GTI or something.

      3. If you play it right, you get old and have millions – you can spend your well-earned free time and drive *all the cars*.

  30. Patrick says

    I stumbled onto this website while doing some research, and as I am currently in the process of buying a new car, took a look at this article. While I feel you make some good points, I tend to agree with those who say that this may be an extreme “rule” and not be viable or even reasonable for many people. Also, shouldn’t we look at someone’s bigger financial picture, rather than focusing on a hard guideline for one specific category?

    I am an admitted “car guy”. I drive for work, and my cars are more than Point A to Point B transportation devices (no, I do not deduct my vehicle on my taxes). That being said, obviously I prioritize more spending on a car than your guideline recommends. I am 28 years old, and earn approximately $90k gross annually. No consumer debt, and my housing totals 7% of my gross income. I save a total of approximately 38% of my gross income (combination of pre- and post-tax investments and liquid cash). My current net worth is approximately $150k. My current truck is a 2009 Tacoma valued at $15k, with no lien. It now has 135k miles on it. Now, according to your guideline, I should keep that truck (in fact, even it’s current value is 2x more than I should spend). However (and I suppose here is my real question) – if my net new car purchase is $30k ($50k -$20k cash/trade), and my total debt to income is now approximately 18% with a Debt Service Coverage (net income/debt payments) of over 3x, is that not still being financially conservative and smart? I do not swap cars often, and this is a 10-15 year vehicle for me. You could argue, I suppose, that my average vehicle cost is $3k/year (although that would be inaccurate).

    Further, expecting a $8,000 car to last as long as a new one is a pretty agressive assumption. Yes, cars today are more reliable than they used to be. But they’re still mechanical – they wear, and things break. I had a 1995 Toyota Avalon in college – to this day, still the best car I ever owned. I bought it for $5,000 in 2004 with cash. It had 130k miles on it, and was in immaculate condition (still had original plastic coverings in some places!) with a full service history. That being said, I still put over $2,500 in repairs in it by the time it was totaled via a deer in 2008. Things that were no fault of the car – shocks, struts, tires, brakes, belts. In your previous articles regarding your old Land Rover, you talk about how little you’ve put in it and how great a car it’s been. However, you also mention numerous deferred maintenance items that made the car a potential safety and mechanical hazard (check engine light, brakes, bald tires, possible faulty airbags, etc.). What’s better – spending a reasonable amount of money to on a newer/nicer car to keep yourself and others safe and in dependable transportation, or deferring maintenance and safety items just so you can say you were more frugal? Personally, I’ll choose the former.

    Sorry for the long post. I just think it’s important we look at an entire financial picture, as opposed to touting hard and fast rules that don’t fit many (or most?) situations. Critcizing people for spending more on a car than you would, when they may not have the same financial goals as you, gets us nowhere. Instead we need to focus on educating people on budgeting, financial planning, and understanding their total debt load. For instance, I have no dreams of retiring at 35, owning a Hawaii home, and spend very little on travel. That does not make me any less financially responsible because I drive a car above 10% of my gross income.

    • Richard M says

      “I do not swap cars often, and this is a 10-15 year vehicle for me.”

      “My current truck is a 2009 Tacoma valued at $15k”

      “I am currently in the process of buying a new car”

      Something is amiss here.

      • Patrick says

        I didn’t explain my situation fully, which is my fault. When I bought my 2009 Tacoma (slightly used), I drove my personal vehicle for work. In the 5.5 years I’ve owned it, I’ve put 140k miles on it. For the past 2 years I’ve had a company vehcile for when I do travel, so my annual mileage has gone from about 35k/year to around 10-15k. So while the Tacoma has not been around for 10 years, this next vehicle will be. Possibly even longer, depending on annual mileage. Hopefully that explains my situation a little better.

  31. says

    Awesome points. I have some accountant friends who religiously pay brand new luxury car payments from the moment that they landed jobs out of university. The worst mistake I can ever imagine.

    BeSmartRich

    • Ben says

      I suppose it depends on what your into, I’m an accountant myself and drive a brand new car. I realize the immense savings to be had by purchasing used. The thing is, my salary is high enough that I can afford all of my other living expenses, saving a healthy amount for retirement, and purchase a brand new car.

      Sure if I bought a used car I could have a larger pile of gold when it comes time for retirement, but at what point do you become like the character Smaug from the Hobbit? I mean money can only bring so much happiness, after which point it’s better to diversify into other areas that bring joy. My first priorities are my family and retirement, but after that I allow myself to splurge on my vehicle. I don’t care for fancy clothes, food, vacations, etc. Heck, when I travel I don’t even get a hotel 90% of the time, I usually just find somewhere to pitch a tent.

      I guess what I’m getting at is sure, a new car is a “waste” of money, but what if purchasing myself a new car brings me more marginal utility than purchase another share of stock?

  32. LiveALittle says

    This is absolutely ridiculous. Unless you don’t enjoy cars at any measure, or would like to add the vehicle that you drive and use every-single-day to your long list of boring frugality, then do not follow this advice. Please!

    Your article makes a lot of sense, some people who aren’t financially sound should definitely follow it. I understand the art of being frugal, but not when it comes to this. How boring can you possibly be, to earn so much money on a regular yearly basis, that you can’t even treat yourself to ONE expensive item that you’ll be using almost every day. No, let’s earn 50k every year, have a little cash saved up, and buy a $5,000 rust bucket from the kid down the street who’s still in high school. What a life. What’s the point of wanting to earn money if you’re not going to enjoy that money once in a while. A vehicle isn’t an investment, it’s one of those few exceptions where you can afford to take a loss.

    Saving is good, its good to save. But this article shows just how much of a tight-stingy, “no one wants to be around” type of person you are. Life is unpredictable people, one day everyone dies. Build wealth and be smart but just remember you’re not guaranteed anything. Keep waiting until your 65 and watch your money grow, maybe if you’re lucky to get to 65 (and physically able) then you can finally enjoy it. Hopefully you’re not depressed, could have easily been driving a nice newer vehicle throughout your life, but instead you opted to drive an out-dated 10-year old economical piece of transport compared to everyone else.

    Some people enjoy the boring lifestyle, they’ll never truly learn to live. Follow this article only if you’re in financial trouble, then once you’re out of financial trouble, celebrate by buying a nice car, drive it and enjoy it for 10+ years.

    • Richard M says

      “…you opted to drive an out-dated 10-year old economical piece of transport compared to everyone else….Some people enjoy the boring lifestyle, they’ll never truly learn to live.”

      If you spend your life comparing yourself to everyone else, you’ll never be happy. It’s easy to spot an unhappy person…those who call others “boring”, “tight-stingy”, and the kind that “no one wants to be around”. Does writing this post validate yourself?

      It sounds like you are one of those people who needs to spend money on material goods to enjoy life. I know a lot of such people, several of whom lost their home around 2009. Congratulations, knock yourself out. But don’t come to these web sites complaining about the high cost of health care, insurance, and other necessities that make life, as you indicate, “unpredictable.”

      Did it ever occur to you that some people might enjoy saving money so they can feel more financially secure? Or pass it on to children?

  33. Craig says

    Why not pay yourself by putting money in your 401k first, and then spend what you have leftover on whatever you like? If you like cars, buy a nice car and don’t spend much on other things. If you like to travel, then travel and don’t get a nice car. Cars, clothes, vacations, etc…..none of them will bring you a big return on investment. Make sure you save for the future, but also make sure you live your life.

  34. Dan says

    This makes little sense. I make $45,000 a year and previously owned a 2003 Mercedes ML350 because it was a gift. The problem was, it ate up gas, required premium fuel and needed repairs constantly. When all was said and done, it was costing me about $650 a month to own it. So I traded it in for a brand-new Toyota Camry. My car payment is $275 a month, and I pay a third of what I did for gas now that I drive a car that uses regular and gets double the gas mileage. By owning a new car, I’m saving about $250 a month over what I was paying. That car payment doesn’t make me feel dumb. On the contrary, every time I make it, I feel brilliant.

    • James says

      You are comparing the cost of ownership of a 13 year old high-end luxury vehicle made by MB when quality was on the decline with a brand new flagship vehicle made my the the most reliable car brand on the planet? Based on your income you should probably be in a mid 2000’s Camry instead.

  35. Richard M says

    Terrible rule, based on no analysis whatsoever. Very condescending tone as well. This magical “rule” doesn’t even make sense.

    The overall idea of spending less on a money-losing investment is sound, but if you are making $50K, the LAST thing you want to do is find a $5K (or less) car. Does the author have any idea what kind of car that will buy you? A high-mileage, high-maintenance gas hog!

    Better advice: (1) Buy a late-model (no more than 2 years old) used car. (2) Buy a car that gets excellent MPG (30+). (3) Buy a car good enough to last you a MINIMUM of 10 years. (4) Perform ALL scheduled maintenance.

    The biggest issue isn’t the worth of the car, it’s how often you BUY a car. Buying a car incurs payments, which is what hurts people the most. Gas guzzlers (mid-size SUVs and larger) simply create bigger payments and bigger maintenance costs (larger tires cost more!).

    DON’T lease; that’s as bad as renting a house.

    These days, a car capable of lasting 10+ years will cost you at least $10-12K – for a late-model subcompact. If you’re too large to fit in a subcompact, lose some weight by driving less and walking more….thereby saving even more.

  36. Bryan says

    I agree and disagree with this article… What are you saving all this money for again? Are they going to stuff it in your casket? Are you saving it for your spoiled grandkids so they can get a hand out where they don’t appreciate anything? I say it’s your money, do what you want. You have one life to live. You can’t go everyday penny pinching till the cows come home. Sure use coupons at the store, and don’t buy certain items till they come on sale sure. I already invest 18% of my pay towards retirement, plus a pension, and have been for 10 years. There is this thing called “Quality of life”… Meaning your entire life. I mean once you have a house and a promising retirement that builds interest, who gives a crap how much you spend on a car? For car people, this would never fly. My car is my hobby, it gives me the happiness and the quality of life that I enjoy. This is what non-car people don’t understand. It’s what makes you happy that matters, not the price tag that’s attached. As long as everything is paid and taken care of, who cares.

    • Wookie says

      I consider myself a ‘car guy’, and I didn’t buy a new car until I had my house paid off and my retirement savings well along the way.

      I think once you’ve embraced the ‘saver’ mindset, buying interesting cars on a budget is just another challenge. Me, I bought old big motor Mercedes sedans. I typically paid $5,000 or less for each one – they had ~150K miles on the clock. I’d drive them for another 150K and then sell them or part them out. Did this four times over 20 years. I enjoyed the hell out of those cars, and almost universally people thought that I’d spent way more than I had. I had some repair bills, but nowhere near the cost of ownership for a new car.

      Today, maybe old VW GTIs or Mazda Miatas might fill that bill (I have not done the research). Car guys tend to have fun no matter the budget.

  37. sandy says

    Hi Friends,

    Thank you for this website, this was so helpful, wanted to ask your opinions:

    I made a big mistake of buying a new Mercedes GLK350 for $45k when I was single. Now I am married and save its becoming difficult as now my car has reached 50k miles. My question was is it better to trade in (current value of benz is $21k) and get a basic camry ($20k range) with less maintenance and better mileage for next 5 years? Or is it wise to keep this car until 90k miles and then opt for a trade in that time(at that time It will be about 13k plus I would have spent on extra gas for this suv+extended warrantly of 2k + maintenances)? We may need a second car in next 1 year.

    Thank you very much
    Sandy

    • Benji says

      Keep your car, drive it until 200,000 miles. Shouldn’t be getting rid of a car before 100,000 miles. Barely broken in at that point.

      Or you could trade it for 10,000 Camry. It would be silly to trade your depreciated Mercedes for a non depreciated Camry at 20,000. In five years the bens will still be worth more than the Camry.

    • Victor says

      Sandy,
      I think you should get rid of it as soon as you can because the more you keep the Mercedes the more you’ll lose in depreciation. You have already paid x years of depreciation ($24k) but the car is still worth something. In another 50k miles / 4 years the car will likely lose (say) another $11k.

      If you are concerned about not burning money, don’t buy a brand new car because that will bring the steepest depreciation loss. The first year is the steepest and the next few years it would still lose a lot of value. Even if you buy a Japanese car like Camry or Accord for $21k or $29k you will easily lose $2k the minute you sign that purchase paperwork and another $2k in a year. Every year that brand new car would lose $3-4k. If you buy a 4-10 years old Japanese car for $5k (Camry) or $10k (Lexus LS for example) and you ensure that you don’t get a badly maintained or a lemon car, you will lose a very small amount in depreciation on that car. You could keep it for another 4-10 years and still get some of your money back. I have never spent more than $8k on a car, always bought in cash, started with $1400 1995 Toyota Tercel with 150k miles which I bought in 2007, kept a few months, never had spent a dime on repairs and then upgraded my way over the years. I have bought many cars at 140k+ miles and almost all cars had been above 100k+ miles and I never had to pay for any major maintenance (occasional wheel hub or bearing, axle or radiator which cost a couple of hundred, not even a thousand dollars). We bought a 1997 Avalon with 140k in 2008 and had to offer it to a cousin next year at 165k because he desperately needed one, otherwise we would have kept it. He’s currently at 190k+ and the car runs as smoothly (or even better with new tires).

      Those who complain about “repair costs” for older cars are just using that as an excuse to buy new shiny cars. The monthly depreciation, monthly car payment, insurance and tax amount is usually around $1000 for a new car whereas any old clunker would not require $1000 in repairs every month. My current cars are 2002 Lexus LS (more luxurious and comfy than any new $29k car, bought $8k 137k miles 1.5 years ago, now 153k miles and worth probably $7k, spent $480 on a wheel hub, $50 on a rear view mirror button, other than that just oil change and wheel balancing + alignment) and a 2005 Chrysler Town and Country van Limited (bought $5.5k 97k miles about 1.5 years ago, now 111k miles and worth probably around the same 5-5.5k, spent $600ish on a various items to remove a check engine light, this is among the highest ever spent on maintenance, still driving fine, took several 250+ mile road trips with family).

  38. HR Puffinstuff says

    Well…had little in life and have had lots. I drove a Honda Accord for 12 years until it was falling apart. Drove it hard, too. Traded for a 64K Z71 4WD Tahoe, paid cash. Net worth 5 million. I plan on driving it a long time. I’m a taller, 40ish girl with toys to pull. According to net worth chart, could’ve bought more expensive, but I like my all-American tough truck. And my boat looks good behind it!

    • Jonny says

      Sam,

      Love this article and drive a ’99 Corolla for work, cost $2K. However, I have tried to follow this for the family car and have bought a 05′ Malibu and ’02 Odyssey that ended up costing 3-5k in repairs over 3 yrs each and tons of stress on my wife and kids. Even decent used vans are freaking 10-15k now….any ideas? 28yrs old Make 50k, no debt except mortgage, net worth 100k. 4 kids, 1 stay at home mom. Know that I am crazy on that front, but love it! MMM frugal.

      • Victor says

        Jonny,
        Sorry to hear about your repairs. Honda cars from late 1990s, early 2000s are quite bad (late 2000s are too new and too expensive so I never considered them) especially the V6 cars (Accord, Acura TL, MDX, Odyssey etc) have had nearly universal problems with transmission. I have tried various cars from Toyota, Honda, Nissan and Mitsubishi and eventually I have become a Toyota/Lexus buyer (5-12 year old cars). Toyota Sienna is much more reliable than Odyssey and its used car value is about the same as Odyssey. We sold our 04 Sienna XLE Limited (all bells and whistles, $9k-ish) 118k miles a few years ago to put money towards our house down payment and haven’t been able to find a similar value deal on Sienna since then. We currently have a 05 Chrysler Town and Country which has given some issues ($600ish total in repairs for check engine light) but nowhere near the issues you had. Having read reviews from Odyssey owners (on KBB site and on edmunds) I would never buy an Odyssey unless they fix them for 2016 model and I read good reviews in 2025 about them being reliable in the 100-150k mile age :)

  39. Sommer says

    Also, though not by a large amount, automatic provides worse fuel efficiency.
    The experts, who have many years of experience in this field, often suggest junk car owners to sell out their
    vehicles to charitable institutions. Venturing
    to a business that involves making custom cars.

  40. Carlo says

    I don’t agree with this rule. Why not enjoy your money and drive the car that makes you look forward to drive it? I feel safer and I know I am safer in a BMW but I never lease or buy them new. A one or two year fully loaded model would save you 15 to 20 percent off MSRP and would still have warranty and free maintenance. Life is short. Your undeserving relatives will fight for your high net worth that they never earned when your 6 feet under. This idea seems to suggest that we are immortal or will live to be a 100. I don’t know if I’ll be alive tomorrow so I don’t stress myself out of amassing a million $ net worth in the far future. I enjoy the here and now and not worry and put all my trust in the almighty. Financially, my family is well taken cared of if I checked out tomorrow.

    • Bud Mor says

      Carlo, while this rule is not perfect, your arguments against it are terrible.

      Safety argument: IIHS only has one BMW on its list of the safest cars in 2015 and that is the BMW 2-series. If safety is really an issue then you should be opting for a Volvo XC60, Mercedes M-class Toyota Highlander etc. Or just go and get a very heavy vehicle and drive it slowly.

      Enjoy your money argument: the reason this is a poor argument is that you are not a 2-year old. As an adult one generally has obligations to one’s self, family and future. The goal of this article is to ensure those obligations are fulfilled. If this were a good argument wouldn’t we all refinance our homes and buy Ferraris and Bugattis.

      Die tomorrow argument: and you could live to 100. You don’t know. While we as a nation may only be 36th in terms of longevity (beaten by Lebanon, Hong Kong, Taiwan etc), men have a life expectancy of over 77 and women over 82-years. Plus if you live past the babies who die early and the young male morons who get killed in the teens and twenties one’s life expectancy is well into the 80’s. And it is getting higher. To make a financial decision based on the notion that one could die tomorrow, rather than the fact that one is likely to live to one’s 80’s is foolhardy at best.

      Perhaps one doesn’t want to leave a bunch of money to relatives to fight over; but that is surely preferable to having to beg those relatives for monetary support later in life, or living off food stamps just because one wanted to drive a BMW.

      • Benji says

        You must have missed this part “I enjoy the here and now and not worry and put all my trust in the almighty. Financially, my family is well taken cared of if I checked out tomorrow. “.

        There’s nothing wrong with spending as much as you want on a car as log as your finances are in order.

        If your can pay your mortgage and save for retirement and still buy a car 50% of your income I don’t see the problem.

        Personally I own a cheap home, I don’t really see the purpose of having a large one. But I have quiet a bit of money in my vehicles.

        I’m extremely happy with this scenario.

  41. Valerie Lafferty says

    I too was one hour away from buying a new car. I read your article and it made really good sense. My car is four years old and my warranty is about out plus I am very close to buying new tires. I have decided to keep my vehicle(Buick Enclave) but I will be purchasing an extended warranty, which a lot of folks think is a no no ,but I will feel better.

  42. JMG says

    Hi,

    Disagree with the frugality of the rule, however agree with the principle behind it.

    What about a variation of the rule…instead of spending 1/10th of your gross income on the car (MSRP) dedicate 1/7th of your annual gross income to your ANNUAL car payments.

    Say you earn 100K (most of us don´t want a Ford Focus or similar) you should not allocate more than 7K to the ownership of a car per year, this translates to monthly payments of $580, which if you have a good debt to income balance should not represent a burden, and at the same time allow you to buy a car you actually like and (although it may sound superfluous) that suits your job and lifestyle.

    If you dont like cars just get a honda or a toyota,,,but if you do, having a nice car is among the things that money is for

    Just my opinion….

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