​

Financial Samurai

Slicing Through Money's Mysteries

  • About
  • Invest In Real Estate
  • Top Financial Products
    • Free Wealth Management
    • Negotiate A Severance
  • Buy This, Not That (Bestseller)

Cash For Clunkers = Personal Finance BOMB!

Updated: 03/23/2023 by Financial Samurai 12 Comments

Cash for clunkers was a failure. Let’s discuss the cash for clunkers program in more detail.

The latest development in the “Cash For Clunkers” legislation is that it may be extended for one more month until labor day. Under the program, buyers of new cars and trucks can get rebates of $3,500 to $4,500 by trading in older models that are then scrapped.

Seriously though, is this multi-billion dollar government works program just money spent to appease the car lobbyists? Or is the goal really to get old cars off the streets and save the environment? The good thing is that these old cars are getting scrapped.

Otherwise, if you trade in your gas guzzling SUV for a Honda Civic, you’ve NET ADDED to the world’s pollution because someone is still driving your old car, and the new Civic still emits waste!

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

Cash For Clunkers Was No Good

The only way you’re going to really make a difference is if you scrap your old car and just take public transportation and ride a bike! Again, I’m absolutely for driving a nice low emissions car, but the fact of the matter is that these cars are expensive. I’m not spending $30,000, and if you look down on someone who can’t afford the $7-10,000 premium for hybrids then shame on you!

The real problem with this legislation is that it’s giving money to people who don’t need it. If you are driving a car valued at $4,500 or less, it’s probably unlikely you can afford to buy America’s average car price of $25,000! I strongly suggest you stick with my 1/10th rule, which states that you should spend no more than 1/10th your gross income on cars.

Hence, only until your income or your combined income is $250,000 should you be buying America’s averaged price car. Spending more than 10% of your gross income on a car is absolutely ludicrous if you’re serious about early retirement, savings, and investing. Say no to car debt!

Supposedly 167,000 transactions worth $667 million have gone through already. I bet that a good percentage of these transactions were made by people who overextended themselves financially to get into that shiny new $38,000 luxury automobile.

Save Money On A Car Is Fine

The thought process is that they can “save” over 10% on the value of this luxury automobile they’re eyeing if they trade in their car. You’re not saving anything! The $3,000-$4,500 is likely the value of your car, unless you’ve got such a heap of junk that you’re getting an extra $2,000-$3,000 worth, in which case you definitely shouldn’t be buying a $25,000 car!

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

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

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

See: Only The Rich Or Fools Can Afford To Buy New Cars Today

RECOMMENDATIONS

Check out Allstate online. They have some of the best plans with the lowest rates around. It’s worth spending a moment filling out a quote to see if you can save some money. Car insurance is one of the largest ongoing expenses for car owners. Allstate has good driver discounts, and multi-product discounts as well.

Sign up with Empower, the best free tool to help you become a better investor. With Empower, you can track your investments, see your asset allocation, x-ray your portfolios for excessive fees, and more. Staying on top of your investments during times of uncertainty is a must. 

Pick up a copy of Buy This, Not That, my instant Wall Street Journal bestseller. The book helps you make more optimal investment decisions so you can live a better, more fulfilling life. You can pick up a copy on sale at Amazon today. 

For more nuanced personal finance content, join 55,000+ others and sign up for the free Financial Samurai newsletter and posts via e-mail. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009. 

Tweet
Share
Pin
Flip
Share
Buy this not that instant bestseller Wall Street journal banner

Filed Under: Automobiles, Budgeting & Savings

Author Bio: I started Financial Samurai in 2009 to help people achieve financial freedom sooner. Financial Samurai is now one of the largest independently run personal finance sites with about one million visitors a month.

I spent 13 years working at Goldman Sachs and Credit Suisse (RIP). In 1999, I earned my BA from William & Mary and in 2006, I received my MBA from UC Berkeley.

In 2012, I left banking after negotiating a severance package worth over five years of living expenses. Today, I enjoy being a stay-at-home dad to two young children, playing tennis, and writing.

Current Recommendations:

1) Check out Fundrise, my favorite real estate investing platform. I’ve personally invested $810,000 in private real estate to take advantage of lower valuations and higher rental yields in the Sunbelt. Roughly $160,000 of my annual passive income comes from real estate. And passive income is the key to being free. With mortgage rates down dramatically post the regional bank runs, real estate is now much more attractive.

2) If you have debt and/or children, life insurance is a must. PolicyGenius is the easiest way to find affordable life insurance in minutes. My wife was able to double her life insurance coverage for less with PolicyGenius. I also just got a new affordable 20-year term policy with them.

Financial Samurai has a partnership with Fundrise and PolicyGenius and is also a client of both. Financial Samurai earns a commission for each sign up at no cost to you. 

Subscribe To Private Newsletter

Comments

  1. ED says

    March 22, 2023 at 10:28 pm

    I don’t know about the 10% rule, so I’ll say my downpayment should not surpass 10% of our income. So about $25,000. Then keeping the payments low at about $1000/month, I can get the Lexus LC500.

    Sounds very rationale.

    Reply
    • Financial Samurai says

      March 23, 2023 at 12:48 am

      Spending $1,000/month for a car is irrational, even if you’re making $10,000 a month. The 1/10th Rule For Car Buying is the best car buying rule to help you stay disciplined and build more wealth.

      Reply
  2. El Guapo says

    November 25, 2014 at 11:08 am

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

    Reply
    • Financial Samurai says

      November 25, 2014 at 11:56 am

      Good stuff El Guapo! Funny you found this post and shared your story. Glad you’ve adjusted your car spending habits!

      Reply
  3. FinancialBondage.org says

    May 31, 2010 at 3:43 pm

    a fine example of what happens when the feds try to do something useful. It bombs. Also see Social Security, Medicare, and Obamacare. :)

    Reply
  4. Anonymous says

    August 8, 2009 at 11:23 am

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

    SocialistRenter

    Reply
  5. Financial Samurai says

    August 5, 2009 at 9:38 pm

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

    RB
    Sam

    Reply
  6. KCLau says

    August 5, 2009 at 9:22 pm

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

    Reply
  7. Anonymous says

    August 5, 2009 at 6:53 pm

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

    Reply
  8. RB @ RichBy30RetireBy40 says

    August 5, 2009 at 6:52 pm

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

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

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

    Best,

    RB
    RB30RB40

    Reply
  9. Gen Y Investor says

    August 5, 2009 at 3:06 pm

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

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

    I feel like I'm living in bizzaro world

    Reply
  10. Resort At Squaw Creek says

    August 4, 2009 at 11:52 pm

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

    Reply

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *


n

Top Product Reviews

  • Fundrise review (real estate investing)
  • Policygenius review (life insurance)
  • CIT Bank review (high interest savings and CDs)
  • NewRetirement review (retirement planning)
  • Empower review (free financial tools and wealth manager, previously Personal Capital)
  • How To Engineer Your Layoff (severance negotiation book)

Financial Samurai Featured In

Buy this not that Wall Street journal bestseller

Categories

  • Automobiles
  • Big Government
  • Budgeting & Savings
  • Career & Employment
  • Credit Cards
  • Credit Score
  • Debt
  • Education
  • Entrepreneurship
  • Family Finances
  • Gig Economy
  • Health & Fitness
  • Insurance
  • Investments
  • Mortgages
  • Most Popular
  • Motivation
  • Podcast
  • Product Reviews
  • Real Estate
  • Relationships
  • Retirement
  • San Francisco
  • Taxes
  • Travel
Buy this not that WSJ bestseller 728
  • Email
  • Facebook
  • RSS
  • Twitter
Copyright © 2009–2023 Financial Samurai · Read our disclosures

PRIVACY: We will never disclose or sell your email address or any of your data from this site. We do highly welcome posts and community interaction, and registering is simply part of the posting system.
DISCLAIMER: Financial Samurai exists to thought provoke and learn from the community. Your decisions are yours alone and we are in no way responsible for your actions. Stay on the righteous path and think long and hard before making any financial transaction! Disclosures