Are you looking for a car buying guideline? Do you think my 1/10th rule is too harsh? If so, do not fret! Let me also introduce to you the net worth rule for car buying guideline to follow.
The net worth rule for car buying is generally reserved for wealthier people or retired people with a lot of assets, but not a high income.
I came up with the net worth car buying guideline because my 13-year-old Land Rover Discovery II was starting to give me fits back in 2013. His cruise control had just died and I was starting to worry about car safety, which is everything if you have a family.
I had just spent $800 that summer on a new steering pump, timing belt, and 125,000 mile tune up. So it was disappointing to see another issue come up.
Besides the cruise control not working, the brakes are mushy, the airbags haven’t been serviced at the 10 year mark, the traction control and ABS lights are on, and a couple $220 M+S tires are balding.
Oh yeah, the CD player doesn’t work either and there’s no bluetooth of course! My trusty mechanic of 12 years said Moose was operationally fine. The dashboard lights are just on due to a broken fuse lodged deep inside the control panel that makes it not worth replacing. Still, I had my doubts.
I wanted to buy a new car! But I also had just retired in 2012 and no longer earned six-figure in finance.
Based on the 1/10th rule for car buying, I can buy a new compact car. The problem is, I wanted to buy the latest Range Rover Sport that costs $90,000! Let’s see if there is a car buying guideline to help get me and you what we want.
The Net Worth Rule For Car Buying
The net worth rule for car buying states that you can spend up to 5% of your overall net worth on the purchase price of a car.
The 1/10th rule only accounts for one’s annual income when deciding on how much to spend on a car. Perhaps a greater barometer to determine car spending is your overall net worth. After all, if you can live in a 100% paid off $5 million mansion and live off $150,000 a year in disposable income you’re much better off than somebody who earns $300,000 a year with no assets to speak of.
Based on my net worth by income post, a 30 year old should have roughly 2X their salary in savings or overall net worth e.g. $60,000 annual income = $120,000 net worth. Hence, to keep consistent with the 1/10th rule for car buying and my net worth by income calculations, I think spending 5% or less of one’s net worth on a vehicle works very well (5% X $120,000 = $6,000 = 10% X $60,000).
The net worth rule for car buying covers those who’ve retired, are temporarily out of a job, are a stay at home spouse, have a medical condition and can’t work full time and so forth.
Let’s say you worked for 40 years and accumulated a $1 million net worth by the time you are 65 through diligent savings and investments. You’re now living off roughly $60,000 a year from social security, dividends, and a pension.
The 1/10th rule says you can only buy a $6,000 car which seems much too onerous for a person of your stature. It’s time to live it up a little! My net worth rule provides a guideline for the retiree to buy up to a $50,000 car instead.
Net Worth Guideline By Income Chart
Below is the net worth guideline by income chart for your review. As you can see below, a 50 year old person who makes $200,000 a year and has a $2,400,000 net worth should feel comfortable spending up to $120,000 on a sweet Porsche 911 CS instead of just $20,000 on a Honda Civic.
Whether he does or not is another matter. If I’m sporting a $2.4 million net worth and $200K income, I’m still driving a $20,000 car, because $3 million is the new $1 million thanks to inflation.
Car Recommendations By Net Worth Amount
Cars are so much fun. I understand every single one of you who salivate over the latest model sports car or SUV. But cars are also the biggest money wasters. Follow my car buying guideline. Nobody really needs a car that costs over $5,000. Cars built after 2000 are so much more reliable than those building in the 70s, 80s, and even 90s.
The money we spend on cars could be invested in real estate or stocks that will super charge our net worths. The money you would have invested in the stock market or real estate market when I first wrote this post in 2013 is now worth more than triple in 2021!
I’d like every car buyer to think in terms of opportunity cost when making a decision on which vehicle to get. Every time I think about plunking down $50,000 on a new BMW, I shudder to think how it could turn into $100,000 10 years later if it grows at 7.2% a year.
In 2018 I invested $50,000 in Tesla stock while my preschool teacher friend bought a $50,000 Model 3! My Tesla stock can now buy me three Model 3s for free. This is why it can be so hard for investors to spend money.
Basing a car buying decision on one’s net worth may actually be harder than basing a decision based on income. Our net worth is a lifetime achievement whereas income is only one year at a time. Are we really comfortable spending 1/20th of our lifetime’s work on a depreciating vehicle? Maybe, but that should certainly be the max.
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Great article. Would this apply to all “toys”. For example if you want some cars AND a boat does it all have to fit into the 5%?
You should include your boat. I heard from Dave Ramsay that all your toys (which he said anything has a motor, has tires or requires gas) should cumulatively not exceed 5% of your net worth.
I guess I’m a little late to the party since this article was published as I think at age 50 it should be in the 3 millions for net worth. Interesting enough that I’ve followed my ideas in finance and aligns quite a bit to this site. Some of it like F.I.R.E., however not to the extreme.
I’m approaching 50 now and working toward my 4th million in net worth with salary(not including investments income) averaging over 200k a year (past few years now). Kids college all paid for (529) and everything paid off. Maybe retire at 50 since my investments can cover over 100k a year now.
Here’s my rule on purchasing cars that I followed throughout the years, I recommended to my friends and family 15% of home value for married couples otherwise 10% for singles. (this kept up well with housing market and car prices and I call it “Home to Car Rule”). An example, it would seem very silly driving a 150k Mercedes in a neighborhood where homes average 500k.
I never leverage the NW approach which I find interesting, let’s label this as “NW to Car Rule”. If I was to consider it, then I would recommend 5% rule to NW (be careful of being car rich going higher than 5%). For me that would be NW of 4 million equates to 200k total cars (not single car), but equate it to what you paid for them and not current value. I already have my luxury SUVs and toys today (I followed the 15% “Home to Car Rule”), but now considering a exotic car (Lambo), however that means a used one at the 5% rule to NW and a little passing the “Home to Car Rule”, but throwing away my minor “Frugal” label.
So here’s what I’m considering as options to my next big car purchase:
I can retire at age 50 with my investments covering a recurring income of over 100k a year, however not feeling comfortable leveraging my 5% rule toward “NW to Car Rule”, perhaps stay around 65k for that cheaper car.
Or I can stay in the workforce and continue to make around 200k in salary and buy that exotic sports car (probably being frugal a used lambo), but 5 years more would solidify many things.
Or perhaps look to part-time which likely will be around 120k a year outside of the investment income, but still enough to consider an exotic sports car (again used)
Or nothing which is likely seems to be my default in past years and just continue to dream for it. However I get to laugh it off when the self-driving electric cars take over the world!
BTW, as I’m writing this, I find it very silly that the luxury cars I currently own has depreciated so much, but if I would have brought that used Lambo years ago instead of my last luxury SUV, the Lambo would still hold about the same value (not counting inflation).
HI,
I’m earning 1 lac per months in hand and after deducting lively cost & other liabilities, balance amount is 40K net saving for investment / expense.
What car I shall buy for mumbai- day to day usage for office ?
daily commute – 30-40 KM
family size – 4
Existing car – premium hatch back and want to show off also with new car
Unless you have already addressed your financial goals and are a car collector or have the skills to fix and flip cars, buy a used car. 2-3 years old will keep you from spending 1000’s and still get a warranty.
1) Buy the car you are going to drive for the next 20+ years and learn how to care for it.
2) If you don’t live in a Rustbelt, your car might begin to appreciate after 20 years.. :)
3) If you are in sales, buy a nice car, refresh it before 10 year old. Especially if you are a Realtor or travel with your clients. Not a top end model unless you are catering to the 1%.
4) Give your wife, who takes care of your children, the best car with the best tires. You will drive it when she gets a new one.
5) All cars require maintenance. There is no such thing as lifetime fluid if you want it to last 20 years+. 3,000 miles on Walmart Mobile 1 (High Mileage) + filter goes a long way toward making your car last. Your car’s engine will last longer, consume less fuel, develop less oil leaks if you stick to the old schedule. Ignore the newer intervals.. they only want to get you out of warranty.. Change the coolant every 2 years, transmission and diffs at 30k, rotate the tires every 3-6k if they are the same size.
6) Run the Premium fuel. It is usually $0.25 more, your engine knocks less and lasts longer (knock sensors help.. but are a crutch for poor fuel), but gives you better fuel economy. Don’t believe me, run several tests of both types of fuel and track your mileage.
7) Drive a plain, simple, and comfortable to work. It was not that long ago strong arm windows, manual locks and 5-speed manual transmissions were all the rage!
8) If you live in the South, get A/C.
9) All things require regular maintenance, the more skilled you are or become, the lower your maintenance costs, which go a long way toward reaching your finical goals. Labor will chew through a budget fast, even most BMWs, Mercedes, and Porche can be owned on a budget if you have the skills and time to do the work yourself. Do you earn $100-150 an hour? Very few do.. That is the going rate if you can’t do the work yourself. The parts themselves are not too much more unless you purchased a very one-off model.. with YouTube and the internet so much is available to what used to be a “secret” of the trades. But a good trades person will have the skills and training beyond what you can learn from YouTube… but if you have already learned some of these skills, it might be an option.
Save the Ferrari collection for something to do with retirement money because you over-invested, instead of spending during your working years.
Love your article! Good perception on what you really need to realize to be safe financially with getting your new car.
Base on the 1/10 rule and/or 5% rule I would qualify for a used Honda Accord. Yet, I’ve always have a nicer car and one that I truly want. Here are the steps to get that better car:
Step 1: Plan at least one full year before getting that new car- do you research on ratings and value
Step 2: Pretend you purchase the new car and put monthly payments into a car fund (don’t touch it)
Step 3: After one of making pretend payments truly ask yourself if you can afford it—like not eating top ramen or mac & cheese every night
Step 4: If you can answer yes to step 4 than go for the car you want plus you now have a decent down payment
Eh? Now you’re changing your own rules to accommodate net worth instead? Are you 21 or something? AND you said that’ 90’s cars were more reliable. But now a car from 2000 is more reliable than a car from the 90’s? What you smoking boy?
He’s probably smoking money because he’s got one of the most successful finance blogs on the internet.
Hi. This article is very timely for me. I’m retired (age 65), debt free with a net worth of about $3.3 million, and income and expenses of around $80K year. My wife and I saved all of our life, put 3 kids through college, and lived conservatively. Due to my wife’s extreme medical conditions, I’d like to buy an extremely safe and comfortable car for our long distance travels to family and friends. A $120K S-Class fits this to a tee. Based on my own financial analysis, I felt I could afford this purchase, but your analysis helps with my decision. Great that I was finally able to obtain purchase info analysis based on net worth, as opposed to annual income.
My dad is worth $6.5 million (house $1.5 million, liquid $5 million) at the age of 60. He makes $500k/year pre-tax, though his income hasn’t always been this high. It’s only been around this level since around 2011. Prior it was $400k/year for a couple of years, $300k/year for a couples of years, etc., all the way down to $40k/year starting back in the late 1980s. You should correct your ideal net worth multiplier to apply to something like an average income.
$500k/year times 20 suggests he should have $10 million, but there is no feasible way he could have accumulated that much given that he hasn’t been at $500k/year for the entirety of his working life (most people aren’t – the only exception I can think of are maybe some investment bankers after a couple of years and specialist physicians like orthopedic surgeons, neurosurgeons, cardiologists, etc. after residency.)
He does not feel wealthy even with $5 million in liquid net worth. His reasoning is that at a 4% withdrawal rate, $5 million is nowhere near enough to replenish anywhere near his current pre-tax income of $500k.
Although he makes $500k/year pre-tax, he certainly doesn’t spend anywhere near that much. $125k or so goes to federal income taxes right off the bat. He maxes out his retirement plans ever month and with everything said and done his take home per month is in the $22k-$26k per month range.
Of that, he and my mom spend anywhere from $10k to $12k per month and pump the remainder into his brokerage accounts (TD ameritrade, etc.)
He’s never spent more than $60k on a car because he does not think that he can afford to buy more. Being able to technically pay for/write a check for a car does not mean he can “afford” it, in his opinion.
He needs $12.5 million in liquid assets to replace $500k/year in pre-tax income. He is on target to reach $12.5 million by his intended retirement age at 74, but only assuming the stock market does well and barring any major crashes. A catastrophic setback could cause him to have only $7-$9 million at retirement, depending on when it occurs. Granted, he’s slowly phasing his money into bonds over stocks as he ages and fortunately for him a $7-$9 million nest egg would still be sufficient to replace his typical annual spending (though not his total annual pre-tax earnings).
He still actively worries about being able to generate enough income to replace his pre-tax working income, and so by that standard he’s far from wealthy. He considers himself squarely upper middle class and would scoff at the idea that he can afford a $250k Lamborghini Gallardo Spyder just because he has $5 million in liquid net worth.
Spending $250k on a car right now would mean forsaking $500k in future net worth 14 years down the line at retirement age (assuming (72/14)% compound annual growth rate).
I might even go a step further than this. There is a big difference between someone who lives in a big city and their house value has gone up by $500k vs someone who has $500k in investments.
This is actually very helpful for me as I am considering if I should put in close to $1k to fix up my 2001 4Runner or just buy a “new” to me car.
In the end I think I am still better off with my older 4Runner consider it is just basic maintenance plus it is a very reliable car.
Hello Sam,
I’m going to be 36 years old today. i have 2 mortgages, a house – where i live (worth 700K and i paid off 60% of it) and a condo (300K haven’t paid anything on it yet, plan is to get Airbnb to pay the mortgage for that). I can save 25K/yr and ive managed to accumulate 120K over the past couple of years. The original plan was to direct that cash towards my house to lower my monthly payments but lately, i’ve been really dreaming about buying a brand new porsche 991.2 4S for 150K or a new AudiS4 for 72K but i really want a porsche. (btw, i currently drive a dodge). I know its not the most sane decision but based on what i shared with you. Is there a way to recover? (the only reason i’m having 2nd thoughts is that i have 2 kids and i feel responsible for them but then my counter argument is that i’m the one making the money and i need to enjoy it while i can!)
I love the 991.2. But $150K is such a STEEP price to pay for a car based on your net worth. If you follow my net worth rule for car buying, you should really wait until your NW reaches ~$3M.
I’d rent one for a weekend to get your thrills out first. Your home to car ratio will be totally out of whack with a $150K car!
Keep your Dodge and wait several more years. You’ll appreciate the Porsche more and you’ll be much wealthier too!
Related: The Average Net Worth For The Above Average Person
Sam
Hey Sam,
This is my update. I’m now 38, I have 31K left on my house and 270K on my condo. The dodge is no fun dude. Wanna revise your NW guidelines?
I’m willing to go for a Model 3. I can no longer stand the dodge. I don’t want to do a foolish thing though.
I know I’m late with this post by a couple of years but hoping I can get some input from the financial samurai. Since anonymity is at my advantage here I will be blunt with my numbers…my situation is as follows
Age: 32, wife is 31
We’ve been working for about 4 years since finishing school
Household income: 550k/yr
Student loans: 215k, we started with 500k and have been aggressive paying them off and putting minimal towards savings. we hope to pay it off entirely by 2019 and begin aggressively saving.
Bought a house in 2016 for $360k with a new doctor loan which requires no down payment so our mortgage+escrow is about $2.7k/mos.
No credit card or consumer debt.
We live fairly frugally, don’t plan on having children.
Our entire monthly overhead for mortgage and required bills is about $3k.
Last year as a reward for myself I leased a BMW M4 through my business, with a monthly payment of ~$1k with everything rolled in. I’ve always loved cars and always wanted an M3 and now I have one.
Being able to pay for it through my business is a major advantage tax-wise, and even though the $1k/mos is under 1/45th of what my gross monthly income is, sometimes I still feel like I am being irresponsible being that I have no savings right now. I put about $10k/mos of post-tax money into my wife and I’s student loans.
So in my mind, either I put $11k/mos towards loans and have a more responsible car, or I put $10k/mos into loans and have something that brightens my day whenever I drive it, and is something that I’ve always wanted.
I can’t help but feeling a bit guilty, especially reading this article on your site, however I also know life can be short and fleeting, especially in my line of work I see it all the time. And I don’t want to be one of those people that delays their gratification so long they miss out on things they are passionate about.
In the end, am I looking for validation of my choices? Heck yeah. Do I think I ultimately made the best choice for my situation? I guess that’s for any brave soul that read this entire post to answer!
Thanks for your time,
Tragedycat
I believe if you mixed both theories of buying a new car. This would be more of a realistic buying criteria. No person with a net worth of $50,000 would buy a car with a value of $2,500. Maybe using 5% net worth with a 5% gross annual income combined would be more realistic. Also a factor is the length of time the person will keep the car which maybe approximately 5 years depending how well the person takes care of the vehicles and condition of the vehicle. I live in a suburban area which is a necessity. Other individuals that live in a urban area will never need a vehicle for their work commute.
Investing a little more money for a quality car will prolong the depreciating asset. Vehicles that are more than 10 years old and/or have high mileage are more likely to accrued high repair costs that may equal the cost of the vehicle. Base on the idea that previous owners may have not followed the maintenance care of their vehicle.
I am as well a previous Civic owner and currently a Accord owner. The Accord has saved my life in two different occasions. I do believe that we do not necessary need a higher end vehicle for safety. The last decade our safety standards have steadily increased. Higher end vehicles just add more assurance to our safety.
Th e problem with believing that your $50,000 will earn you over 7% a year and net you a hundred thousand dollars in 10 years is this,
inflation will eat most of those profits away. Even if you take the official government inflation numbers as fact, and nobody in their right mind believes the government’s numbers, your hundred thousand won’t have anywhere near the purchasing power It has today.If you believe non government inflation figures, you will be lucky if your hundred thousand dollars will buy you what $50,000 buys you today.
$50,000 in forever stamps will likely be a much better investment.
The key is to be like “Financial Samurai” and have had $50k 30 years ago in the Bay Area. Then you’d magically have $5M today thanks to the preposterous real estate bubble created by foreign investment and NIMBYist land lords who are now free to milk the current working generation AND preach to them about “fiscal responsibility” for good measure.
Of course to folks like this “7% on $50k” (I’d LOVE to see that… unfortunately the market is heading RIGHT back down so BUH BYE GAINS!) seems ‘easy’ because they fell ass backwards into right place/right time real estate in BS markets.
Unfortunately that requires a time machine.
Man, I’m not 60+, Im 38. That would be sweet if I turned $50K into $5M. Alas, I’m not so lucky.
You seem frustrated. Maybe this post on The Average Net Worth For The Above Average Person will pick you up!
Okay, so my dad is looking at buying a new car. Currently, he drives a 2013 Toyota Tundra. He bought me a 2014 Jeep wrangler for my 16th birthday last year for about $36,000 which is much nicer than his car. My mom has a 2013 Nissan Pathfinder which is nice as well. Anyway, my dad brings in about $400,000 through his real estate. He’s developing a neighborhood with two other partners and besides the $400,000 a year, he’ll make another $1.5m from the units/houses that are sold. That is not yearly, however, it will take about two years to sell all of the units. Anyway, we also own 17 apartments in our complex. We profit about $3,000 a month, because he uses the rest to pay off the apartment building. Also, as ridiculous and impossible as this sounds, we bought a house about four years ago for $400,000, renovated and had it appraised for $1.7-2m… That’s another million and a half that we have. Our net worth, excluding our house and the $1.5 from the neighborhood’s houses, is right about $3,000,000. Sorry for the all the other information above. Anyway, about how much would be appropriate to spend on a car. I caught him looking at 2008 Bentley Continental GTs, even though he’d never buy one because he doesn’t want to be flashy. Would spending $70,000-80,000 be appropriate? Thanks
I like both the 1/10 and the 5% rule – I think they are good “brackets” to bound spending. But people forget that finances are more than of immediate concern. Often, money is a consequential concern, as in the case of getting killed or severely injured in a car accident. Cars are a necessity. Safe and reliable cars are a requirement. I see no point in putting my wife and daughter in a Fit or Smart Car – put that up against a head-on with a semi-tractor and see what happens. So we driver larger Lexus vehicles with 10 airbags each. Yeah, we have high NW and high income, but we pay the price for safety and reliability, not for the sake of having an expensive car. We don’t drive fast, rather boring actually. All that adds up to greatly increased odds of living longer and injury-free – to make more money and enjoy! Small cars and fast cars are a prescription for disaster. Just look at accident statistics. Sports care are inherently safer by design, yet have the highest death rates. Small cars are, well, just plain deadly by virtue of their low mess when they do the tango with a larger vehicle or road barrier. Mini-vans are inherently unsafe but have the lowest death rates because they are driven slowly by soccer moms – they aren’t driven fast enough to die in. These considerations should be the focus of which car you buy and how you drive it. If you want to risk dying early and ruining your family financially, by all means buy a sardine can-sized car or buy a sports car and drive like a nut. If you want to do what you can do to survive an accident, then buy a safe, luxury car, with an airbag in each seating position, preferably a large sedan or mid-size SUV (Lexus LS 460 and GX 460 or RX 350) and get it with pre collision, lane tracking, driver attention. And be a boring driver. That way you will likely survive most accidents AND live to continue earning more money, or at least enjoying what you have. Instead of buying the new $30K Honda Accord, buy a 3 year old Lexus RX 350 with 10 airbags for the same money. They can be had a dime a dozen. The car you drive has a much longer-term bearing on your financial future than just the immediate purchase. You might save $1000/year in gas driving a Prius, but you won’t save any money when you can no longer work because it got nailed by a dump truck and you are crippled for life – that is actually worse than simply getting killed. And if you have a family, these effects are multiplied by each family member that stands to lose their life or their physical well being in a car wreck. My 2c, FWIW.
Thanks Mark for putting it so accurately. I am looking for the safest vehicle for my family as well and this is hands down the biggest priority for me.
How true the old adage: “Life is about Compromises”. Do we enjoy life now, or later? Will we have enough later, if we spend now? And then you toss in the “What is the meaning of happiness?” question.
I am a car nut. Have been since I could walk and talk. I have over $3M in net worth, and pull in over $430K/year. I drive an 11 year old Infiniti with just over 100K miles, and I’m sure it will keep running for another 10 years as I’m meticulous with maintenance. Yet, the emotional tug of buying a new car constantly creeps up on me. So articles like this help me see clearly again.
In response to the car enthusiasts out there, here is what I recommend. Get yourself a classic car. It doesn’t have to be expensive, or shiny, or even be considered a “classic”. I have a 1967 Alfa Romeo Duetto that I bought about 10 years ago for $11.5K from the original owner, who had had it restored to street quality.
I greatly enjoy driving it on weekends. Registration is just $150/year. The only major repair has been an engine overhaul at $6K. My annual insurance is $200 for full coverage at an agreed value of $20K. I’ll have to bump that up now because these cars have appreciated, and are fetching $40K at auction! Not a bad investment for a car.
It depends on how you calculate networth. The majority of my networth is in my businesses and factoring their value I would have a networth that allows for a 100k car. If I were to factor just my cash and home equity it would only allow, by your standards, a 20k car.
However, as one of the previous comments stated it sometimes doesn’t matter…
I enjoy your car buying posts. I think they may be a tad too restrictive for some on the lower end of the spectrum, but these low percentages are the wake-up call that many people need from a financial health standpoint.
To poster above, maybe I’m misunderstanding your particular brand of math, but the 5%/1% NW rule sounds downright miserly unless you are a multimillionaire.
I think Ed makes an excellent point that some people have a preference towards spending money early in life rather than binge saving. He seems to be enjoying his AMG. I would only argue that I don’t think it is precisely an either/or proposition. Once you have a good retirement base going, you can continue to save and spend a little more.
Also, I think it’s worth noting that there’s an abundance of enthusiast-approved vehicles that fall into $10k-$50k range… especially when considering used.
$10-$50K cars are great provided you have a net worth of $200,000 – $1 million.
So by your estimation the car industry should shut down completely.
How many people in the US have even a $100k net worth? (answer – very few)
So in your view *no* person in the US should be buying *any* new car.
it’s completely ridiculous, but I get it. You had the great fortune to make enormous sums of money and can now presume to dictate to folks working regular jobs how they can “get rich”.
Here’s an idea. Tax Bay Area real estate at say….. 25% of total value PER YEAR and put that in a fund to help normal people buy cars thereby keeping the auto industry (that employs millions) alive. No? Yeah.
Incidentally, how about food, vacations, clothing, etc? What other “frivolous expenses” should the working class rabble leave to rich, property owning, folks?
What’ wrong with taking the bus, walking, or riding a bike?
Check out: Spoiled Or Clueless? Trying Working A Minimum Wage Job As An Adult
Gotta face reality instead of wasting your time and money.
well said. there is only one life to live. The rule is live within your means. don’t overspend. don’t be so frugal either. work hard ..enjoy life..fancy clothes, car while you are still active….when we die we live all those savings for others to spend. YOU don’t need to be a millionnaire to enjoy a 150k car…..what matters is the satisfaction you derive from owning it in a way it does not stress you monthly payments.
We found this very interesting as we have had a similar process for house and car for decades. Ours is a tad more conservative though: 5% NW for house and 1% for total of cars. This is , obviously, too restrictive for younger folks just starting out. We adopted this over the years as we observed a lot of “wanna-be” folks in our area ( big hat, no cattle). This approach is certainly not for everyone but we are quite content with the results. It allowed us to retire in our 50’s and do as we please. The money that would have gone to house and cars is used for travel- just depends on what folks find important to them.
I do .01% of net worth for house and .0001% of net worth for car. I think 5% and 1% is pretty crazy really.
Out of curiosity… Where the F in the US can you possibly live that “5% of NW” can equate to *anything* that can realistically be called a “house”?
Let’s say you have a 1M net worth. With NO house (because by your calculation, house cant be counted in). This would make you literally one of the richest people in the USA and, by extension, on earth. Sitting on $1M in CASH.
So by your calculation…. you now feel that a FIFTY K house makes sense.
Are you sure you don’t mean house PAYMENT? Even so, that’s insane.
Let’s take a look at the average person with an actual decent job. Call it $90k a year. After the government is done, they’re taking home $60k *tops*. Lets say through some sort of magic and parasitic behavior leeching off of friends and family, they save $50k/year of that.
After FIVE YEARS of that they’d be possibly at $270k net worth. Cash. With basically no possessions at all.
By your calc, they would now be ready to spend…. wait for it…..
$14k.
ON A HOUSE.
Yeah. Makes TONS of sense.
Honestly, Sam, some people don’t care about having 5 million when they are 60 yrs old. You can either lead a mediocre life saving and investing all your young years, and then live extravagantly when your old and wrinkly, and only have 20 yrs or so until your dead.
OR
You can live a enjoyable life your WHOLE life, never becoming rich. I’m your age, drive a c63 amg, and only worth 200k. But thats ok. I don’t mind. I don’t care if I only have 1million vs 5 million when I’m old. I don’t care to leave my millions to my children. I’m a car lover, and it’s one of my few hobbies. Live is about enjoying reasonably your whole life, not trying to amass wealth when your old. Thanks for reading!
Ed, I agree with your point. We all have different thrills.
My thrill is owning property, hence why I just spent another $1.35 million in a panoramic ocean view property in San Francisco that I’m absolutely giddy about. Yet I also finally just traded my 2000 Land Rover in and only bought a 2015 Honda Fit.
The thing is, I love the Fit! Feels like I’m driving a M4! And I love being able to finally be able to watch the sun set in the ocean and potentially see an appreciate of my investment.
Enjoy the C63!
https://www.financialsamurai.com/increasing-passive-income-through-leverage/#sthash.QyN5edpA.dpbs
“The thing is, I love the Fit! Feels like I’m driving a M4!”
I’m sure the Fit is a fun little car. But comparing it to an M4?
Sounds like your putting $$$ aside for hallucinogens as well.
Maybe. But I’ve had an M3, and I’ve driven an M4, and I love the new Honda Fit equally as much. When you can park in 25% more spots around the city, having the fit is a dream come true. The women in this city looooove the Fit too. It’s all about econo cars here.
The wife and I aren’t within your rules, but…..
The car payment on our luxury SUV costs less than 6% of our take home, we can pay it off at any time and we still save about 40% of our take home and that doesn’t include retirement savings that adds another 10-12%.
Ultimately it’s less a function of what you spend on a particular item, and more your overall savings rate. We save so much and are working on growing our incomes so our car habit isn’t hurting us IMO
The part that is missing here is that for most people a car is a necessity, so it is a continuous part of living expenses, whether you have a car payment or not. Personally, I can’t tolerate a beater car – hassles of repairs drives me nuts. My NW is $1.5M (plus the value of my retirement annuity and other income sources) and I make $150K per year in salary. I have a $1M retirement portfolio and could retire in in 7 years at age 56 (though I will do consulting work on the side). My wife and I both drive mid-range Lexus vehicles and feel worth every penny, both bought new. The safety features alone (10 airbags!) make it worth the price of admission – I like idea of my daughter having an airbag in the rear seat. I’m a follower of the Millionaire Next Door, Suze Orman, Jane Bryant Quinn, etc. and follow these philosophies to a large extent. Everyone always focuses on depreciation of a car, but what about everything else that depreciates? When you buy a $65 pair of jeans at the Gap they are worth zero the moment you wear them – now THAT is depreciation! When you buy that huge LED TV for $3K at Best Buy it is basically worth nothing after you take it home! Even a car bought new with 100K miles on it will have residual value! I prefer a balanced approach to looking at Income vs. NW. Income is what you live on and NW/Expenses is how long you can live with no income! So, as long as your NW covers your planned lifestyle (Expense) when you retire, spend up your Income to the extent that you don’t effect NW/Expenses ratio in a manner that compromises your long term goals. Concerning a car, you have to compare apples to apples – meaning, you can’t compare a new Lexus to a used Toyota, and so on. Do the math on a used vs. new car for the same exact car (e.g., used 2011 Camry vs. new 2014 Camry – same exact model and features). By the time you factor in repair risks, no warranty, finance rates, less features, etc., you will find your used car savings are relatively minor compared to the benefit of the new car. This is true, unless, of course, you buy a clunker with high miles – you really are taking your chances at that point. New is also a no brainer when you plan to keep the car for a long time. Concerning the topic of this discussion, I think 5% of NW is a good rule of thumb, but it really does depend on the specifics of an individual’s situation. For example, IF you have $2M NW but no income, then you would want to spend much less on a car! Bottom line, have balanced financial plan that works towards worthy goals (no debt, pay for our kids college, advance society, etc.). And remember that your money will not follow you into the grave!
Well said, although you are speaking as someone with a relatively high net worth of $1.5-$2 million eventually. You’re not the worry here, although you don’t mention your income.
The worry is the 20-30 something year old who makes $30,000-$150,000 a year with less than 3x income in assets who is splurging on a $30,000+ automobile. This is a disaster for one’s finances.
See: The Net Worth Rule For Car Buying (For Those Who Can Actually Afford Their Cars)
I have a 1990 Toyota 4×4 pickup I bought new for $16,500
Currently it has 309,896 miles and counting.
I expect to be able to get 2 or 3 more years out of it before
something breaks that is too expensive to justify fixing.
Hmmm, I stumbled here by accident too. I have had this fascination lately with the cost of depreciation and mechanical issues. I spent countless hours when I decided to sell my 9 year old Honda Accord (I owned it for 3 years and replaced only the cv joints in all that time) trying to find something that would do as well for me as it did. I paid $7k for it and sold it 3 years and 50k miles later for $5800. I am now hooked on this urge to drive something that will pay me back as well as the Honda did. I fell for my husband’s desire for me to drive a Cadillac SRX 2004 with really low miles but after driving it for a few months I was so nervous about it dropping value that I sold it for $300 more than I paid for it and instead bought an 8 year old 4Runner. I’ve had the 4Runner a month now and I have looked up the book value at least once a week. I think I am addicted in a different way.. but I think I got a good enough deal on this 4Runner that I can keep it awhile without risk of it depreciating on me too much. The thought of buying a new car or anything close to a new car just makes me sick. All I can think about is how much money would be just driven away into nothing.
Stumbled upon this page by accident and it always amuses me to read about car prices abroad.
Where i live (Norway) a dirt cheap 7 year old family car with 60.000 miles on the meter will set you back around 28.000$. A modest new car will set you back around 50K, and the car you want to drive your family around in (ex volkswagen passat, Toyota Avensis … ) starts at 80.000$.
When you consider that the average salary is around 57.000$ and we pay around 55% tax(including 25% VAT) the 1/10 rule doesn’t even start to make sense. Cars here are in all meanings of the word completely senseless (but absolutely necessary)
Greetings from the cold north
Marius
Greeting Marius! At least Norway is one of the happiest countries on earth, despite all the taxes and cold! :)
Sam
Yeah, It’s not to bad. But car prices here are absolutely ridiculous. I guess that’s why me and many Norwegians envy your car prices (and laugh when you complain about them ;)). You know that gasoline (95 octane) is about 9,33$ per gallon at the moment?
But then again if I become severely ill at this moment, undergo surgery and can’t work for 12 months it won’t cost me a penny and I’ll still get my salary (albeit not from my employer)
A bit of topic this so I’ll end now… :)
Regards
Yeah, I have to say a Vanquish just seems like stupid money. You did say I could spend less…
I actually have a slightly different spin on vehicle values. In the last 5-6 years, I’ve enjoyed taking my cars to High Performance Driving Events at the major race tracks up and down the West coast. The two cars I use are worth about $15 – 20K each now, 5-7 years of depreciation later. While I could afford something like an Audi RS5 (using the NW rule, not the 10% of income rule), for the time being I fixate on the possibility of a total loss at the race track. I rationalize to myself that I can afford to ‘eat’ a $20K total loss, but a $75K total loss on an RS5 would really hurt.
Great site you have here. Just stumbled onto it this week doing a Google search on ‘mark to market’ inheritance rules on rental property (still don’t have the answer to that one).
Welcome to my site! Funny you got here from a mark to market rental property search rule.
I so have a large real estate category if you scroll down and to the right. In some post commentary we talk about this, but I forget wish. Try searching in my tool bar as well.
Cheers
Gotta say that I stumbled across this website via 20something’s blog and I am loving it! Even though I haven’t read all the comments on this article yet I will post something that I have always thought, why not just save up and pay cash for a car? I always buy a slightly used car (usually 30k or less) so the other guy takes the hit. Then I drive it into the ground while I save cash for another slightly used car. Usually takes about 10-15 years to kill the car and doesn’t hurt my net worth in the slightest. Mind you I’m not buying 30k cars either (all have been under 20k at this point).
I think this article is misguided in a couple respects:
1. Safety is important. Your net worth doesn’t matter if you die at age 30 in some clunker car.
2. There is really no good reason to pay more than 30k for a car unless you have money to blow. Even then….it’s a questionable purchase. There are few money pits in this world quite like automobiles.
Honestly, best deal for cars right now is a new Civic: 20k gets you a car with best in class safety, good economy and proven reliability. For family movers, there’s mini-van options around 30k. For “upscale” cars, there’s also plenty of good options in 30k. Anything past 30k is merely usurping someone’s long-term financial goals.
While both of the car buying rules you’ve come up with are good, I’m not sure it makes sense to speak in terms of buying price. Better instead to think in terms of operating costs as a percentage of your income. That can include all of the following: maintenance, depreciation, gas, insurance, lease cost, government fees, etc. There are so many variables that can go into how much a car costs you, so this is an equalizer. I’m going to say a reasonable percentage is no more than 10% of your income. If you make 50k, that could allow you to lease a Honda accord for around 250 a month, and pay for insurance and gas. Seems reasonable. Or you coud even buy an 87 Porsche 911, suffer no depreciation, but spend more in gas and repairs. At 200k, you can afford an M3 for example. Personally, I try to shoot for 5% but even that might be too limiting.
Buying price is a simpler metric, hence my proposal. When you make rules too complicated, things don’t get done and people lose interest and don’t follow.
Gotcha. For those of us who prefer to think in terms of operating costs vs net income what percentage do you think is reasonable? 5%? 10%?
Too many people attach too much meaning to cars. For every rich guy with a fancy car, there are ten posers with a mountain of debt. Don’t judge people by their cars – you’ll probably be wrong.
What ever happened to common sense? Spend what you can easily afford on a car, and that’s it. There are so many better ways to spend money – houses, raising children, education, travel, etc. Debt is for rubes!
I just found you site and really enjoy it, lots of good food for thought. Using your 5% rule I can buy something up to 45K, but will only likely spend 30K (I’m thinking about a 2013 Honda Accord V6; BMW 3 series; or Merc C250). Do you recommend paying cash, or can I finance part if not all? Thanks!
Now I see why I keep getting wealthier. I’m a millionaire with my eye on a hundred-thousandaire’s car. I’ll feel pretty good spending under 1% of my NW on a new used car. Whenever these 13 year old Hondas die, that is.
I’m glad many people here drive older super cheap cars. But some people LOVE cars. I’m one of them. They get a rush and real pleasure from driving performance cars and it’s not just A to B for them. So since we’ll all be dead one day, driving around in a $6K Civic isn’t how they want to spend the time they have here. Versus a $25K GTI which makes everyday driving fun. And the difference in cost is worth it to many.
I’m not saying going into tons of debt. But there’s more to life than just making sure you have a nest egg to retire. You gotta have some fun in your life. And if driving is fun to you, drive a fun car.
I earn $108K/yr. Have about $150K in savings/investments. Net worth with 401Ks and equity in my rental property maybe $250K total. I paid cash for my $15K slightly used 2yr old car. But if I spent double that for a kick arse V8 Mustang, I don’t think there would be too much negative consequences honestly. I’m just too cheap to do it.
I love Mazda 5’s so I plan on getting a 5 year old model when my 175,000+ mile Corolla finally kicks the bucket. It’s one of the best milage 6 passenger cars out there.
My only issue with a “rule” about buying a car is when someone makes more money, having a rule might encourage them to get more car than they need.
We bought my car in cash. Paid $13K for it. It was a 2007 Honda Civic. At the moment we used a little over half our savings. We had no other cash. Should we have not paid in cash? Maybe, but it feels great knowing we don’t owe any money on it.
It certainly does feel good not having a car payment.
I love Honda Civics. They run forever and are so economical. If I had $26,000 cash, I would be too afraid to spend half of it on a car. I’d wait for my raises and promos to come in and build at least $100K liquidity somewhere in cash and stocks and buy a $5K car instead. But that’s just me! I’m risk averse.
Based on your chart, I am not spending enough on a car! I have no regrets though. I rather see my net worth increase than drive a jazzy car. Besides, I did it with a Mercedes, BMW , Audi and Nissan (Datsun) 300z in my younger days. Some time ago, I was going to satisfy my fantasy of getting an exotic car (Porsche, Ferrari etc) by renting it for the weekend when I turned forty years old. I never did because I thought it was a waste ($500-1,000) of money.
Larry, you seriously need to buy a Ferrari! So you not feel the desire to spend more of your riches in your 60s?
For a long time, Ferrari’s were good investments because they held their value. This is not longer true. I think I will continue to invest in assets that grow.
I have had an issue with your first rule, and have even a larger issue with your second rule.
Here is why:
1) Car by itself is not an expense, it’s a depreciating asset, hence comparing it to income does not make sense.
2) Car is not an investment, so calculating it as a percentage of net worth does not make sense either.
What does make sense it calculating true annual cost of ownership and comparing it to income.
Depreciation is only one aspect to look at, also cost of insurance, fuel, repairs, service, tires, etc… and don’t forget to calculate costs of rental, if you car is old and need to spend time in a shop. (those are all tangible costs and could be easily figured out).
Now, there are also intangibles, such is pleasure and enjoyment derived from driving а nicer/newer car, etc. To some people it’s not worth anything to others it’s worth a lot.
Why the price of purchase is not relevant: I buy 1-2 year old cars from dealers auction, and sell them 2-3 years later. My depreciation+tax typically runs 3-4/k per year on $50,000 ride. Comparing this to buying the a car brand new (for the same $) and trading back to a dealer would run you probably $10k/year.
Clearly while the initial price paid is exactly the same annual cost of ownership is very different.
Ok, whatever works for you. Seems very complicated to me. My rule encourages people to calculate their net worth and think about car purchases in relation to wealth. What is your net worth?
Looking at all expenses associated with car ownership is too complicated? Or looking at depreciation is too complicated?
My net worth is just under $2m.. most of it in RE.
To expenses, b/c there are multi variables. The more variables you have, the more complicated things get.
If you propose a guideline that is overly complicated, nobody will end up doing it. I’d love to see a post from you on your recommended car buying guideline if you don’t mind. I’ll post it up here and we can see how it goes. Feel free to shoot me an e-mail. Thanks!
You know, the lower the % of net worth you spend, the better. 5% is a great maximum. Ideally, 1-2% would be the expenditure, but it would tough for many I imagine. To me, the biggest thing as a parent is safety; it’s not worth compromising. The brand name, etc I don’t care about at all any more.
I have a multi-millionaire friend with a 12 year old car that has over 150k miles. The guy started out years ago buying a car that cost as much as what he made in a year – a sweet BMW. Now, much older and quite successful, he values freedom and independence more than cars. He gets it.
Safety really is my number one concern as well. But it’s also nice to have fun while on the road.
Under your old rule I was allowed a new F-150. Under your new rule I’m allowed a new Maserati Quattroporto. I’m pretty sure my wife won’t be buying into the new rule. Do you have some more ammo for me?
A lot of 20-something year olds use the term You Only live Once (#YOLO) for justifying all their spending. See how your wife takes it.
Do you guys still work or are kicking back nowadays?
Offer foot massages too. Women seem to love them.
I am not the best writer so I doubt I could put together a larger post that made sense. It was lot of hard work and luck to summarize. It kind of funny how things have worked out so far because its completely different that what I had planned doing when I graduated school for the first time.
You’ll surprise yourself. I’m not a good writer either but have managed to write 3x a week for 210 weeks in a row! You can do it!
I also think it depends on where you live and how good your repair skills are. Yertle, my 99 Civic, broke down this week 70 miles from home. Luckily, I found a friend to fix it and it wasn’t a serious repair, but if he hadn’t been around, that would have meant a tow and God knows what in repair bills. Little things keep popping up that would be easy for a good mechanic, which we are not. I think Yertle is ready to go to a new owner, and we’ll drive our better cars, even if it means more in gas.
I would not pay for a luxury car no matter how much money we had. People just don’t have those here, and we’d stick out like sore thumbs. Interestingly enough, our US Congressman lives down the road from me, and he used to drive a Jag until he started running for office. He changed to a Ford F-150, and has been driving similar vehicles ever since. I’ll be curious to see what he drives when his political career is over.
Ford-150! A fine choice that is included in my list.
These charts are based on zero maintenance skills.
My thinking about this is that it’s not so much the price of the vehicle, but how long you keep it.
Back again to cash flow. Yes… You can purchase a 15 or 20 year old vehicle, but it will be badly worn (and likely corroded). And then you constantly risk unplanned negative cash flow events through expensive repairs. Or worse, waste your valuable time constantly shopping for replacement used vehicles as opposed to doing more productive activities which actually increase your wealth.
I think purchasing new or maybe a few years old is better. And for many people, get the extended warranty. And then do regular proper maintenance while keeping the vehicle for at least a decade.
I think planning around a fixed monthly transportation cash flow is the best way to go.
Need you to write me a post arguing why and I’ll publish it here. Let me know!
Ok Sam….. I will give this some careful thought.
Personally, I don’t think anyone should ever spend more than $20,000 for a car. It’s such a waste of money! The most I have ever spent on a vehicle is $6,000 and it was a way worse vehicle than my trusty $2,500 Honda Civic that I still have today. I don’t care about what others think about me. I’m more content to watch my net worth grow and spend my money on relationships and experiences.
Yeah, I’m having a hard time justifying paying more than a $20,000 for a car as well. HOWEVER, I think after your NW is over $5 million…. I say go crazy and spend whatever if you really like cars. The NW rule says $250,000 car for $5 million, so I think $100,000 or 2% of NW seems reasonable.
The thing about your plan is: You can have all the life insurance you’d like, let’s say even a million dollar policy. But only a car <4 years old will protect you to the maximum degree from a fatal car crash. And car crashes are the number one way people die other than heart disease/cancer. I encourage you to be skeptical of my claims and do your own research. Side air bags, better collision testing to find flaws, and stability control are all standard/mandated for 2015 cars and newer. Those have been statistically shown to save lives. A tiny 2015 car may look silly compared to your Civic, but it may also save your life some day. (Remember: Even if you are the safest driver out there, someone could still put you in an unavoidable situation that results in a fatal accident.)
(Speaking as a fellow 16-year-old Civic owner that is suddenly thinking of trading up for a better model because it is warranted by the 1/10th NW equation.)
I love following you blog, but this is a first time post. I am still feeling a little guilty about my new car and figured you could relate. I’m 26 years old and my company just bought me a low mileage 2008 Mercedes S65. I am one of the 4 owners but own the smallest %, It cost close to 25% of my annual income and 12% of my net worth. But I have done a good job of rationalizing it, I am 26 single and save half my income pre-tax income. I figure its a once in a lifetime opportunity to own a 200k car and it really wasn’t cash out of my pocket although it kind of was. I also got a great price on it where I could probably sell it for 10k more than I bought it for, its not going to cost me much to drive it for 3-4 years an sell it with depreciation.
S65 is sweet! Black with 20″ Brabus wheels perhaps? I was just looking at an older S550 myself yesterday for fun.
At 26 and single that is prime to enjoy a fancy car. Most bang for your buck. After a while, the women want to know whether you rent or own and the car becomes less of a status symbol though fyi.
So how much did this bad boy cost you?
Its black but just with the stock 19″s. It was 55k with taxes and the extended warranty. It only had 38,000 miles. I live in large Mid-westen city you do not see many cars on this level. I feel like when I go out to California I see a lot more nice cars.
Nice. What love to know how you got to a $220,000 income and $500,000 NW at 26! Perhaps a brief synopsis here and a larger post to share with the community?
I’ve always believed there’s a lot more money out there than people know or think and you are a great example especially living in the mid-west.
Thanks!
(You can start a new thread or respond to a previous email since threading stops at 3)
sam. been reading you for 6 months. good stuff. i worked at UBS for 10 years and then bolted to kansas. same deal as you. don’t give up on the moose. pay the money and fix it. it is the creep that will kill you.
UBS! An old competitor. Nice. Whatcha doing in Kansas now?
I’d like to add a thought….. I own an airplane….. I’m pretty well off.
I would likely never purchase a really expensive automobile. Beyond the fact that automobiles are a decaying asset (unless they are collector vehicles), I think it is unwise to outwardly display wealth.
I prefer a car which can be parked anywhere and no one will pay attention to me.
Cool. I was thinking about getting the G650, but decided to wait until the G7 models. Planes are a blast aren’t they?
Gulfstream?
I’m not that well off! I do recips, and fly myself. Much more fun than fancy automobiles!
A link in regards to millionaire drivers:
The claim is that Mercedes E-class is the most common. Interestingly, Honda and Toyota is more common in Chicago. I suppose Chicago millionaires value reliability and stealthiness! LOL!
I concur!
No matter what, you cannot convince me that living in Chicago is better than living on the West Coast. Winter is coming. Bundle up!
I have given up on selling Chicago. I like it here and that’s all that counts!
Sam,
Great post! I couldn’t agree more. Although I don’t think I’ve ever written about it publicly, I’ve always imagined 5% of NW being a fantastic barometer. I actually have a little over 1% of my net worth invested in my 1997 Frugalmobile, and it feels wonderful!
Best wishes.
Hey Sam,
I don’t think the networth formula really works with automobiles. You need to look at monthly cash flow. You have to figure that if you don’t own relatively new, you will be paying pricy mechanical bills (unless you do your own repairs).
This all depends on individual circumstance and geography. Some folks live in places with excellent public transportation (Chicago, New York, etc.), and may not need to own a car. These folks just rent when the occasional automotive need comes up.
Most other folks need at least one automobile. If you are not towing boats on the weekends, a basic reliable vehicle such as a Toyota Camry or Honda Civic would work fine. Low cost (both fuel & maintenance). Low cash flow (whether lease, loan, or check).
You can always buy two year old bling at a reduced price (BMW, etc.), but maintenance costs can get high unless you enjoy turning your own wrenches.
For a guy like you, whom doesn’t do his own maintenance, and probably doesn’t drive much; I’d say a 30 month lease on a low cost car would be best.
But my Net Worth rule is so beautifully simple and it encourages people to think about their net worth.
The cash flow is addressed through the 1/10th rule.
There is one more option to consider for those making more than $100k in states with high electric car Tax Credits like GA – leasing an electric car such as a Nissan Leaf – when you factor in the credits – it’s virtually a free car (especially if you get the lower end model) and when combined with no maintenance, no gas, HOV access it becomes difficult to justify the purchase or leasing of any other gas car. Even though you don’t own the car you’re not really paying anything other than insurance to use it.
Sam, you know I love these posts. I haven’t spent over $3,000 on a car in 10 years, and most of my cars last AT LEAST 7 years. Just sold my Civic that I had for 7 years. Bought it at $2,000, sold at $1,400. Less than $100 a year for that purchase :)
5% of our net worth would put us on the lower end (just starting to climb the net worth chart), but even when I’m halfway to a million, I don’t see spending $25k on a car. Way more important things in my life to put my money toward.
And all this is coming from an EXTREME car enthusiast, who happens to have many higher priorities. Ahh well, no 335i for me.
Good stuff Jacob. I like the discipline!
And stop thinking about the 335i coupe. It’s all about the $60,000 435i now!
Ahh, I’m living in the past! I forgot about the new 4-series. I’ll have to google is now and get my drool cup ready ;)
I never got into cars, but people do have to have reliable transportation. In my book, even top-end reliability can be had for less than 15-20k.
As for the 5% net worth rule, it should only be applied to the financially independent. (I think that was the implication…) But, I still like the 10%-income rule better.
Doesn’t matter for me, though – I’m sticking with my old beater as long as it continues to pass smog tests. I dread the day when I’ll have to look for something new.
I like part of the rule, since 5% isn’t a huge portion of someone’s net worth. But maybe there ought to be a cap since a car’s depreciation is a bottom line sort of thing: it’s losing a certain amount of money regardless of what other assets you have. You feel the pain relative to your assets, but the loss is the loss regardless. Since we know cars lose money I think a reasonable cap for retirees ($50k? $30k? $20k?) might be in order.
Nah, no cap because it wouldn’t make sense to restrict anybody in this free world, especially a retiree with $5 million net worth wanting to buy a car more expensive than $50,000.
At the end of the day, the Net Worth Rule is just a guideline. I think it’s a good one that will save/make people lots of money over the long run.
Luckily, my husband and I do not care about cars. I drive the “nicer” car right now and only because I wanted something safe to carpool the kids around. I have a 2008 Chrysler Town and Country Minivan (don’t be jealous). My husband is currently driving a 1999 Ford cop car…I can’t remember the name right now. He bought it in the spring for $3,000 and it had 45,000 miles on it. We will both drive the cars we have now until they die. In the 11 years we have been married, we have NEVER had a car payment. We do not like them so we save up for cars.
I don’t understand the draw that people have to purchase the newest, nicest thing on the market. Cars depreciate as soon as you drive it off the lot. I do understand it if you are into cars though. We are all into something, right?
Yeah, a lot of guys and some girls are really into cars. We fellas grow up dreaming of that sweet ride with the lovely lady in our passenger seat. It’s kinda like this in all of Asia too actually.
Love affair with the automobile!
Oh no, I’m in trouble. I have a confession. I’m addicted to wheels. 4 cars, 2 trucks, 3 cycles, 2 trailers, and a tractor. I’m stockpiling for the “cylinder” wars! Seriously, if you can budget for it, long term, get it. But for me that means I do all repairs and i only insure a few at a time (rotating them from the road to storage). Also, collector car insurance can be used on newer vehicles if you limit the miles.
Wow, how big is your garage?!
Pole barn.
Don’t give up on Moose. At 125K, Moose (who I always assumed is an Explorer) is still young…I wouldn’t expect to get rid of a daily driver until 200K at least. Former coworker (Engineer), still drives a manual trans Explorer at 235K…it’s not pretty, some accessories don’t work, but engine is fine and passes state emissions which is key.
Ah, wheels, my passion since youth. I like to read Autoblog.com often. I believe everybody needs a hobby. It’s not that expensive if you acquire tools over many years and have space to store/work on them. [ICE – suck, squeeze, bang, blow.]
Just stay away from exotics cars, boats and airplanes. IMO, it’s best to know other people who own these and ask you to join them for a ride on these models of transportation.
Never get front wheel drive. From an engineering perspective, wheels should NOT rotate and be powered at the same time (torque steer). Today there is no reason to accept FWD with traction control being available on rear wheel drive.
And don’t get me started on how unreliable most of the vehicles on your list are; I’d never own a BMW, Audi, Range Rover, etc. They are like the most beautiful woman in your graduating class. To later cost their owners a fortune in maintenance! :)
I hear ya. Mechanically, everything works well. It’s just all the electrical gremlins are starting to pile up. I long for the days of the 1950s muscle cars. Sweet engine sounds and fuel smells, no electronics!
Thanks for the tip on FWD. I have AWD.
Don’t knock the fine ladies. They’ve evolved!
I would like to see a government program for transportation assistance, with a progressive scale like the Federal Tax rate. The bottom 47% of taxpayers would get a free car, and the top 8% of taxpayers would pay for those cars as well as their own. ObamaCar, anyone!
That was a joke! Seriously, for me in 37 years of car ownership driving a total of 665,000 miles, I owned four cars paying a total of $36,130. I drive it ’til the sound system is worth more than the car itself.
Some people have jobs where they need to present a certain image, and need a luxury car less than 3 years old. If you live in SF and want to blend with the Twitterati, you might need a Range Rover. FS, you have made your bones with Moose and now deserve to feed your Range Rover monkey! I think Moose would want you to. Enjoy!
I’m totally down with ObamaCar! Brilliant! Down with the 8%!
It would be so sweet to get a subsidized Range Rover Sport.
Wow!! Great use of the sole purpose of a vehicle, a tool. I wish I could say this but unfortunately I am passionate about drivers cars Porsche, corvette and such.
I tried a remote control car but wasn’t the same as the real thing.
Congrats to all who can drive a car till I can go no mo! I have failed at that objective in life.
What about Tesla?!
Gotta support the “home Bay” super car!
I always enjoy your perspective on financial matters, it’s refreshing to see the here’s-what’s-possible point of view of sound financial diligence and management against the usual coupon clipping advice.
So what will you do with Moose? Donate it for a modest tax deduction?
How could I forget?! I have included the Tesla S in the $75,000 range of the chart.
I think when it comes time to sell Moose, I’ll give it a go on CL, and then if that’s too much of a hassle after two weeks then I’ll donate it for sure. What are you sporting now?
a 2008 JKU Jeep Wrangler…with about 4 payments left. I’m happily counting the days until this until my car payment disappears, and frees up capital to devote to paying down other debt. It’ll be the first step in my personal, snow-ball debt reduction effort.
He/She (i need a name i guess) has nearly 70,000 miles and I plan to keep it going for as long as it will last me.
Hmmmm… a 5 year old car with still 4? Get to work! There was a big bull market over the past four years!
A good alternative to those people not earning an income. The only problem I can see is, say that people buy a new car on average every 6 years, then the retiree who is break-even on income and expenses then reduces their net wealth (and therefore their income) by 5% every 6 years.
That said, if retirement starts at 60, its probably not too much of a problem…
I should hope everyone’s net worth increases by AT LEAST 5% every 6 years. If not, you are doing something very wrong.
Ah, but we are not merely average people!
Sam
I am just not feeling it. Let me tell you why.
Lets say I am retired with a $1.5M net worth. My $500K house is paid for and I have a $1M portfolio. Generally accepted guidelines say to take no more than 4-5% of my portfolio out to live on each year. That’s $50K/ annum on the high end. If I take another $50K out to buy a car I have violated this rule, decreased my future “income” based on the lower balance, and increased the chances I will outlive my assets.
I think I would be more comfortable with a rule that states you can spend 5% of your NET WORTH — only to the extent it exceeds the amount you need to generate a “livable ” income.
So, If I am retired and comfortable living on $50K / annum- I must “put aside” $1M in net worth at 5% to generate this income (less I guess if interest rates are higher). If my Net Worth is actually $3M– I can spend 5% of the additional $2M on a new car ($100K in this case)
Thoughts.
Sounds a little convoluted frankly. My Net Worth Car Buying Guideline is UP TO 5% of net worth. Everybody has different income variables in retirement that they should consider.
The good thing about your $1.5 million net worth example is that you can qualify for lots of health care subsidy if that’s your only income!
Fair enough. I guess I blew by the “up to” language.
As long your not saying everyone SHOULD or CAN spend 5% of net worth I think I can support it :)
Love your blog dude.
Thanks man. Always good to have new readers and perspective!
Since I am relatively young and FI, I also use judgement that adjusts for Shiller PE10 (historic highs) and interest rates (historic lows), effective income tax rate (gone up for me), and discounted cashflow (solid job, expecting to work 10 more years until the kids start college). You can always justify spending as little as possible on a depreciating asset, but when you’re older, money doesn’t have the same ‘bang for the buck’. I have fond memories of cruising in my Supra with the targa top down 10 years ago that I wouldn’t trade for another million in the bank now, no kidding. I drive a fun Mini Cooper S, although I could afford and justify (and sometimes think about) an R8, because I’m not trying to turn heads or impress women, just happy to out-accelerate traffic and get good parking spots that SUVs have to pass up. Maybe you can do a future post that takes some of this into account, since your background is Finance and mine isn’t….
You’re right about money not having the same bang for the buck when we are older. I’ve got a post on how to cure financial hoarding I think you’ll enjoy.
Who cares if you’re 60 and driving a Porsche 911 Turbo? You deserve it by then!
What is the rule for bikes? Some of the top of the line folding commuter bikes or road bikes can be upwards of $1500-$2500…
Perhaps I’ll have to write another post. I’ve had many bikes before in the $100-2,200 range and I would say anything more than $400 for a commuter bike is unnecessary.
In short, I would not buy an imported vehicle. Your sugguestions don’t work for me.
Go USA! What’s wrong with a Ford Escape, Cadillac Escalade, or Ford Taurus?
Yeah I think a lot of people struggle with the 1/10th rule, especially in their younger years. I’m a fan of compact cars as long as the safety ratings are good. They’re cheaper, sporty, great on gas mileage, I think they look cool, and can fit in tiny parking spaces which cities like SF are filled with. But I can see the lure of luxury cars, especially for those people who have long commutes and go on a lot of road trips. Perhaps there should be an another rule for usage that gets factored into the 5% of net worth rule.
Safety is fast becoming the top priority for me.
Interesting. We just bought a car used and spent about 19% of our annual income and 9% of our net worth. So I guess we violated both of your rules. I looked at things differently during the process. First off, we had the cash already saved up and that set our upper limit. Then I made up a formula to calculate the long-term cost based on up-front cost, current mileage, insurance, taxes, etc. The one we got was a lower long-term cost than the newer models, but the curve was fairly flat because of the reliability of the model (Honda Odyssey). There were even older models with higher mileage (over 100k, often over 150k) that would have made it even cheaper, but the honest answer is we just didn’t feel comfortable that they would be in good shape. We were willing to pay a little more for something newer (a 2007 with 43k miles) that we felt had a more realistic chance of lasting 10-15 years.
Not saying our approach was better or worse. I like rules of thumb like this to help make sure you don’t do something really dumb.
Straight to jail for violating both rules!
Your plan sounds fine, b/c you have a plan and you know your money strength.
I just don’t know about spending a whopping 9% of your net worth on a car though. It just seems so much to pay for a lifetime of saving and investing, unless one hasn’t been working very long and has a low net worth.
You make a fair point about the % of net worth, and I’ll be honest and say that I’m not entirely sure how I feel about it. We have a pretty solid net worth for our age/income, but nothing too fancy, so it’s not a high percentage simply because we have no money. I guess I view it more as a purchase over time rather than a one-time cost. I could have spent a lower % today, but maybe I would have had to replace it sooner. So it’s not a measurement you can make exactly at a single point in time. Again, the rule of thumb is helpful to make sure you don’t do something really dumb, but nothing can ever be boiled down to something so simple.
In any case, I do like the thought process here and think it’s helpful. 9% of net worth does sound like a lot when talking about an asset that will one day be worthless. Gives me something more to consider for the next one.
I dont think you really being realist on your 5% rule. We just got the same car as Matt- a honda Odyssey -mini van- 2011- costing 25k. resale value-30k. I have 4 kids, a husband that works away from home and i live in an area that absolutely everything we do we must have a car. So from my point of view, we dont need a brand new car that will depreciate on the moment we drive out the lot, but we need a car that we can rely on it. So that being said, i have a 2 year old car, reliable, with a great gas mileage -something that older cars cant provide. Also, i do drive a lot ! I drive kids back and forth and i also go to school at night. total of 75miles/day. Our previous car was costing us way too much if you add the mechanical services plus the $100/week on gas. Our older SUV used to do 11mpg and now our mini van does 23mpg . We were spending $24 dollars/day on gas and now we do $12/day. That means half in gas a month…. so on my case i do love the fact that i have a car that does great in gas, is reliable (since i dont have a husband around to help me) and better of all- holds the price quite well.
Are you saying your net worth is not around $500,000-$600,000?
I like four year old cars myself. Best bang for one’a buck as the heaviest depreciation is gone yet still very new.
What if cars are your passion??
I am sure there are people who love to travel and some bucks to do it, whether they have the money or not.
Btw 34yrs old debt free including house and 3 cars.
Net worth $800k
I went over the 5% rule w my cars. My family of 4 is supported by 1 income, mine.
I need a car so does my wife
I want an extra fun car so I had the cash laying around and bought it.
2006 Toyota 4Runner worth $10k
2012 Lexus GX 460 worth $30k
Well that’s the magical 5%.
But unfortunately I am a car guy so I bought a 2013 corvette z06/z07 for $60k cash!
Yes I know that was dumb, but I got to live a little. Made plenty of good descisions and sacrificed to get where we are.
So don’t feel bad about making a bad financial move on purpose. We can’t be perfect!
I really hate to think how much that vette really cost you. I love vettes BUT, take the dollars you paid for the vette and put it in Dave Ramsey’s investment calculator for 25 years at say 6%. You would have 257,512. You did save up and pay cash, and you are debt free, so your decision is better than most Americans
does net worth include mortgage debt?
I think net worth is houseValue – mortgage = equity, and equity is part of net worth.
So if you could sell your house for 100k and you have 50k on your mortgage, your equity is 50k and you can add that to your net worth
Excellent advice. If only we could be so rational in reality.
Ahhh…a post near and dear to my heart. Cars are absolutely my weakness, I work in the auto industry and do so because since I was a kid I’ve drooled over them. I whole heartedly agree with your assessment of NW to car buying and it is pretty much in line with how I operate. Being a small business owner my nice daily driver is covered & it allows me to have a few toys.
I would throw one more wrinkle into your equation or maybe ask a couple of questions:
-I assume this is based on only having 1 super nice car?
-I assume your rule is thinking that the person will keep the car for a while, not trade new each year?
-What about boats?
I sort of take the approach that my summation of frivolous non-essential toys is worth approximately (almost exactly) what your NW to value shows. Life is way to short to short sheet yourself if you’ve achieved and covered your nut. Enjoy life but have a balance!
I like the rules to pertain to per individual income earner. If it is a household income, then very well. Have as many cars as you want under the 5% of NW Rule. Just know that costs start piling up.
If one buys well, then they can trade well without losing too much after taxes, time, and other fees.
Best time to own a boat is when you pick up and hand back the keys. Love sailing on the Bay w/ a friend’s boat, and rented boats for $300-$400 a day split multiple ways. Much better for sure!
Fair enough…I like that rule & yes the costs definitely do pile up!
I love your best time to own a boat analogy…and it absolutely applies for 99.97875% of the boat owners out there. I would say I’m the exception though, since I live on the water I use it all the time. My boat was probably the all time highest $ per smile value of anything I’ve ever purchased. It is kind of a way of life…like telling a person who loves sunsets and has a house right on the beach that it’s better to walk two blocks and sit on the public park bench and watch the sunset vs. sitting on your living room couch through a wall of windows each night.
Why not consider leasing? The outlay is minimal (and that money not being used for a car purchase can be used for investments for the long term) and you only pay for the depreciation you use. It is akin to renting an apartment. The upside is that a huge amount of $ upfront is not required, the maintenance costs are low (versus an older vehicle), you do not lose time with a newer vehicle, whereas with an older auto, it seems like more and more of your time is spent in the repair shop and the newer vehicles tend to have better gas mileage than the older counterparts?
I think what people need to be careful with is allowing themselves an additional justification to buy the more expensive car. That being said, I think the 5% rule makes sense, especially in combination with the 10% rule. That allows for both young individuals to utilize the original 10% of income rule to buy that 10 year old Honda to get themselves started on the next several years of their life. All while allowing those a bit further in life and net worth to pick up a nicer vehicle should they be in the financial situation to afford it.
I have no job no income I own a 2017 g wagon cash a 2014 Aaron Martin drop top cash and a 3028 Maserati drop top cash as well as a boat. (Over 250k just a toy) I am 49 years old live in palm beach and spent over 100k travelling to Europe this past year. I have my clothes handmade in Italy my shoes handmade in England and a great watch collection. My girlfriend is a smoke show and I never actually graduated college. I do business deals and own companies but I lie in the beach all day and drink. Life is good if you let it be. I’m dead serious.
I’m sure Sam will step in and correct me if I misunderstand, but it seems like it’s an “either, or” situation. Either use the “10% of income” rule or the “5% of net worth” rule — whichever is more appropriate for where you are in life. Both approaches have the same end goal. I think that most folks will need to use the 10% rule at first, and then transition to the 5% rule.
You can buy a 13 year old Land Rover Discovery II for $4,900 no problem! Winter is coming…
Dear god please don’t advice anyone to buy a 13 year old land rover discovery II. Been there done that… it’ll end up costing you 3x more in engine repairs and towing charges.
Agree. I sold my Land Rover discovery after 13 years, and bought a Honda fit. Drove that for three years, and then bought a 2015 Range Rover sport.
Interesting idea. I live in Northern Virginia (outside of DC) and I can’t take a piss outside without hitting some sort of german luxury car or one those 40k suvs. Noone is following your rules :).
Whenever I try to gear up to buy something nice like a watch I look at my portfolio and say to myself: “If I spend this 6k now, I’m losing at least 12k over the next 5-10 years, since I lose all the interest I would make over that time in P2P lending”. In other words, there is an opportunity cost to spending.
Problem is I never end up buying anything. There has to be a balance in life, and going by net worth instead of salary seems to the trick. It allows you to reward yourself as you reach goals.
I keep telling myself that when I reach $1million in the bank (not net worth) Ill let myself get some of the nice things I want. That’s what I tell myself anyway….
Maybe they are all following the two car buying rules. All about STEALTH WEALTH! NOVA has some of the richest suburbs in the country with Langley, Great Falls, Mclean, and Chevy Chase in MD. Lots of people are ROLLING in dough thanks to government contract money honey.
I’ll have a new post on financial hoarding you’ll be interested in coming up!
Some people may be floating in dough, but there are plenty who are floating on piles of debt instead. U.S. personal savings rates are low, and I would expect that keeping up appearances is a powerful motivator for spending in the upscale DC burbs. Some people can really burn through money.
I have enjoyed you blog but the 1/10 rule always bothered me as completely unrealistic and frankly not properly configured for financial management. Since cars a depreciating assets that have limited usable life we should be talking about what is a acceptable yearly cost. For example if I used your 1/10th every year vs. once every 5 years I would be in a significantly different financial condition after 10 years.
I would try to come up with a rule for yearly car expenses (the car itself, insurance, gas). I would also try and understand that many of us live in areas without any backup public transportation so a reliable car is a must or we cannot get to work. For me that means a maximum age or 10 years or 150,000 miles, there is of course some flexibility there depending on personal circumstances.
Aaron, I welcome a nicely researched post with charts on your car buying advice. Just shoot me an e-mail when you’re done and I’ll put it up for you. I think it’ll be great! thanks.
I believe the 1/10 rule for car-buying is only a measure of the car’s value vs annual income, so if you have a 100k income, your car is supposed to be worth 10k.
I see why this isn’t perfect either, because if you spend one year 10k, next year it is worth less and you’re below it, so you should spend more on it, and so on.
However, given it’s not specific advice, and everyone’s financial condition is different, I would take it with a grain of salt, as it was probably intended.
I agree with your comment, for those that live outside a major city a reliable car is a 100% necessary lifeline for survival and work. That costs money.
However I think with some diligent work one can follow 1/10th rule even in a low income bracket. For me when I was younger and making hardly any money it was doing my own maintanence and repairs, even if it had to be done in the middle of the night before the next work day. You have to do whatever it takes. I think it was one of my greatest positions to save money and increase my net worth. It sounds scary to people sometimes but with YouTube and forums out there anybody can learn to wrench, I was literally taught by strangers I’ve never met, todays technology is amazing in that regards.
Being self-sufficient is huge!