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. Ultimately, we all want to be wealthy based on a high net worth that is taxed more favorably.
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-figures in finance. I’m other words, I was asset rich, free cash flow poor.
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. For example, if you have a $1 million net worth, you can spend $50,000 for a car. If you have a $3 million net worth, you can spend up to $150,000 for 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 $3,000,000 net worth should feel comfortable spending up to $150,000 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, SUV, or electric vehicle. 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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The Net Worth Rule For Car Buying is a Financial Samurai original post. Use the car buying rule if you have a lot of assets, but not a lot of income. A car is a depreciating asset. Please buy responsibly.
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Frugal and happy says
Thanks Sam and all. Family has followed this rule religiously… until yesterday:-)
Salary = $290,000 including bonus and about another $60-70k in passive RE income. NW +/- 3MM.
Had my old vehicle in the shop (+100k miles, 10yrs old) and when our mechanic told us the cost to repair, we said forget it.
Ended up getting a 2019 E-Class with 23k miles for just under 40k. 10k down and financed at 2.99% for 36m. 2yr manufacturers warranty still in place. Plan is to pay off in a few years and drive it for 10yrs.
We are still budgeted to save 50% of take home (our 5yr avg) and maxed out on all pretax / retirement stuff.
I flippin’ love the car, but we’ve been so damn frugal our whole lives that I am coming here seeking financial validation :-)
(Mid forties, two kids, live in high COL area)
James Soloman says
You’re driving it for 10 years, that’s completely fine at that ratio
Sometimes I feel like I need to stop being so frugal, but then I can’t get myself to commit to purchasing anything
Income is about 300k as well, drive a used 10 year old lexus
5 percent networth is too much for depreciating assets, my rule is 2 percent of your networth.
Financial Samurai says
Sounds good. How do you define “depreciating assets” and what is your net worth range to go 98% into riskier assets? Thx
I think 2% makes sense. I’m 66 and still working, I drive a 20 year old GMC I paid 8500 for 4 years ago. My income is about 160K and net worth 2M. That is 0.4%. 2% would be 40,000 which seems OK. I would have severe heartburn spending more, especially since 2M is barely enough to retire on is you don’t have a six figure pension like my government friends. Besides 6 figure cars are typically going to require 5 figures of maintenance soon and are junk in 10 years.
Ok, I don’t feel so bad now. Paid $37K OTD for my sports car new (I’m a bit of car junkie). I currently owe $9K on it. Net worth $870K (not including my condo equity). Owe $102K on my condo, $300K equity in it. Salary $132K. Single, 52, no kids (none planned). My car only gets about 16-17mpg overall which kinda sucks but it’s a big v8 and I drive around 6K miles per year and work from home…..so I’ll give myself a pass on the cr@ppy fuel mileage.
Financial Samurai says
Yes, at some point, you’ve got to enjoy life more.
With our investments doing well in a pandemic, the time to spend more money on a better life is now IMO.
The YOLO economy is here to stay!
Ron Lehman says
So what car did you buy! I’m in similar predicament. 2007 Nissan Murano 188k. Decent shape may get couple more yrs. But safety is paramount!!
Financial Samurai says
Ended up buying a 2015 Range Rover Sport in December 2016. It had 10,200 miles on it and I still rive it today. Looks good. Fun to drive. And perfect family car for 4. No big issues either with it.
Related: Safety First! Finally Bought A New Car
Had a Murano, Went 160 mikes or so before transmission crapped out. Spent 5K on that then something else happened. I would drive yours until something major goes wrong, then scrap it and get a used ( or new) Toyota or Lexus.
How frequently am I allowed to spend 5% of my net worth on a car?
If I’m following the 1/10 rule, how frequently am I allowed to spend 10% of my salary on a car?
This is a question borne of curiosity. In the last 21 years my wife and I have owned – and in one case leased – six cars and spent just over 2% of our current net worth on them.
You should recommend the Tesla Model 3 SR+ as a good option for someone with a 1M net worth. They’re right around 40K, and in some states you get tax/sales tax benefits on them too. Not to mention it’s a smart purchase as the fuel costs are way less, and so is the maintenance… and they hold their value better than any other car on the road.
John C says
Found this article as I’m trying to justify buying a new 911 Carrera to myself. Given your 5% of net worth “rule” i can absolutely do it. But, as much as I hate to admit this, I think your rule might be a bit too generous.
I’d tweak it to say that the value of the car you’re buying should be no more than maybe 2-3% of your investable net worth. Why? Well, a car will cost you approximately 15% of its value in annual running costs. If you combine that with not spending more than 10% of your income in car expenses, and assume a 3% “withdrawal rate” (which admittedly is high in our current environment), you’ll get to a budget of no more than 3% (or whatever withdrawal rate you’re comfortable with).
david r rabjohns says
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).
Ron Lehman says
Late to the party here but have you considered a Tesla? Sounds like you have great taste in cars.
I’m a cheap bastard and trying to justify a Tesla y lol.
Makes sense. You have great options. I’m not an expert but here’s my opinion, work 5 years, buy a lightly used Corvette, and call it good. I think 4 to 5 M is plenty, depending on your expenses.
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.
Tom Baker says
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?
Eric Meyers says
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.
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!)
Financial Samurai says
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
Mostafa Magdy says
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,
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.
Quantum Flux says
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.
Financial Samurai says
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!