13 year old Moose is starting to give me fits. His cruise control just died and I’m starting to worry about safety. I just spent $800 this summer on a new steering pump, timing belt, and 125,000 mile tune up so it’s 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 is 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 have my doubts.
Now that I no longer have a job, I’m having a more difficult time accepting my 1/10th rule for car buying. I introduced the rule to those who still had to work for a living in order to not have to work forever for a living. It seems only fair that someone who is retired should be able to spend more than 1/10th their income on a car since they were able to cross the finish line don’t you think?
Based on the 1/10th rule for car buying, I can buy a new compact car. The problem is, I want the latest Range Rover Sport that costs $90,000! I’m not pulling in anywhere close to $900,000 a year so I’m forced to strategize and change my car buying guidelines to fit my desires. See how easy it is to justify our spending choices?
INTRODUCING THE 5% OF NET WORTH RULE FOR CAR BUYING
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.
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, but that’s just frugal me.
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. 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. 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.
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.
RECOMMENDATIONS
Lower Your Auto Insurance Costs: Check out Esurance online. They have some of the best plans with the lowest rates around due to their lower overhead costs. It’s worth spending a moment filling out a quote to see if you can save some money. Car insurance is one of the largest ongoing expenses for car owners. Esurance has good driver discounts, and multi-product discounts as well.
Grow Your Net Worth By Tracking It For Free: In order to optimize your finances, you’ve first got to track your finances. I recommend signing up for Personal Capital’s free financial tools so you can track your net worth, analyze your investment portfolios for excessive fees, and run your financials through their amazing Retirement Planning Calculator. Those who come up with a financial plan build much greater wealth over the longer term than those who don’t! I’ve seen my net worth growth by several million since I started using Personal Capital in 2012.
Is your retirement on track? Check for free after linking your accounts
Updated for 2018 and beyond
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.