In 2009, I watched in horror as a total of 690,000 new vehicles averaging $24,000 each were sold under the Cash For Clunkers program in 2009. The government’s $4,000 rebate for trading in your car ended up hurting hundred of thousands of people’s finances instead! Your $20,000 invested in 2009 in the S&P 500 index would now be worth over $50,000 today given the stock markets are now at record highs!
Buying too much car is one of the easiest and biggest financial mistakes someone can make. Besides the purchase price of a car, you’ve got to also pay car insurance, maintenance, parking tickets, and traffic tickets. When you add everything up, I’m pretty sure you’ll be shocked at how much it really costs to own a car and barf!
The 1/10th rule for car buying is simple. Spend no more than 1/10th your gross annual income on the purchase price of a car. If you make the median per capita income of ~$42,000 a year, limit your vehicle purchase price to $4,200 if you must buy one. Absolutely do not go and spend the median car price of $24,000!
A median income earner buying the median priced car that now costs $34,000 in 2018 is financially absurd. Who spends ~72% of their gross salary on the purchase price of a car? Worse yet, after you pay a 20% effective tax rate on your median $42,000 gross income, you’re now spending around 95% of your net income on a car! That’s crazy and a sure path to financial mediocrity. Don’t expect the government or your rich Uncle to bail you out.
WHY YOU SHOULDN’T SPEND MORE THAN 10% OF GROSS ON A CAR
1) Maintenance costs: We’ve got auto insurance, maintenance, parking tickets, and traffic tickets. Furthermore, the thrill of owning a new or new used car lasts for only several months, but the pain of paying the same car payment lasts for years. Everybody should at the very least check online with eSurance for better insurance rates to save money. They’re one of the best and largest providers auto insurance providers around. Chances are very high you are paying way too much.
2) Opportunity cost. When you buy a car you lose the opportunity of investing your money in assets that will likely grow and pay you dividends in the future. Everybody knows to save early and often to allow for the effects of compounding. Buying too much car is like negative compounding! Imagine how much money you would have accumulated if you invested $300-$500 a month in the stock market over the past three years instead of paying for a car? Probably around $15,000-$30,000!
3) Stress. When you pay more than 1/10th your income for a car, you will become more stressed. The stress you feel from not wanting to park your car in a crowded lot is completely because you cannot afford your car! If you are within 1/10th of your income, you drive and park stress free. You stop caring about door dings, bumper scrapes, even break ins. Stress kills folks.
4) Makes you want more. The nicer your car, the nicer your other things. You start thinking stupid thoughts like: I’ve got to buy a matching chronometer watch, driving shoes, and outfit. You start paying $20 for valet because you want people to see you come out of your car instead of park for free. Having nice things makes you want to have nice everything!
5) Makes you feel stupid. Deep down, you know that if you can’t pay cash for your car and have money left over, you can’t afford the car. Each payment you make is a reminder how foolish you are with your money. Why would you want to be reminded every single month of being dumb?
IF YOU’VE ALREADY MADE THE MISTAKE
Look, everybody makes dumb financial moves all the time. The important thing is to recognize your mistake, stop, and fix it! Here are some things you can do if you’ve bought too much car already.
1) Own your car until it becomes worth 10% of your income or less. This is the simplest solution if you’ve spent too much. Drive your car for as long as possible until the market value is worth less than 10% of your gross annual income.
2) Bite the bullet and sell your car. If you’ve spent anything more than 1/5th your gross annual income on a car, I’d sell it. It’s making you poor. Even if you have to take a little bit of a hit, I think it’s worth getting rid of your vehicle. Don’t trade it into the dealer because you’ll get railroaded. Instead, try negotiating via Craigslist.
3) Punish yourself. If you don’t punish yourself, then you will repeat your mistake and feel fine with what you have now. For the life of your car loan, take away a food you love to eat such as chocolate. If you are a coffee addict, swear never to drink that stuff again! Save more of your income after taxes and feel the squeeze so that you realize how ridiculous your car spending is.
RECOMMENDED CARS BY INCOME (TASTES MAY DIFFER)
Cars built in the 1990’s and beyond are so much more reliable than those built prior. If you are serious about improving your finances, consider buying a car with less options, and less electronics to deal with. The more you have loaded in your car, the more maintenance headaches you will have in the future.
THE CHOICE FOR GREAT WEALTH IS YOURS
Treat the 1/10th rule of car buying like a game. You will be surprised to find how many different type of cars you can buy with 1/10th your income if you make over $25,000 a year.
If you want a $30,000 car, get motivated by the 1/10th rule to figure out a way to make $300,000 a year. One way is to start a side hustle to generate more income on the side. I never thought when I started Financial Samurai in 2009 that I could leave the corporate world for good in 2012 and make more than I did as an Executive Director at an investment bank, but here I am.
If you can’t get motivated, then fine. Just don’t think you can afford much more. Think about your future and the future of your family. A car is simply there to take you reliably from point A to point B. If you’re thinking about prestige and impressing others, don’t be silly. Owning a nice property is way more impressive because at least you can potentially make some money from the asset!
One of the worst combos is owning a car that you purchased for much more than 1/10th your gross income and renting. You now have two of your largest expenses sucking money away from you every single month. Think about all the wealthy people you know, or the millionaires next door. Chances are, the majority of them own their homes and drive used cars that don’t come close to 50% of their gross income.
If you want to achieve financial independence and not have to worry about material things stressing you out, follow my rule. If you want to detonate your finances and end up working longer than you want for the sake of a nicer ride, then go spend more than you can afford. One life to live right? All is good!
Recommendation
Lower Your Auto Insurance Costs: Check out Esurance online for 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. There is no obligation to sign up once you get a quote either. You want to leverage the internet to get the lowest rates!
Track Your Net Worth Religiously: Hopefully you are now motivated to make more money to afford the car of your dreams, instead of going into debt and buy a car you can’t comfortably afford. The easiest way to grow your wealth is to know where all your money is going. Sign up for Personal Capital, the best free financial tool on the web. I’ve been using them for free since 2012 and have seen my income and net worth skyrocket. The app keeps me motivated to spend smartly and invest wisely.
Updated for 2018 and beyond. The money you spent on a car five years ago would be worth 100% more today if you had invested it in the stock market, and perhaps 300% more if you put a 20% downpayment on a home in a coastal city market.
I would say this is a little extreme and takes away lifestyle. If someone makes $100k per year they can easily afford a car better than $10k. I’m not advocating buying a $50k car but limiting to 10% is taking lifestyle off the table. It also could force them into higher maintenance costs than a $20k car and end up costing more each year.
Spending about 10% PER YEAR on auto costs may be more reasonable. That includes payment, maintenance, registration, gas etc.
My lifestyle doesn’t change if I sit in a $5,000 car to go on camping trips vs sitting in a $20,000 car to go to the same place. Does yours really?
Spending $20k on a car while making $50k is really on the borderline for dangerous spending. It has to come down to one’s assets if such a vehicle is desired.
I don’t think you understand what the op means by lifestyle. The car you own is a lifestyle choice, as you can choose to have a more expensive/faster/nicer car at the expense of other things you might want. That is what lifestyle choice means. If you’re into cars, then what you drive actually does matter. The same as it matters what clothes you wear – which I’m sure it does to you. We could walk around in tracksuits all day, and it would make no practical difference and save us money, but we don’t. You have to accept that the things you choose to spend money on (investing is one of those things btw) isn’t what other people want to spend money on. And spending $20K over five years when you’re on $50K is not that big a deal. It’s actually what most people are doing.
Reality – I think you’re missing the point.
“You have to accept that the things you choose to spend money on (investing is one of those things btw) isn’t what other people want to spend money on.”
Uhhh – it’s his blog. A blog specifically about personal finance. He most definitely does not have to accept other people’s financial choices.
“It’s actually what most people are doing.”
Most people are broke. Why would anyone bother to read this blog if his advice was simply to do what the majority of other people are doing?
Spending 10% per year on auto costs??? Are you insane? Someone with a $100K income who wants to work until age 65 (and still take a huge ‘lifestyle’ hit upon retirement) maybe could waste that much money on a car and get away with it, but they certainly could not be regarded as a person who is financially responsible! That’d be 10K per year! So probably at least $500 per month in payments?? And buy a new one as soon as the old one is paid off?
I am horrified.
gas, tolls, maintenance, insurance and registration alone costs us $800/month for two cars. So, without any car payment, we are spending almost $10k/year on auto. And that’s not in California and we only have 10 miles commutes and drive less than 12k miles/year on each car.
For a family of 4, that has kids and 2 cars, spending 10% of your gross income isn’t a stretch of the imagination by any means.
Plus, we give 10% and put away over 10% so I would consider us very financially responsible. However, I guess that’s only about 3% of our annual income, but 10% or 10k/year isn’t a stretch on expenses for a family of four to spend on auto costs if they make $100k/year. They just have to choose to spend less on eating out, entertainment, etc.
I agree that 10% is not always realistic. Our lives are busy and one breakdown has drastic impact on how the rest of the day goes and a lot of resulting stress. For some people it will cost them income, business, or worst a business account. With car payments we are operating at 17% of gross on total vehicle/transportation cost. That is surprisingly high. Didn’t realize until I calculated the annual cost.
It all comes down to need. If the top priority is reliability then get a known reliable care. Something that is 3-4 years old car with 30-40K on it so the previous owner got all the warranty issues worked out and now you have a reliable car for 5+ years. This is what we shoot for.
We spent 28% when we last bought our cars. Looking back now, it was a bit much. I might have wanted to avoid buy brand new… but that decision has already been made. On the flip side we historically keep cars past 150K miles. Since I do most work myself I have a decent feel on when it is time to cut our losses and move on. My target is always 200K+ miles. I still want to hit 300K on something someday, but the next milestone for this round of cars is 200K, then 250K. But safety & reliability is always #1, and we have been blessed enough to have the option to replace at reasonable intervals if absolutely necessary. Our savvy spending habits and 40% save rate helps a bits also. The key to happiness is to be content with what you have. Otherwise happiness in not obtainable. We have been blessed in many ways and one way is with being content.
Lol, you will struggle NOT to spend 10% of your income on auto costs. Car payments are only a small part of costs. You also have gas, insurance, tax and maintenance. I spend more than 10% of my income on gas alone, and I don’t have any car payments to make any more. I’m sure you do too unless you only drive 4k miles a year. In which case, what are you doing even talking about cars since you barely use one?
I definitely like the idea of this post about people spending way to much on vehicles, but I think the 1/10th rule may be a little tough. I bought my first car in high school for $2,500 and it was a steal. The KBB was a little over $8,000 when I bought it and it had about 130k miles on it. My monthly payment was $80 a month and I was able to pay it off in 2 years. Now I can assure you in high school I wasn’t even close to making 25k a year, I was working part time at a Mcdonalds as well as being involved in sports, church a social life, yada yada. I also paid my own insurance and gas. Now I will be the first to admit I got a killer deal n my vehicle, but that was really because a friend of my parents sold that car to me.
Now don’t get me wrong, I do think people are spending WAY too much on vehicles, especially for the wrong reasons. However, if you live somewhere or are in a situation where you need a reliable vehicle I think it may be worth it to spend a little bit of extra cash on a good, reliable vehicle. I don’t think settling for a cheaper car is always the best choice because to be honest, older cars with higher mileage tend to have more problems and get worse MPGs. Paying around 8 or 9k for a car really can be worth it, even if you are not making 80 or 90k a year.
Just my personal opinion though, definitely loved this article!
I think buying a car in high school is a very different issue, since at that point your other expenses are frequently a much smaller portion of your income, and a lot of other financial issues/advice don’t really apply.
At the same time, most cars I see tend to be worth an extra 1-2k because as long as you shop smart you are buying reliability. It is very hard to find a reliable car for under 2-3k, and I’ve seen my boyfriend buy 1500ish cars all the time. They have yet to be a good deal.
If anything, save money while you still have a good car so that you can buy the car outright for what you would otherwise have to pay in interest. You pay more, but get a much better deal. After all, it doesn’t take a genius to figure out that you might one day have to replace your car.
I would also say it is a bit extreme but it does offer some good thinking. I do think people spend way too much on cars but you need to really assess how you plan to use and keep the car. I wouldn’t want to buy a 10% car just to have to buy another 10% car in a couple years when I could buy maybe a 25% car and make it last 3 to 4 times as long AND enjoy it. Just a personal choice. I have cut back in other areas that others spend a lot more in.
I violated your rule when I bought my car in 2008! I was in your lowest income bracket but bought a car similar to the ones you listed in your second-to-bottom bracket for less than 20% of my income. Honestly it wasn’t a burden at all and I paid off the small loan I took out very quickly. (Though I watched some of my peers take out car loans on the order of 100% of their income!) I didn’t have to drive far on a daily basis but in my city biking and public transport weren’t realistic options at the time. So I think you can’t draw such a hard line at those lower income levels but the 10% rule is a good thought to consider. I definitely plan to keep my car until my income shoots up and I have a need to replace it.
You are forgiven since I didn’t come out with the rule until 1 year after you bought your car. Now if you read about the rule, and then went out and bought a car… well, maybe not so much. But spending 20% of your income on a car is not bad either as I note in my chart.
The 1/10 rule is extreme but necessary! I tell people their car should be no more than 20% of their annual income. And I advise them to buy a car with cash. Cash is king. The moment you drive a car off the lot it decreases in value dramatically. Why make payments to something that decreases in value?
Your rule is ok for someone who makes $80,000 plus. They can get a reliable-ish car for $8000 and up, and afford to fix and maintain it, and deal with breakdowns (missing work, rentals, etc)
For someone who makes $40,000 / year, the cars at that price range are 11 years old, with mileage from 150,000 absolute minimum to over 200,000. ( I got this from a quick look on Craigslist for Orange County CA and just looked at practical american and Japanese sedans, no old BMWs). These are cars that are mostly used up. They’ll have serious mechanical problems coming off of the lot if not in the first year. This is not reliable transportation and poor advice.
I’ve had my 2000 car for the past 7 years and it has been very reliable with no beyond normal maintenance problems. It has 118k miles and is worth about $3,500.
Let me guess, you spent way more than 10%? What do you own and make?
IN 2005, on about $110,000 gross that year, I spent $22,500 on a 2 year old Land Rover Discovery with 22,000 miles on it. I still have it, it’s at 103,000 miles, this is the first year I’ve fixed anything other than brakes & tires, I spent about $1500 for smog sensors to pass CA smog. I’ll have it as my primary vehicle for another year or 2, then spend $30,000 on something I’ll drive for 8 more years (at which point I will be 60 years old)
So I spent 20% 7 years ago for a vehicle to drive for 8 years. It has been 100% reliable.
With all of that said, I would not drive, or recommend a $4000 vehicle for anyone, that’s asking to spend another $4000 in the next 2 or 3 years on serious repairs. A vehicle like that will be extremely high mileage and coming into serious repair requirements.
20% on gross isn’t bad at all as you can see from the commentary on my chart.
If you are age 52, I’m going to assume you have much more wealth/assets than the typical 20-40 year old who is wasting their money during the asset accumulation phase. As such, is be much more lax on the rules for sure!
Moose has been worth $4,000 or less for the past three years and has been great. Cars are well built nowadays!
I absolutely agree with you, Sam! I don’t like making car payments at all. I also try to spend only 5% of my income on a car.
I did this without even thinking, just spent $5900 on a 2004 Jeep Liberty with 90,000 miles. I did test drive several new cars and almost bought a new Mazda 3 for almost $25k, but in the end I paid cash from a private seller on Craigslist for the Jeep and I love it. Once I started looking at what I could buy for between $5000 and $7000, I knew I would rather take the cash I was going to use for a down payment and buy a used car.
Nice work Noah! Maybe subconsciously you knew about this rule and deployed it!
$5,000-$7,000 is a great sweet spot where one can find a ton of good, reliable vehicles.
Households making $50,000-$70,000 is also quite common as well.
My car is probably now worth about 1-2% of my annual salary… But I don’t care. It’s pretty comfortable, doesn’t need any major repairs and will probably last until at least 200k miles. Am I doing something wrong? :)
Nope! You are a financial hero in the sweet spot who needs to help advocate the 1/10th rule to prevent financial detonation of our youth!
Good job! And tell me, doesn’t it feel great that your car is worth less than 10% of your gross income now? Whoo hoo!
Wow! What kinda pickup truck costs $70,000 anyway?
Maybe he got some serious kickbacks nobody knows about?!
F-350 turbo diesel dualie 1 ton 4×4 jacked to the sky….or the Dodge or GM equivalent.
I grew up in a military town and saw this all the time– median incomes, brand new 50k+ cars every two years. Brand new cookie-cutter houses. Yet most families I knew had little to no money saved for their kids to go to college/would never consider private school.
Whereas my parents made 150k a year but always drove used Toyota’s and owned the same old, but nice home my entire life. But they also had enough money saved to send three kids to college and help a lot with graduate school.
My first car probably cost about 1% of my income, a 10-year old Nissan with 70k on the clock. Never broke down, started every time, and got me from A to B. Now that my income has drastically increased, I’m spending far less than 1% on a car (leasing drops that figure significantly). My friends have described it as a ‘fancy’ car – but you wouldn’t put it in a sports car category.
Every once in a while I think about getting something with more horsepower and less seats, but then I think about how much it costs me every time I’m not driving it, the paranoia of parking it anywhere, and the unwanted attention it attracts. Given the choice of spending more on travel costs, I’ll choose first class on the rare occasions that I fly instead of an expensive car.
Excellent! 1% is a super low percentage of income on a car. What are you rolling in?
I can’t stomach paying 3-5x for first/business class unless it’s a business expense. Maybe one day though when I’m closer to death and mega millions!
Driving a leased Audi A4, which might seem to some like I’m throwing money away but if my circumstances change I can walk away – just hand the keys back and buy something second-hand with good mileage.
Business or first class might seem like an extravagance, but I only travel about twice a year and generally live a low-key lifestyle. I compare my stress levels when I fly economy vs business and there’s no contest (I hate airports with a passion). No waiting for security, no queuing to get on or off the plane, getting your bags almost immediately, the ability to use the premium airport lounges, and the comfort of a bigger seat and meals. I’m willing to pay for that. (If I flew every week, I might not pick first if paying for myself… or I might find another job).
Love the blog, keep writing!
A leased A4? That’s a $30,000 car. And that’s less than 1% of your income?
I don’t think simple formulas can be applied to things like cars, housing or individual categories without looking at a person’s financial situation holistically. And at $4,200, you’re going to end up with plenty of maintenance costs and no warranty to boot, so it may not be a huge savings over time. But anyway, if someone makes $50,000 but has a pretty low spend lifestyle, rents, has a steady job, etc., why not spend a bit more than $5,000 on the car, especially if they finance at 0.9%? How’s that different than if they were spending a few hundred bucks a month on something else? Under this formula, to buy a typical new car for the $24,000 cited, people should have an annual income of $240,000?
Bingo! A $24,000 car is an absolute luxury, so $240,000 is a good income threshold for such luxury.
you are way too hardcore. That’s crazy.
and this only apply to America.
In east asian import tax is almost over 100% so people there usually pay over 30K for a used, okey condtioned,honda or toyota.
must make at least 5M to start considering a mercedes.
extreme. i know.
Rules or formulas work most of the time! Since I just recently bought a new car, I broke your rule. My circumstances are different than most with no debt except for a small mortgage and some very large IRA/403B/Roth IRA/Brokerage accounts . I tend to keep my cars forever and keep a low profile lifestyle. I agree 10% makes sense for many, but not all.
Glad you are living it up Larry! With your situation, I definitely think it’s time for you to splurge some more. What did you buy?
I bought a Toyota Prius C. The cost (dealer invoice) was about the same price I paid 17 years earlier for my Honda Accord Coupe.
Ahh, to be nomadic and free with minimal possessions to way you down! I love it.
Good to hear from you. I enjoy following travel blogs!
I think the 1/10 rule is a little extreme, but we’re not too far from it now. Our cars together are valued at around $20K, and we’re on track to gross around $175K for the year, I think.
Car is one of the major expenses of any middle class family ( of course after their house). I have seen many people (my friends too ) that they spend a lot of money on buying a car and then they need to spend money on its maintenance and then blame others for not reaching the end of the month. I like new cars, but I always used car.
I think people often spend more on a car than they can afford. I’m fortunate that I live in an area with good public transportation so I save a ton of money by not having a car! Even if I ever move to the suburbs I’m not going to buy an expensive car. As long as it’s safe and runs without breaking down, I’m happy to buy a used car without expensive bells and whistles.
Using the 10% rule, I’d say anyone making under $50k needs to stick with a bicycle. ;) I think sticking with 1/3 of your income is more reasonable. It’s great to pay for a car with cash, but if that can’t happen, pay it off within 3 years is a reasonable goal. OR stick with bikes and public transport.
That’s what I’m saying! There’s nothing wrong with just having a bike or taking the bus!
You don’t need to buy a beautiful, reliable, sub $5,000 car like I have. Have nothing and like it!
You have to admit reliable public transportation is not common in America however. look at the Midwest!
Try Texas – public transit is a joke. Doesn’t even come within 15 miles of my office. Literally.
I understand a car is very alluring for guys who just graduate from school. I couldn’t help myself either.
I would use this rule to try and motivate you to earn more first. Why not shoot for $170,000 before buying the 17k Corolla? As soon as you try killing yourself and realize how hard it is to make bigger money, you might very well not want to waste it again!
I do agree that people spend WAY too much money on a vehicle & buy something out of their price range.
However, I’m inclined to disagree with the 10% rule – mostly because I think people should try to save their money a little bit at a time and then just pay cash. I paid more than 10% of my yearly income on my car (paid around $9000 & make around $45k). However, I drove my last car well past 200k miles and saved money for a newer car. For me, no car payments is the smarter financial decision. Unless it was an emergency (car exploded or something), I will never have a car payment.
Sure, sounds good. My default assumption of this post is that if one can’t pay cash and have money left over to live, then one can’t afford the car. Maybe the “left over” money is 6 months, or longer, depends on each.
Our cars were purchased for $3,500 combined, and our combined income before my wife quit was about $70k, so we’re using the 1/20th rule :)
And people who say you can’t find a reliable car for under $5k are plain ignorant.
Uh oh, you telling Bridget down below she’s being ignorant?
1/20th rule doesn’t have as nice a ring to it than the 1/10th rule!
I am saying if you buy a car out of fear, you will spend more for “reliability”, when you are actually just ignorant of how cars work work and what cars are reliable.
I have a rul not to buy anything NEWER than 5 years, and that helps me determine reliability. Also, look at what 90’s cars are still on the road and make a mental note. Those cars outlast the others, and for good reason. Then, go about 5 years newer and look for a similar make/model with low miles.
Cool. I’m just kidding. I like that rule of not buying anything newer than 5 years! You should write a post about that!
I’m impressed. Where do you find these cars for so cheap? My husband bought a 4 year old Toyota for quite a bit more than what you paid and we’ve already had $1000s of dollars in repairs. At this point we would have been better off buying new. (For 40% of his income.)
Anna, go to Craigslist. You can sort by MAX PRICE. That is the best way that’s free and easy imo.
Everyone should inspect the car and take it to a trust mechanic before you buy. Bring a friend who knows cars, kick the tires, negotiate, go for a test drive, etc. Cars are so well made nowadays, it makes the 1980’s seem like a joke!
Yup, Craigslist. And what Sam said; Get a mechanic to inspect it, or a friend who knows cars to chekc it out. Bad purchases don’t make ALL used cars bad, just that one. I am lucky enough to have a mechanic brother who can help me with this, but paying a professional $80-$100 to check out the car before purchase will definitely help weed out the issues.
Also, you need to to research on the model you are buying, i.e. search “common issues with ‘you model car’ and see what you find. If you buy a newer car, it may not be fully proven on the road just yet, so you don’t know the true reliability. For me, mid-90’s Honda Civic and Accord have lasted us 5 years already, and have many more years to go. Also, repairs/maintenance should be done at home, if possible. If you aren’t willing to put in the labor, then you will pay the big bucks, no way around that.
Thank you both for your advice. I’ll keep looking.
Read “used Honda Fit” for my income and am crying now.
Thanks.
I don’t own a car and no plans to buy one though so I guess I don’t REALLY care.
Don’t cry. Used Honda Fits are great cars!
NO! My friend has one and it’s such a POS. I don’t think I could do it =(
But you’re still her friend, right? I’m sure people would still like you if you were driving a Honda Fit.
Thank you for posting the hard truth! If you emplace “set in stone” rules and don’t take no for an answer 10 times out of 10 you will find a way. I truly believe that. I do not find this 1/10th rule absurd at all. Americans spend far too much on vehicles in the name of “status.”
I personally made a six figure income and I bought my 2003 Honda Civic 2 years ago at less than a tenth of my salary and it runs just fine.
If someone is not willing to purchase a vehicle on 1/10th of their income then they should save and pay for the car they want in cash.
If people were required to purchase their vehicles using cash I guarantee BMWs, Mercedes, and Range Rovers would almost be extinct on our roads!
Cheers mate. It always seems like the older, financially savvier, wealthier readers agree with my financial advice. I don’t know what’s up with the younger generation nowadays, or folks who say they want to achieve financial independence, or who say they want to build assets, or say they want to save money.
If you want it, do it. If you don’t want it, don’t say it b/c you’re just fooling yourself folks!
Many of the younger generation has had to try tips like this out of necessity, and they’ve failed. Out of my friends (a group turning 25-30) we’ve bought a total of around 12 cars. Out of these cars, most are in the 1-3k range, with a few at 5k and mine at 10k (partially a gift, partially cash). Out of them all, 4-5k cars seem to be the sweet spot, which is over the 10% rule for all of us. When we follow this rule, we get stuck with clunkers or expected to find a bus in a rural area where the only “public transportation” is a greyhound to another state.
Not everyone lives in a populated area, which seems to be the going assumption.
Also, keep in mind that wealthier readers can buy cars at or above the 4-5k sweet spot. I think you need to realize that there is a minimum standard that needs to be included in the equation (rather like a baseline).
This is really the key. For someone making $100,000 or more per year, this advice is sound; you can buy a reliable, quality used car for $10,000 USD – heck, you can almost afford a new Kia at that price.
For someone making less, however, you’re venturing into territory of risk; you’re more likely to get a money pit clunker for $4,000 than you are a quality used car.
Don’t forget, too, that used car prices and values vary from city to city and region to region. In Austin, TX (a college town), there’s practically nothing for less than $5,000 that even runs, but if you’ll go 250 miles east to Houston, there’s a great selection.
Since most of us don’t live in NYC, Chicago, or San Francisco, public transit is not a realistic option. I live in Austin, where public transit is sort of passable, and I couldn’t get to work on transit despite having a rail stop in my apartment complex.
You didn’t talk at all about frequency of car buying, which could be just as important as price. If you make 50k and buy a 5k car every year, that would be worse than buying a 20k car and driving it for 10-15 years.
If you have to replace $5k cars every year, you’re making bad purchases and/or taking bad advice from mechanics. An intelligently-purchased $5k car should last at least 5 years with just routine maintenance, and that’s if you drive the wheels off of it.
However, with the right skill set you can make a car last indefinitely, and it will be cheaper in the long run than purchasing another car — new or used. How?
Learn how to fix your own car.
Q: What’s a bigger rip-off than financing a car?
A: Taking one to a mechanic. Just look the hourly rate the garage charges, and then figure you’re getting charged at least double the cost on the parts — and that’s for a regular, “honest” garage. Not some shady joint!
You can learn how to perform pretty much any repair on a car using the internet. It has taken me about 12 years of studying on my own time (I’m an engineer by day), but now I can pretty confidently complete any repair my car would need besides a transmission rebuild or machine work.
Just last week, my father-in-law was quoted $900 in parts and labor (about half and half) to repair his 2004 Ford Focus with 130,000 miles at a local, trusted garage owned by a friend from his Rotary Club. After learning what the quoted repair needs were and scouting around under the hood myself to verify, I ordered the appropriate parts for $90 off of the internet. It should take me about two hours to perform the repairs once the parts arrive.
Remember folks, ignorance is expensive. To get the most value out of your used car you’ll need to get grease under your fingernails!
What do you do about lifting the engine block out? Honestly curious- my roomate’s car needs a timing chain replaced and we don’t know how to get the engine out without a mechanic because we don’t have the pulley.
The easiest way to get the engine block out will be to rent an engine hoist. Look around in your area for tool/equipment companies. They will have what you need, might cost you $100 a day, haven’t checked the rates. If you have the space and intend to repeat this on multiple cars, might make sense in the long run to purchase your own but probably not worth it.
How do you feel about leases, Sam?
Not a fan. But, if it’s a business expense, I’m much more of a fan.
I’ve bought and sold ALL my cars and have never leased.
Lease is a guarantee to lose money, just like renting. At least with owning, you have a chance to break even or make money.
Looks like I’ve got a long way to go before I’m allowed to have my BMW :(
My current car is right where it should be, but when i bought it it was worth 70% of my annual wage. OUCH. Bought it on payments though so the bi-weekly $74 it cost me was very managable, even at that wage. It took me two years to prepay and pay it off in full, been enjoying 4 years of no carpayments. :)
I’m not sure if I agree with sticking to the 10% rule… yes it mostly makes sense but, take me for example.. my car is worth about 2,000 and good for another 3-4 years. But, what if, in 4 years I’ve saved up 15k to drop on a 1-2 year old car (I’ll never buy actually NEW new) even though I still make $40k a year (hopefully by then I’ll be atleast double that…) I don’t think that’s neccesarily bad. It depends on your whole financial situation, income/cost of car are not the only two factors that play.
I am glad I bought my car when it was one year old, I’ve had almost zero maintenance.. had I bought my car at her current age… i’d be in for a ride. (it will be scrapmetal in another few years) I will probably repeat what I did with my current car in the future: Buy a newer car, a few years old, probably much more than 10% of my annual income but paid for in full, with cash.
Yep, gotta wait for that BMW! They’re nice, but so are nice Honda Civics! :)
So your car is currently 6 years old? What type is it? I’m pretty sure it will last way more than 4 more years if you’ve taken normal care of it. I’ve had my 12 year old car for 7 years, and plan to have it for at least another 5 years!
If I made $40K and managed to save up 15K cash, there is NO WAY I am spending all my hard earned savings on a car. Absolutely no way. I’m investing it.
My rule on a car: Set aside a fund for it. Even if I want to get a car right away, I need to save so I can spend as much cash on it and get it paid off quickly. Otherwise, even if you are able to use the 10% rule, you could still wind up wanting more.
Well, I broke your rule back in 2006 when I was making almost nothing and getting a college degree. I was also 21, so cut me some slack :) I bought a new 2007 Scion that was paid off in 2011. Now that I’m slightly older and wiser I won’t ever make the mistake of ever buying a new car again. When you’re actually making money it’s amazing what decisions you end up making – I still regret taking on the huge car loan that didn’t allow me to save much at all during the start of my career. I’m further along in my career and making in the mid 70’s so I can safely say now that my 5 year old car is roughly 10% of my salary! Live and learn, you know.. it’s tough saving money when you’re young and everyone around you is “living it up”. I want to travel to Europe or across the USA, but I’m conceding that these things will have to wait many, many years (sadly). Not only is it hard to come up with the money but also come up with the time away from a start-up company that is very demanding! Thanks for the article, I look up to you!
Nice job Melissa! You can have lotsa slack because I didn’t publicly announce the 1/10th rule until 2009!
I wish I could buy a new Scion. Will just have to keep on loving Moose! Really funny how after we start working for money we cherish money so much more.
Why does when you announce the rule matter? If it’s a good general rule, when it’s discovered shouldn’t matter. Was there a car boom in 2009 or something?
It seems like saying “I didn’t say spend less than you earn until 2009, so it wasn’t good advice until then”, which is why I’m asking.
I absolutely love your car buying rule. I had NEVER heard this rule before you so I must give you all the credit.
I love it so much that I’ve told everyone I know about it (including an article on my site). The conversations have been hilarious. Most people respond with “What! That’s insane!” and I get to respond with “Oh, I thought you wanted to be wealthy. Nevermind.”
Haha, awesome. To be a little bit wealthier is a choice indeed! I’ll have to check out your post.
But being wealthy or financially independent is overrated. More fun to rev the Ferrari in traffic down the main strip!
i don’t know much about your suggestion for ppl make less than 500k but i am totally with you on the 1M above part.
Mercedes, especiall G wagon,are known for unreliable.Lambo and ferrari under normal circumstance are not supposed to be driven daily fo communte and after every 10-15k miles, you need ship them back to italy for major maintence.
i would suggest anyone with a gross annual income over 1M consider the bentley gt, porsche and maser. much less problem and much more reliable
At over $1million income, focus on the rare cars that actually appreciate in value or have markups the first year they are out and get in tight with the dealer!
I’ve been driving a 10 year old civic with 145,000 miles on it. I now need to travel for my new job and don’t want to get stuck on the side of the road by myself day or night. So I’m looking at 3 New cars in the 21-23K range. While this breaks your rule, I intend on keeping this new car for 10 years well into the 150K miles again. Income is at 70K with $700 car allowance. I’m going to pay cash for the new car. I opted for a new car because the gap between new and used is $500-$1000. I’m interested in your opinion.
If you can keep it for 10 years and not waver, then I guess it’s OK. A 10 year old civic is a 2002, and those babies go until 200,000+++ with regular maintenance.
Depends on how much cash you have too. I would say if you have more than $75,000 in cash, then paying $21-23K cash is doable, but you will still feel a sting……..
So, my conclusion is… buy a $7,000 car or less. Follow my rule!
An ’02 Civic is just barely broken in at 145,000 miles. As the Samurai said, those cars will go (cheaply) into the 200,000+ mile range. Take it to a mechanic, have him go over it, and all should be good.
That’s why I recommend people who make $25,000 or less not buy a car and just use public transportation. Buying a $2,500 car or cheaper is grounds for some problems. So essentially, if you always follow my 1/10th rule, all will be better! :)
30/30/3 rule for house buying!
What do you do when there is no public transportation? Carpooling only gets you far when others have a schedule that works. Same with sharing cars.
What’s the rule on having kids? :P
Make sure you want them and can afford them!
I leased a Subaru this past March for $300 per month and I make $60,000+ per year. The car itself is $25,000. I sold my honda civic, 3rd party, for $10,000 (dealer was going to give me $7,000) and invested all of it. My next car, in three years, will probably follow the 1/5th rule.
I see your point about 1/10 rule, but the piece of mind knowing that I will not have any maintenance problems for the next three years, in a very modern and comfortable car, is worth a lot to me. I figure that once my three year lease is up (I put no money down), I will have paid just over $11k in maintenance and lease payments.
Sam, I think you ignore safety as well. Consider car accidents are the number one killer in my age group, I think it’s worth spending the money on a nice car sometimes rather than an old beater. Gas mileage is better on newer cars too.
I bought a 2004 Infinity G35 for 36k in 2004 in cash. I am now trading it in for a new Audi Q5. Getting 6,800 usd for the trade in. Will pay 38k with trade in for the new vehicle and pay cash. I make 200k a year. While I am not following the 10% rule I do feel I have thought this through and made a conscious choice I am comfortable with. I like to keep my cars for a long time and pay cash. I usually by safe vehicles that are well rated and keep well. Been thru the process of buying cheap cars and found they cost more in the end. I think the important thing is too keep the cost of any outlays cheap so when things change you are not stressed. I have no payments and the only debt I have is a mortgage which with taxes is about 12% of my income. I think financial security is the ability to make wise choices, realize your not smarter then everyone else and SAVE. Oh yeah, and make a budget. Thanks
Mike, if you’re paying cash, then the 1/10th rule doesn’t have to be followed as stringently. The worst is when people can’t pay cash, and spend way more than 1/10th of their income on a car! Ridiculous!
Wait, if you pay cash, then the 1/10th rule won’t be followed?
Ho ho, you should see how much cars in Singapore cost and people are buying them like there is no tomorrow. ;p
I did a comparison of car prices before. If you are interested, it is here:
https://singaporeanstocksinvestor.blogspot.sg/2012/06/tea-with-ak71-new-car-for-s75000.html
What we pay for a CheryQQ in Singapore is more than what a Porsche Boxster would cost in the USA!
Yep, I’m aware of what Singaporeans and other Asian countries are paying due to tax. Crazy! But, It’s because you guys are all rich! Otherwise, you wouldn’t be able to afford it!
Not capital gains taxes and 20% flat tax is the bomb!
Well, it is not just the high taxes. In Singapore, we need to successfully bid for a Certificate of Entitlement (COE) in order to buy a car! The certificate now actually costs more than a 1.5 litre Japanese make (inclusive of import and other taxes)!
This will really shock you:
https://singaporeanstocksinvestor.blogspot.sg/2012/11/category-coe-hits-record-77201.html
The latest round of bidding saw the COE for engine size of 1,600cc and below almost touching $82,000. A new record! It is plain ridiculous.
Most Singaporeans are not wealthy. The median income is some $39,000 per annum…
See the statistics from the government:
It is no wonder that the ruling party lost more seats in Parliament in the last election.
Kinda crazy that a median income of $39,000 would bid $82,000 for a 1.6 litre engine car!
At least your taxes are low and you have a good government safety net.
So, let’s say you have two otherwise identical job offers, one with a salary of 20k in a city with good public transportation, and another with a salary of 170k, but with a rule that you must buy a specific type of new car costing $19,000 .
Which would you take? According to your rule, it should be the former. Which is a laughable absurdity in my book.
What kind of logic are you talking about? Neer heard of a job or anybody forcing anybody to buy a specific $19,000 car.
Look, you don’t need to justify your bad car buying decision with me. Just be angry at yourself and learn from your mistakes of you want to build your wealth.
I made no such decision. In fact, I do not even own a car right now.
And I also don’t claim this happens in real life. It is a thought experiment to demonstrate the absurdity of allocating a fixed percentage of income for any specific expenditure.
If you like, pretend it’s your spouse who requires you to buy the $19k car if you get that job, rather than the employer.
I don’t think you will have a tighter budget with a salary of $170k and purchasing a $19k car than you will with a salary of $20k and no car. Can we at least agree on that?
If so, what does the 10% rule actually mean?
If you don’t own a car, don’t claim this happens in real life, what is the point of this conversation?
The point of that conversation seems to be to get the flaws of this system acknowledged so a better rule can be made. The 10% rule ignores a few very important factors, which need to be mentioned before people follow this advice blindly.
Assumptions:
There is a viable public transportation system where you live.
The 10% rule applies only when you buy a car, and does not factor in insurance cost, repairs, or set a periodic time when you are able to make that purchase.
Finally, you never mentioned when the 10% rule appies. Once a year? Once every 10 years? When?
I like that rule of not getting a car! If you don’t need a car, you will save so much money in the long run!
I bought a new Honda Civic when I was in college in 2002 using $6K from leftover scholarship money for down payment and the rest of $17K was a loan co-signed by my mom. I was planning to buy a used one at the time but my mom, who was influenced by my aunt who was always fearful that getting a used car would mean breaking down in the middle of nowhere, kept pushing me to buy new and I wasn’t financially smart enough to push back. I paid it off 3 years later by paying extra to the principal whenever I could. Today, I want to say I regret buying it new, but I don’t with this one. After nearly 11 years it’s still in great shape. The car has never broken down nor given me any problems even after falling into a ditch one icy day. It gets 35mpg. I’m hoping I can still drive it for another 10-15 years and then pay cash for my next car, used one this time.
I never heard of 1/10 rule before. That’s a pretty good rule and I would follow it as I make close to $75K-100K a year and $7.5K used car would be more than I need to get from A to B. However, my mom at one time made $12K/year. I don’t think I would feel safe letting her drive a $1.2K car. I would rather buy a $4K one for her so I can sleep better at night. She lives at least 10 miles from her work place. Public transportation, bicycling, or walking isn’t an option since she works night shift. I don’t live in fear, but where it concerns my family’s safety, I prefer to spend some extra money for a peace of mind.
Do you think anyone making $12K a year would be able to afford a decent car using your 1/10 rule?
A $1,200 car is tough. What does your mom do to make only $12,000 a year? That is below poverty wages. If you are making $75-100K/year, I think the #1 priority is to help get your mother a car, or have her stop working such a low paying job and help her out.
I agree. I have a Neon (paid for upfront) that we got for 10k. I have added 93k to the car over 7 years and not had to do a single repair (which would be a minimum of $200 around here, as I don’t have a good mechanic contact and am only moderately car-savvy). If I was to buy this exact car after the 93k miles, I would still pay approximately 7k for the car.
$10,000-$7,000 = $3000
$3000/93,000mi = $0.03/mi
Considering that the “cost” of milage on a car ranges from $0.30-$0.60 depending on who you ask, the depreciation value would not have made this car a better deal. I’m college age, and have been around several people who follow the 10% rule. All of them have spent around what I do over this time because they have to replace their car several times over this period. On top of that, I have had to give several of them rides when their savings car broke down. I have NEVER had a problem with my car, and have another 7 years in it before it matches the cost of a 10% car here. Over this 14 years, I have plenty of time to save for another car that is reliable. I also save myself the worry that my car will break down at an inopportune time, as well as time searching for a new car.
How does the reliability of a car factor into the 10% rule? We have icy winters and jobs that have strict penalties for tardiness/absences (approved or not), so having a car break down on me could reduce my income that year by $10k. As someone who only makes $20-30k/year, that’s a pretty hefty incentive to pay for reliability. The 10% rule seems more reasonable if you mean 10% per year (including repairs and insurance).
This is just bad advice. In fact its just ridiculous and unpractical
If you make 40K you should buy no more then a 4000 dollar car?
That means a 10 year old car with over 100K miles on it.
How much would your annual repair costs be to keep a car like that running?
What about the wage earner that has to rely on that 4000 dollar car to get to work everyday.
Can you take the chance that such a car will reliably get you to your job every day, day in day out?
Do you feel secure if your spouse and children have to be traveling some dark road at night in a 10 year old car with 100K plus miles.
Consider this as a better idea. 36 month lease of an entry level new car. You can find many offers for 200 per month or less. I recently saw A Honda Civic for example for 189 per month with no buydown.
You have a 189 dollars per month expense for a car with full warranty , no repair costs almost no maintenance costs, safety and dependability. Just release every three years and you can budget your transportation costs to the penny month after month.
A 4000 dollar car could well exceed the cost of a monthly lease payment in repair and maintenance costs over the same three year span.
Fact of life- Reliable automotive transportation is something many Americans can not do with out. TheCarBuyersHero can help save you with those costs
I would expect nothing less from someone who has a website that sells cars.
My car is currently worth about $2,500 and is 13 years old. I spend on average $500/year in maintenance since I bought it 7 years ago for $8,000. My income then was in the multiple six figures. The car has been very reliable. With roadside assistance costing $1 a month, all the better.
I get a car allowance from an employer of $800 a month (towards a car payment and car insurance), but I have to give back whatever I don’t spend. I bought a car $0 down (with 0.9% financing) that is about 40% of my annual income plus car insurance which comes out to $700/month.
In this case, I felt I should “reach” since I want to get as much value out of the car allowance as possible, but I’m always worried about either losing the job or moving to another company where I don’t get as many benefits. Awkward situation I’m in. I don’t feel bad about it. If I had to sell the car today I would still profit from the deal so I consider it a win-win.
If you’re already ahead on value, what are you worried about? Nothing wrong with taking free money when it’s offered!
I think the 1/10 rule is a little too bold for my taste. Buying a car is kind of a waste of money but it just how much of a waste depends on a few factors:
1. how good of a driver a person is… do they change lanes erratically, talk or text on the phone while driving, tailgate, or any other bad habits that would cause a person to not own the vehicle for a long period of time?
2. how well does the person maintain the vehicle… I don’t mean washing, waxing, or vacuuming. I’m talking about changing oil religiously and replacing part that should be replaced instead of delaying the process and allowing other systems to fail.
3. how comfortable do you feel in a vehicle that you’ve owned for over ten years… does the person need a new car every five years?
In my humble and personal experience, I would agree buying new is just plain stupid. The market is flooded with vehicles that are slightly used or off-lease. They can be had for nearly 2/3 of the price of a new vehicle and they rarely will have any expensive systems that need to be replaced any time soon.
I’ve owned three vehicles during my 16 years of driving experience. The first two were $3,800 and $2,900 each and were well over the 10% annual salary I had (because I was a full time college student). My current vehicle cost me $16,000 and was also well over the 10% annual salary I had when I made the purchase. Excluding my first vehicle which was more of a recreational off-road vehicle, the second vehicle that I purchased for $2,900 (about 75% of my annual salary at the time) lasted me 12 years and I was able to still sell it for $800. My current vehicle I’ve had for 11 years (I owned both vehicles simultaneously for several years) and I don’t plan on getting another vehicle for at least another four or five years.
If you maintain your vehicles, make good choices on which models to buy (do your research!), and keep them for more than five years… you really can’t go wrong!
FYI: I love cars… and my current vehicle is a smaller turbo-charged sports car. I buy the cars that I really want and can afford… I don’t just buy cars that I can afford. Seems silly to me to do the latter because most of us live in a country where mass transit isn’t taken too seriously!
Let me start off by saying that I’m a “car guy” too. I love cars (especially sports/performance cars, of course) and do as much of my own maintenance as I can. I am currently in the middle of swapping an engine into an old car that was never designed to hold it. Long story short, I know where you are coming from as a fellow car guy.
That being said, I think that your Item #1 is irrelevant. You may have control over your own actions (for the most part — everyone makes mistakes), but someone else’s stupid actions can destroy your vehicle just as quickly. Item #2 is also irrelevant, in my opinion. You should maintain a car religiously regardless of how much you paid for it. That’s the only way to get the most value from it in the long-term. If you do that, then Item #3 should be a non-issue.
Your main argument seems to center around the idea that “as long as you take care of your “investment,” spending more than 1/10 of your income on a car is okay.” I think you are missing Sam’s point. The real issue is not how well you take care of your car(s). You should take care of them regardless of how much they cost. The idea behind the 1/10 rule is that you don’t hamstring your finances by paying too much for one in the first place. It’s the lost opportunity cost… the other work that your money could (and should) be doing for you, rather than going toward a depreciating asset.
I don’t agree with this 10% rule in all cases because it takes in to account only gross income. My wife and I make a little over 200K so by this rule we can only lease/buy a 20K car. But since we have zero debt, own our house outright, have fully funded the college funds for the kids, have a portfolio of over 2.6 million and continue to invest 70k a year, should I really care that I am perpetually spending approximately 1,300 dollars in leasing two BMWs. Lets not lose focus why we have worked and saved all our lives (I just turned 50). Its not for Obama to keep saying to us we don’t pay our “fair share”.
It’s up to the individual. I made much more than 200k/year at 30 and spent less than 1/70th my annual income on a car purchase. I think 1/10th is very reasonable.
It also depends on what you think is enough.
For some, $2.7 million at 50 is good. For others, having to still work at 50 with anything less than $5 million is undesirable.
I agree, it is up to the individual where and how they spend their money. Personally I don’t want to be a Warren Buffet type that spends nothing compared to his net worth.
BTW 2.7 million is my stock position. My current net worth, with house, two properties, art, and physical precious metals is a little over 5.5 million. Carry on the great job… :)
I want to apply this logic to my life, but alas I am a car fanatic. A car is not an appliance for getting me from point A. to point B. It is a huge part of my life that I spend at least an hour a day in, and it provides me with a level of enjoyment few other things can provide. I bought enough inexpensive sports cars to learn that I would spend more time fixing them than driving them. I’ve decided to spend roughly $28,000 (out-the-door) on a new sports car, financing it over 5 years. My yearly gross is roughly $50k so the car payment will account for a large portion of my monthly income, but to me it’s worth it. I guess I won’t ever be a wealthy man, but I can look back on my life and say I had a blast in that little car!
Corey, why not wait until you make $280,000 before buying a $28,000? It’ll be more gratifying and better for your financial health.
But, I’m hearing more about this YOLO term a lot of 20 something’s are chanting. Guess there is always the government and parents to take care of us. What demographic are you?
Sam
Well for one very few people will ever make 6 figures. Multiple 6 figures is better than 90% of people.
True. Which is why I think most people buy too much car for their own financial good.
New to this whole car buying business. 10% seems pretty difficult… Sam what do you think I can afford? Salary=$100k age=28. Not a lot of assets as I just finished paying off my school loans. Have some investments. My only expenses are: gym membership $38/mo. Cell: $60 mo. Gas: $200 mo. That’s seriously it. No dependants, rent etc. I live in Canada where taxes and car prices are higher.
Hi E,
Welcome to my site. I guess it depends on how much you like cars. $100K income = $10K car. Pretty straight forward.
Take a look at this post to see how your net worth stacks up. If you stack up great, then go ahead and be a little looser. If not, then stay strong.
Sam
Ps. Right now I’m driving a car my dad gave me. It’s about 10 years old and on its last legs =unsafe to drive.
Sounds to me like you have an excellent starting point — you own a car that’s paid for! Shell out a few thousand dollars in repair costs and continue to drive the wheels off of that car. It will cost you FAR less than shelling out even bigger bucks on a new(er) car would cost.
I agree with cars being too much money, however there is a strategy to buying a slightly used car. First, if you buy a slightly used car (around 3 years old) with about 20,000 miles on it, there won’t be maintenance issues. With an older car with 100,000 miles, you can easily put in 2k or 3k for repairs on a 4k car. That brings it to 7k. Why not just buy the 14k car with no problems and better mpg because it is newer? I got a 2009 Corolla for 15k a couple years ago.
The next part is all about inflation. When you purchased your car for 14k, used cars were usually around 4k depending. However, after my 5 year loan is up, i expect the used car prices to have risen a little. So with financing at 0%, I think it is better to get the slightly used car because when you sell it in 5 year, you won’t be getting 4k but maybe 5k.
Another point. Since you are financing the car, you don’t have to put anything down. With buying a used car from someone, you often have to give them 4k cash up front. I’d rather only pay $275 per month with no cash upfront for a good solid car that will last than a crap beater. Just my opinion!
Dank, no argument on buying a 3 year old car vs. a new. In fact, I much prefer it. The argument is someone spending 60% of their income on a car that is certain to depreciate and break down.
Get a 14K second hand car. Just make over $100,000 before you do so.
Serious issues with this post. To start, someone who makes $100K per year can easily afford a $25K car. If you have good credit, interest rates are in your favor and you can probably get a loan for 0% or 1.9%. I took the 0% interest for 3 years loan on last year’s purchase of a Fiat 500C. Getting this loan meant that I had to put $5000 down, so I now have payments of $550 per month and the car will be paid off in 2 more years.
As for your examples of cars in the $100-150K salary range – Fiat 500Cs start at $23,500 new. They just entered the U.S. market in 2012, so buying a used one was not an option at the time this article was written. So, according to your rule, no one in that salary range should be buying a Fiat 500C.
I think a rule of not expending more than 10% of monthly gross income per month on car expenses is a good rule. $100K per year translates to $8333/mo, so spending $550 car payment + $200 gas + $100 insurance = $850/mo. The Fiat 500C come with a full 5-year warranty that covers maintenance, so I never have to worry about those costs. This is good finance sense in my book. Buying a $10,000 used car without a warranty and poor gas consumption is not.
Ana, you are welcome to justify your car buying purchase. It’s not up to me to judge you. I just hope folks who want a brand new $20,000 Fiat 500C can aim to first make $200,000 first and not regret their purchase in the future.
I’m against taking out a loan to borrow a car if you don’t have 100% of the cash to purchase the car. If you have $20,000 to pay cash, but decide to take out a 0% loan, then fine. But if you only have $10,000 in cash, and you take out a loan, something is wrong. You can’t afford the car.
Take a look at this post to see where you stack up: https://www.financialsamurai.com/2012/05/14/the-average-net-worth-for-the-above-average-person/
Or this one on savings: https://www.financialsamurai.com/2012/12/03/how-much-savings-should-i-have-accumulated-by-age/
Chances are, your car purchase is dragging you down.
Ana, I see a lot of “used car fear” in many of these posts, including yours. Why do you need a warranty when you don’t have a car payment? Over the long term, car repairs on a paid-off vehicle are much cheaper than monthly car payments. Plus, the depreciation hit that you take is much smaller if you purchase a used vehicle. If this fear is because of reliability reasons, then that is something that’s within your control. Purchase vehicles with good reliability track records (another argument for going with an older used car, rather than the new, hip model), and then maintain it well. You might even find that you’re at the mechanic’s garage *less* than if you had purchased that new, unproven model!
Your comment about gas consumption does not play out either — gas mileage is mostly related to the type/size of vehicle you buy, more so than its age. A 2003 Honda Civic gets the same gas mileage as your 500c, and it has more room, will depreciate far less, will be cheaper to repair, and can be purchased for less than $5000 with many years service life left. This is just one example.
Fun anecdote:
Did you know that the 1987 Honda CRX HF (a little two-seat commuter not unlike the Fiat 500c, at least in spirit) gets 37 city/45 hwy MPG, and it’s not even a hybrid?! How? Power nothing and fewer mandated safety features mean a much lighter car. Curb weight has a huge impact on gas mileage.
Financial Samurai,
I gross $60,000 a yr at age 27. I don’t anticipate my salary to top $100,000 while serving as a military officer. I don’t plan on remaining in the service for 30 years to earn and compete for General rank. I suppose I could demand a much higher salary with a similar position in the corporate world, but, I’m enjoying the benefits and military discounts for now. I’ve taken your advice to heart.
Here’s where I violated your 10% rule (5 years ago).
I spent $55,000 to restore a numbers matching, original 1971 ‘Cuda 440+6 which was re-appraised earlier this year and valued at $86,000. Yes, I know, it’s only worth what the next guy is willing to pay for, but the stock market over the past 5 years didn’t appeal to me. It’s currently in storage and running me $80/month and $0 deductible.
Here’s where I did after reading this article last month.
I set my alternative retirement contributions to 10% of my basic pay; sold a one year old vehicle that I purchased new for $30000 to Carmax and came out of pocket $2500 on the sell; Bought a 2000 Toyota with 82,000 miles and a clean history – paid $5700 cash; will be selling my Harley Davidson “bobber” for $7500 to a local dealer in 10 business days (I owe $5400); all in all I will have saved $637.73 a month in auto payments, and $506 annually on auto insurance. I intend to use the savings to quickly build an emergency fund which I’ve been neglecting over the last five years (thinking my new vehicle warranties would cover me).
Here’s where I violated your 10% rule after reading this article.
The Toyota was sold as-is. I decided that I might as well pay the dealer to do a complete overhaul on the vehicle. Some services were not required yet, but I needed the piece of mind. From the tires, timing belt, all fluids, soon-to-require service parts were replaced, to a $15 car wash and wax at my home, I spent and additional $1175. Total costs: $7875 and change. Now I no longer care where I park, because I can afford to replace any part on this vehicle on any given day. I feel like a burden has been lifted. Best part of it all, I started to cut-back on all other spending that I noticed were wastes:
1) Cancelled Cable TV subscription for Netflix, Hulu, and iTunes. Saved $100/month
2) Decided to subscribe to Experian to monitor my credit score more closely —after seeing how much debt I was carrying in auto payments and credit cards — I transferred $15,000 from checking to wipe out all three credit cards. I’m waiting for my 770s score to reflect my recent activities in about 60-90 days.
Great site, I’ll bookmark this one
Howdy,
Good to have you here! Nice work optimizing your finances. Paying off debt, checking your credit score, and saving money on non vital service will help. Just make sure you don’t start spending more now that you’ll have more.
I’d also consider signing up for Personal Capital. They aggregate all your finances, tracks your net worth, keeps you in budget, and provides free tool for analyzing your investments. It’s free too btw.
What are your financial goals you’re striving for btw?
Regards,
Sam
Cable TV providers are rip-offs. Netflix, Hulu, and iTunes is definitely a way to go.
Please let me know where I am wrong in this scenario (I’m no expert):
Any car will depreciate at least $1,000 per year. The only exception is a car which is 10+ years old, in which case you are potentially going to have MAJOR repairs costing big $$$. With a used car worth $6,000, I would not feel comfortable budgeting less than $1,000 per year in maintenance/repairs. This brings the cost of ownership to about $170 per month. I realize that this is a gamble and could end up being much less, but I will assume the worst case scenario.
If I pay $40,000 to buy a new car, and can sell that car for $20,000 after six years (this is based on actual quotes and used car values), my cost of ownership is about $270 per month. In my opinion, spending what I pay for cable/internet each month ($100) is well worth the peace of mind of having a car that is reliable and makes me happy. After all, I need a car…I don’t need cable. I could easily make the sacrifice of cancelling the cable if necessary.
You’ll be surprised how well made cars are from 2000 and beyond. I’ve got a 13 year old truck and the average maintenance is around $400 a year.
I say go for the $49,000 car if you make $400,000.
And if the car’s actual cost is $20,000 years later, then at least make $200,000 a year.
This is the most ridiculous thing I have ever heard. There are no variables considered. By the way, why would I need to make $200,000 a year to sell a car?
You don’t need $200k to sell a car. I’m suggesting you need $200,000 to buy a car if you want to build wealth. There’s a big difference.
I know so many people who make under $100,000 but spend $20,000-$30,000 on a car and then wonder why they don’t have lots of savings or financial security down the road. Now that’s ridiculous. It’s like being a ‘C’ student but thinking they deserve an ‘A’ lifestyle.
What’s your financial situation and background? Need to get some perspective.
Age: Late 20’s
Salary: <$100K
401k: Contribute 10% gross (current balance = 1 year salary)
Cash Savings: Contribute 20% gross (current balance = 2/3 salary)
Rent: 17% gross (do not own)
I wish I would have seen this ~ 6 months ago. Now that the deed is done though, I’ll be sticking with the advice of keeping the car for as long as possible instead of “upgrading” every few years.
I have a lot of catching up to do but I know it’s still possible. I’m closing in on 30, making > $75/year and my 401k is sitting around $40k. I’ve been reading through quite a few of your articles and while some seem a little over the top, it’s all starting to sink in. I’ve been much more of a spender than a saver for the past few years. Luckily I can change things now instead of waiting another few years.
This is bullshit. When I made $50K a year I financed a car that cost $18K after it was all said and done. Paid it off in two years and now I am on track to make a little over 100K.
It was in no way a strain on my finances. I was able to easily pay the $250 a month auto payment, and often paid more.
My car is going to have much lower maintenance costs and last for much longer than if I had bought a $5K junker.
Are you sure? Read this post to see if your net worth is on track and let me know. https://www.financialsamurai.com/2012/05/14/the-average-net-worth-for-the-above-average-person/
My wife and I make $140k/yr. We have no kids and no debt. We drive two Corollas, a 97 and a 06, both paid for in cash. Combined, they are probably worth $8k. They get us from A to B at the speed limit, have a/c and heat, cd player, airbags and anti-lock brakes, don’t use much gas, and have nice paint jobs. I really don’t see what more we might want in our cars that would cause us to spend more. In other words, I completely support your rule. Btw, we are not minimalists or hippies or socialists or anything like that – we spend plenty of money on traveling, have a nice house, etc. We just don’t see the point in paying more and getting the exact same thing.
Great to hear! You are well on your way to financial prosperity if not now then soon.
I think this is a bit extreme. I make $100k per year. I also have another $85k in cash tucked away, $85k in stocks / investments funds that i can access if needed, and $42k in retirement investments that i wouldn’t want to touch.
I’m looking at buying a $40k car (Audi A5 coupe). Now i would agree this is a bit high, but i do think your 10% rate is very conservative. Perhaps closer to 20% would be fine and that’s not assuming that you have to pay that out of one years salary. Now even if i go to 20%, i’m still breaking that rule by double. Just my thoughts.
I love the Audi A5/S5! What a beauty! I thought they are more like $50-65k new? Getting a second hand coupe?
I would use the 1/10th rule as motivation to make $400,000 a year if you want a $40,000 car. If you are comfortable spending half your cash stash on a car, then go for it!
Nice article and nice advice. It’s interesting to see the comments, because you realize how many Americans buy very expensive vehicles.
To make the point of this article even clearer, I would add that buyers should only purchase vehicles in cash. Think that new A4 isn’t that much? Pay the entire amount upfront then. No one, I believe, generally does this, but it drives home the point that, unlike a home, a car is not an investment and doesn’t make sense to finance.
One other point: I would also caution people against buying premium vehicles with high mileage. I bought a 2001 BMW a while ago with 100K miles for only $8000. I’ve put 60K miles on it, but it’s cost me $5000 in just parts. I do the work on it, so I can’t imagine what someone would fork over to a mechanic. If you buy used (cheaply), then buy a Honda, Toyota, Ford Focus, Subaru.
The comments are interesting indeed. Funny how some folks get so riled up. This rule is my suggestion. Folks can do whatever they want with their money. Just don’t complain to me or the government for money if they don’t have enough or don’t want to work for 40 years after college in a job they dislike.
Wow, what a load of crap. The bottom line is not how much you spend on your vehicle at the onset although you shouldn’t go crazy on something you know you can’t afford. I bought a truck 10 years ago, it cost me, $18,000 back then. According to this “blog” I shouldn’t have afforded that. However, I managed to pay it off in 3.5 years because I paid ahead on the principle and got a very low interest loan. After the initial 3.5yrs, (I don’t drive much), I have been averaging 6,000miles/yr. I have not had a payment in many years and other then gas/oil changes and minor regular stuff I don’t spend more than $300 to $500/yr on my vehicle. THe point is DON’T feel like you need a new car every year and take care of what you got. If you take care of your vehicle and buy to own instead of lease, there is no reason why you can’t buy whatever you want within reason. That is how you keep your costs down and have a good vehicle you can completely trust. According to this guy unless I’m a 1%’er I should resign myself to only driving the broken down leftovers of the common folk, or take the bus. I’m not rich but I’m also not a puppet, nor do I consider myself poor.
What’s wrong with taking the bus? You think taking a bus is beneath you or something? I proudly take public transportation as to many other people.
I would also be all for taking the bus, but that is not always possible in all places in the U.S., I mean just to get to school/work, I would need to spend 1.5 hours or longer on what is otherwise a 10 minute drive. Public transportation is a joke in the U.S., in any other country I am happy to comply with your rule.
I wish I could follow your rule, but unfortunately car buying is way more complex than what you make it sound like… especially if you don’t have a trusted mechanic or know more than the average person about cars. So far I got an $800 dollar 98 Honda Civic that lasted for 3 years, run me from Florida to California and back and from Florida to New York and back. And then it nearly died. It was a headache and we prayed everyday that it would start, that car gave me some good memories, but ultimately made me realize I wanted a reliable car.
However, when you only have one car and *nobody* to give you a ride and that car dies on you, you have to act fast. Even as I did tons of research, and thought I could end up with a $10K Ford Fiesta, I ended up with a $19K Ford Focus on financing. It is not as easy as it looks to go into a dealership and negotiate… dealers will rip you off by telling you lies, like, the financing is only available for that vehicle. Of course I didn’t believe him, but after being rejected three times for a loan on my own (to try and buy a car independently) I had no negotiation power left.
I will give myself a break because I own my apartment outright, so no expenses there, and am halfway through the loan already. It is not so easy to stick to your rule, though, because of the variable of being ripped off. First you have the shady salesman in the dealerships, then you have the banks that will loan you any sort of money with high interest rates, and then you have the old beat-up cars that might break on you any second.
Yeah, in an ideal world we would all go by the 10% rule, which we should all aim to achieve maybe in our 30s or 40s, but then again our 20s are still an age at which nobody will take you seriously, insurance companies will take advantage of you (by charging you 3x what they charge older people), and you will make financial mistakes because this is your first time buying a car.
I would say, instead of providing you hard fast rule, you should include all the tips on how to actually achieve your rule. I did try getting a loan on my own before entering a dealership, I did research used cars, and I did go around looking in Craigslist, I did know exactly what I wanted and still ended up with a more expensive car because it was my first time buying and financing. So tell me, what is your ideal path for anyone to achieve this rule? Go on craigslist and take months shopping around, and save cash for maybe longer than a year for a car? Then have to shell out the $1K when the car breaks down and you have no choice but to get towed to a mechanic? It’s funny how I had the 5k on hand and still found no better options.
Okay, here’s me:
33 years old
salary 140K
no debt
200K in retirement
110K in savings
am currently on my 12th year driving 2002 Toyota Corrolla– guessing it’s worth around $2k at this point– will give it to my parents when I buy new car, won’t be trading in
Does the 1/10 rule apply even when there are savings/my situation?
I am trying to decide between a (loaded) Subaru Impreza at 25K (all in, after taxes etc) and a Lexus CT200h (hybrid) for 33K. Do you think it’s kosher logic that the higher cost of the Lexus is offset by the gas savings on a hybrid? I am guessing I will drive my next car for another 12 years and ovr time will save 5K+ in gas. Do you think, given my circumstances, it’s irresponsible to go for the Lexus?
Sounds like you are doing great. You paying with cash or loan or lease? If you can pay with cash and feel it is a little too painful then you are probably spending too much.
Not sure if hybrids are worth the premium. A 2013 Nissan Sentra gets 39 mpg and costs $19,000 new.
You make $140k per year, and can’t correctly spell the name of your own car?! I need to sell stock in your company.
What would you recommend (cash vs. loan or lease?). I can pay with cash as you can see above, but not sure what the costs/benefits are of both.
Cash. It is cheaper in the long run and will HURT more in the short run to help control your spending.
I must suck… I just spent over 30% of my gross buying a used Lincoln.
It’s OK. Just run it into the ground and stick with the 1/10th rule for your next car.
That moment when I make a bit over 20G per year but my car cost me over 10 grand, why? Because i SAVED for it, i didn’t finance it.. I pay less then $3,500 a year on insurance/gas/repairs (its a celica, lawl), I saved for a little over a year, just being cheap with my other expenses (my old car ate my paychecks in repairs as it was a domestic). Best decision of my life was to save my money instead of financing it, because i am sure I would of regretted it in the future.
I violated this rule pretty bad. I make around 44k, and I bought a 370z that came out to 36k after taxes. I took out a 4 year loan to pay it off quicker, so the payments are pretty high. I was 25 at the time, and figured I would buy a nice car, pay it off, and then proceed to purchase my first house. I don’t see anything wrong with this, as I don’t plan on getting rid of the car once its payed off. Hell, I still have my 95 Civic that I purchased after graduating high school in 2004. Between the two of those, I really have no need to purchase a new car for a very long, long time.
Hope you enjoy your babies. So long as you are having fun and are happy with your financial situation, that’s all that matters!
I have a question? Is the 10% the purchase price or the payment? For instance if you finance a car and the car payment is 10% of my monthly salary. I was thinking of purchasing a car and the payment would be 15% of my salary (my rent is the same amount). Is this insane?
It’s based on purchase price of a car. I’m not a fan of taking a loan to buy a depreciating asset.
Although 10% of income as payment sounds OK. How much do you save of your after tax income a year?
Currently I’m saving 10% of my salary. Plus any bonuses I get (though if I bought a car I would probably use any bonuses to pay off the car). Mind you this is my current budget, any raises I get would just go into savings. To be honest I never bought a car before because I lived in the city, but now that I’m moving to the suburbs I kind of need one (though the amount I’m saving in rent is equal to the car payment).
I have this one particular friend he drives a 30k vehicle and makes about 20-25k a year. I also know people that make NOTHING or next to it (and are on welfare and food stamps) and drive around super nice vehicles. I guess they know what they are doing, huh?
Makes you wonder how they can afford them vehicles. Good thing we’ve got big government to take care of us when we run out of money!
Little Problem with one of the things in your article:
“Your $20,000 invested in 2009 would now be worth $40,000.”
On what Planet? Where can I invest $20,000 and have it go to $40,000 in 4 years? I am currently sitting on over $400,000 getting crap for interest.
Planet Earth. The S&P 500 is up well over 100% in the past four years.
This article might help you.
https://www.financialsamurai.com/2013/02/11/recommended-net-worth-allocation-mix-by-age-and-work-experience/
Interesting article. But honestly ludicrous. A 25,000 USD car is not an “absolute luxury” that could only be afforded by someone making 250,000 USD a year. You are just extremely stingy and are highly content with a minimalistic lifestyle. Anyone can claim to be a financial guru if their advice is “dont spend any of your money on anything, no matter how much you are making”. (Obviously hyperbole by the way). Theres a difference between being an irresponsible consumerist idiot and living a comfortable lifestyle within your means. You are missing the mark in my opinion. 20-25% is a much more realistic price point.
Sean, whatever floats your boat. It’s your money and your financial future. This is my guideline. I decided to work hard to make enough to buy a $75,000 car, and when I did, it felt like a waste of money.
Some people do have good luck investing, but most people, like myself, don’t. It is highly unlikely that people investing $20,000 will see their money grow to $40,000 in 4 years.
True. But I think the MAIN thing is that people simply don’t invest, and spend their money on things they don’t need.
You don’t have to be lucky to make a 100+ return in 4 years in the stock markets, b/c the stock market rebounded 138% from its lows.
One of my 401(k) retirement accounts (with a former employer) is a great illustration of just how the market has rebounded, and then some, since the crash. My account balance was about $22k before the market crash. During the economic meltdown, my company went bankrupt due to an over-leveraged buy-out. Our plant was idled and the company stopped contributing to 401(k) — as did I, since I was trying to put as much cash into the bank as possible in preparation for the layoff I saw coming. It came. I landed safely in a position with another company, but watched my 401(k) balance with my old company shrink from $22k to around $14k in March 2009. I moved my investments around within that plan, trying to get the best mix for growth on what I hoped would be a great rebound. Today, that account has a value of about $33k. I have not (and could not have) contributed anything to that account since it was valued at $22k (and then later at $14k). Pretty amazing recovery, if you ask me.
Great example! Full recovery + 50% more than the peak!
I found this article quite interesting. I am a huge gearhead and an avid member of many car forums. It always intrigues me how much people spend on their cars. About 7 years ago I began a thread with a similar ‘percentage of car’ vs ‘gross annual income’. I understand in reality you can take this figure and work backwards to discover someone’s income; which was not the purpose of my exercise. I simply wanted to understand how much the average enthusiast was willing to spend on a vehicle in ratio to salary. To my surprise I received tons of ‘incorrect’ response. Most people were stating 20-25%, however the majority of responses were a percentage of their paycheck (2x a month) allocated to a car payment relative to total gross paycheck! Now you have to understand I gave a straightforward example (10k car / 50k year = 20%). Only a select few understood the exercise and their response varied from 20-90%. I was quite shocked but not surprised how most people view the affordability of a car relative to payments, not the full value of the vehicle. Often when we would have car meets it would always intrigue me how a doctor could own the same car as a discount tire tech. However, post analysis I believe the formula needs a base + percentage in order to be accurate. I mean if we say people who make 20k/yr spend 25% of their budget on food; 5k, I doubt people who make 200k/yr spend 50k on food. I know it’s not apples to apples but it’s always interesting how our spending habits operate. I’m more shocked by the guy at McDonalds wearing $150 shoes, using his $300 iPhone, with what I assume is almost a $100 monthly plan. BTW I drive a 1991 clear title/low miles NSX, which you can pat me on the back; I fell below the 10%.
Patting you on the back Al! Well done. The 1/10th Car Rule stands out b/c a car is usually a big ticket item. But as you say, $150 shoes and $300 iPhone while working at McDonald’s is interesting too. And there can be rules for that too. I just focused on a Car b/c a car can really mess up your finances quicker due to loans, depreciation, opportunity cost.
you are on to something and I have given the same advise to people, however, I am of the opinion you shouldn’t apply the 1/10th rule across all income levels. Secondly, you should take your age, your net worth and your liabilities in consideration.
30 year old professional, 100k income with a net worth of less than 100k and bunch of student loans, your rule sounds about right.
40 year old, 150k income, net worth of $500k, $ 250k mortgage, slightly different story.
35 year old, 250k income, net worth of $1,0m, $100k mortgage, why shouldn’t he be driving an M3?
Because a new M3 costs $75,000. He can certainly buy an old M3 for $25,000. What’s wrong with that?
You’ll like my new rule for people who can actually afford to buy nice cars:
https://www.financialsamurai.com/2013/10/25/net-worth-rule-for-car-buying-guideline/
This is BS all the way, yeah is well known cars depreciate quickly and is not in any way a good investment, but is definitely one of those little things that make you happy, to drive on a proper vehicle and not a peace of crap, that actually makes me sad, humans must surround themselves with beautiful things is one of the ways to make life bearable, if you pay all your bills and at the end of the month you still have a few thousands laying around why the fuck not, proper investments have proved to be really bad investments over the last few years, so fuck it, if you can afford it get a nice car and live a little. I think the rule should go like this: from 20K to 40K a year 10% sounds about right, from 40K to 65K 20%-30%, 65K to 100K 30 % to 40 % and if you make more than that, then get what ever the fuck you want, at the end if life changes you can always go back to be miserable and ride on a 2K car, or even worst, public transit.
Why not just make more to afford a nicer car?
Make 200,000 and drive a Honda Accord…… are u fucking serious this is a retarded list you have made. i’m not making anywhere near 500,000 but M3 all day. it’s something you use everyday and i want to enjoy it
Hope your M3 is pre 2003, because if you drive a new M3 worth $70,000 and don’t even make even close to $500,000 a year, then you’ve got your financial priorities out of whack. What is your age and net worth?
You can see how you are doing here: https://www.financialsamurai.com/2012/05/14/the-average-net-worth-for-the-above-average-person/
Your 1/10 rule continues to be my rock, Sam. I REALLY want the new Ford Fiesta ST that’s coming out later this summer, but at $22k and change it’s about double what I should be driving under the 1/10 rule. I know I’m better off driving my current ride (KBB: $11k trade-in). Strong like bull!
Nice Winston! So the follow up question is: What are you going to do with all that money you don’t spend buying a $22k car?
A combination of general savings, maintenance of my current vehicle (timing belt service due this fall, plus tires will be needed soon), and additional savings for the master bathroom remodeling that our house needs (still original 1988 decor, with everything that entails). Exciting stuff! ;)
Sam, I think this is the first article on your site, where i completely disagree with you.
The way to determine “cost of ownership” is not how much you spend to buy a car, but what are you expected to spend over the years of owning it. It may in fact be cheaper to buy a 1 year old BMW vs. a 5 year old Ford.
In addition there is value for people to drive a car they really enjoy, vs a POS. I travel 4 days a week, and usually HATE my rental cars, while I enjoy just going for a drive on my BMW.
We bring in about 400k/year + bonuses, and only have one car now, that we paid 45k for. I think it’s exceptionally conservative. I would be very comfortable with 2 cars in the same price range.
In genera my rule of thumb has been Car @ 25-30% of annual salary (not counting bonuses). House @3-4x annual salary.
Now, for some people car is just to get from A to B, in this case maybe 10% is ok, as long as it gets you something that can RELIABLY get you there.
I think it’s great you are following my 1/10th rule for car buying with a 45k car. If you want to buy two 45k cars for 90k, then my simple formula encourages you and other to shoot for a $900k income. This way, it keeps people motivated and financially prudent. This is what I did when I wanted to buy a $75k car, which ending up being a waste of money. But at least I made a lot more money.
This isn’t a do or die rule. It’s a guide for folks who want to build lots of wealth.
I spent 23% on my last car purchase, but I drive them until they become more expensive to fix, than paying for another one. Example is my 1999 vehicle that only has 60k miles on it. I plan on getting another 10 years out of it. The only reason I got my most recent car, is because someone hit and totalled my 1996 vehicle.
you sir or madam are an idiot. 250000 a year you can buy a toyota? hahahah I make 80k and drive a 40k tundra and easily afford it. and my wife doesnt work and takes care of our 2 year old daughter..oh yea and I pay for her 30k camry, groceries , bills, 1000 a month rent, 2 iphones, life insurance, car insurance, and 3 trips a year. hmmmm you may wanna rethink your numbers.
You spent $70,000 on cars only making $80,000? Wow. Why not aim to make $700,000 instead? At least you can work for a very long time to keep paying taxes to help support our country. So keep it up! Cheers
$70k in cars on an $80k salary? Seems like you’re the idiot. Unless your retirement accounts are fully funded (i.e. you could retire tomorrow if you wanted), those cars are making you poor. And you’re renting? Jeez. As long as you’re throwing away money, I’ll take some.
My question for the author is: What do you do with your money? I agree that smart finance basics include planning for a profitable future, but what is the point of a multimillion dollar bank account if you aren’t doing anything with it? Saving to buy that sports car when you are 70 years old and can barely see to drive it? Finally traveling to Peru once you have retired, but now you can’t hike to Machu Picchu like you always dreamed?
Now I understand that your advice on the examples I listed above may be different than what you would advise for buying a vehicle, but a vacation is technically worth $0 as soon as it is over. Surely you would not tell someone never to travel. My concern is that your rule doesn’t leave room for anyone to enjoy what they have actually earned and may encourage a hopeless pursuit and postpone any gratification until its too late. Happiness comes in many forms (as you have said above), but contrary to popular sentiment, it is not always free… Traveling to be with family, taking time off with your wife on vacation, or enjoying a convertible drive by the coast after a stressful day at your average wage job…
I agree, be reasonable and plan for a prosperous future, but live a life, don’t guard a vault.
Hi Devin,
To answer your questions about what I do with my money:
* I take 6 weeks off a year and have done so for the past five years. Two of the weeks are spent traveling internationally. In 2012 I went to Amsterdam, St. Petersburg, Copenhagen, Helsinki, and Brugge. In 2013 I plan to go to Madrid and Mallorca.
* A vacation is an appreciating expenditure in my mind. Experiences last a lifetime and gain value with age. In fact, I found out a way to never feel homesick on vacation. Check it out.
* I went through the sports car phase in my 20s. Loved my black on black M3 with BBS rims. But now I’m happy with my old truck.
* Retired before age 35 because my money is working for me. I’ve gotta admit not having to work is an incredible feeling.
* Not worrying about money much at all. Here’s what financial freedom feels like.
How about yourself? What are you doing with your money? Not sure why you think following the 1/10th rule for car buying prohibits one from living a happy life. Are you really that into cars? I encourage you to just make more money if you want a fancier car and enjoy life to the fullest.
Sam
While fond memories of vacations last a lifetime, so do the memories of driving a hot car. Experiences and Things are not mutually exclusive. A very significant portion of my best memories (maybe a majority of them?) are related to the thrill of acquiring things that do not appreciate in value, and using/enjoying those things.
Hmm this is very good article, I’ve been wondering about this for awhile. My goal is to make seven figures a year in the future. I’m still in college, but I day trade pretty successfully, and at the rate I’m going I should hit my goal rather sooner than later. A lot of my friends overspend so much on cars. I still like taking my bike and the train! But I do want to get a high end exotic some day. I see you are recommending holding off on exotics until 1mil+. I day trade, and any extra money gets put in big investment vehicles. I should have no debt coming out of college, so hopefully I can get in that top bracket soon! You should make an article about houses and salaries. I can never find a good one. In the area I want to live in, I see a lot of 2.5-10mil houses. But I scratch my head and say how much are these people making in a year? I would love to hear your insight on this.
Basically it’s the 30/30/3 rule for income and houses. You can read this article here. https://www.financialsamurai.com/2013/06/05/financial-benchmarks-investors-should-consider-to-gauge-performance/
Also, there is more money out there than you know. You’re on your way to earning a millionaire a year in college, now imagine all of us 10 yeara out of college and how much we’re worth?
First I want to say how impressed I am that you’ve taken so much time to reply to comments, and I’m assuming it’s been mentioned before, but reading it I just felt you were making it out to be a mandatory rule that people NEED to follow everywhere. In reality there are so many factors when it comes to buying anything and cars are no exception. I live in a low income rural area. My area has 18% unemployment, and to have a job at all is impressive. I myself make a whopping $10 an hour working a tech support job, and I’m also in the army reserves (an extra $200-$400 a month) That’s with a college degree mind you (which only has a few thousand still needing to be paid off). Around here it’s extremely hard to find a decent car that won’t break down before you drive it down the street for less than 10,000. A decent 1 bed room apartment however can go for as little as 350 a month. It’s all about priorities and availability. You NEED a car here. We don’t have public transport. So it tends to be one of the nicest things people have, and that’s acceptable. As long as everyone can still afford their child support (haha). I personally am looking to buy a new car, as I’ve been putting about 1,000 into my 98 honda civic every 3 months just to keep it running. I’m also looking in the 10,000-13,000 price range, because it’s important to me, and I plan to have it for at least 5 years. That’s 50% of my gross income at the moment, but it’s far more logical then fixing up my old car over and over. I understand a car is only worth 10% of a persons priorities to you, but that isn’t the case for all of us. What are your thoughts on low-income areas, where public transport isn’t an option? (trust me, if I could rollerblade to work every day. I WOULD.)
I should note that I have savings, between my bitcoins (that I’ve had for years), and a bank account I won’t touch unless it’s an emergency (say I need to buy a body bag, because I kill somebody, and my budget is at it’s limit for the month) I manage well.
Hi Paul,
I’m surprised a Honda Civic 1998 costs $1,000 every three months to maintain. I’ve had one and I can’t think of that much to fix and I know my cars.
To give you some perspective, my car is worth about $3,500 and I’ve had it for 8 years. I put in around $500 a year to maintain or maybe less. It is a British car and parts are expensive.
If you think a 10-15k car is worth it to you while making minimum wage then go for it. No need to justify. Just take $10,000 / $10 to see how many gross hours you need to work to afford it.
Best,
Sam
Are you kidding? I never heard such nonsense. This 10% business is outrageous… and probably intended to create responses.
Edgar
The intention is to snap consumers who want help out of their mindless zombie spending habits and become financially independent. You’ve come here to my site seeking some advice, and not the other way around.
Actually, I did not come across your site looking for financial advice. My web surf for new car comparisons is what brought me to your site quite by accident. And then of course when I saw “THE 1/10TH RULE EVERYONE SHOULD FOLLOW BEFORE BUYING A CAR”… curiosity just took over.
Edgar
Good stuff. Funny how search engines work eh? Hope you found the car you want to buy with some helpful financial advice.
I like your advice, and I read this article before purchasing my new-to-me car. I ended purchasing outside my means, according to you, it wasn’t extreme. I bought an $7,500 car, around 22% of my income, and it was financed.
I understand your logic and considered it in my buying process. But, a big reason I chose to overspend was related to safety. I will soon be responsible for the life of my forthcoming daughter. The car I decided to buy had several airbags and has an excellent safety rating. The most dangerous place to be is in a moving vehicle. I will gladly overspend to reduce my risk of injury related to being in an automobile.
Insurance is a vital component to financial health. Modern safety features on cars are a vital component of any comprehensive insurance package. Because if you aren’t able to earn because of your injury or death (sorry to be a downer), your financial health moot.
If it was just me, I would have probably bought another beater. I’m not in any way in danger of being bankrupt, but even if it means being bankrupt, I will always reach my limits in doing what I can to keep my baby girl safe.
Safety is a big concern and 22% of your income isn’t that big a deal. My 1/10 rule is a guideline that folks can one day take to heart as they improve their finances.
More drivel.
1) Maintenance costs: A decade old (or older) car is bound to have significantly higher maintenance costs. Not only will the normal wear and tear continue (brakes, tires, oil changes, et al), but longer life components will need replacing. Suspension bushings, motor mounts, and similar parts may be low in parts cost, but they’re very high in labor to install. Additionally, parts like air conditioner condensers and evaporators, oil coolers, radiators, and the like are exponentially more likely to need a replacement once the vehicle is past the ten year, 100,000 mile mark (which, according to you, 97.8% of the population of this country should be buying). We won’t even touch on the eventual engine and transmission rebuild and/or replacement.
2) Opportunity cost. How much are you losing having to dip into your emergency fund to repair your old clunker when you could be investing that money? What about time away from work – wasted vacation or sick days dealing with a broken down car? The cost of towing?
3) Stress. When you pay less than 1/10th your income for a car, you will become more stressed. Constant worries about whether your clunker will start each morning to get you to work, depression that your college graduate job earned you a high schooler’s car (how’s THAT for reward on investment?), and frustration with your not-cold air conditioner, flaky stereo, and window that doesn’t quite roll up all the way will drive your stress levels sky-high. Stress kills folks.
4) Makes you want more. The frustration you feel when your assigned intern arrives to work in a nicer car than you (and not coated in sweat because her A/C works!) will make you want more stuff. You’ll need to make up for people seeing you in such a cheap car by showing off that you have OTHER nice things. You don’t have a car payment after all, why not spend on a rolex! Having crappy things makes you want to have nice things to compensate!
5) Makes you feel stupid. Deep down, you know that you’re going to spend more money on that clunker you bought than if you had just made the responsible choice and chose an inexpensive car in warranty from a reliable brand. Each time you spend all your spare cash paying for that third repair on the same problem, you are reminded how foolish you are. Why do you want to be constantly reminded that you’re dumb?
See? I can do it too. You’re clearly heavily ignorant of the subject matter. You understand nothing about repair and maintenance costs, have no concept of how a car works or what is likely (or not) to break, and have a nearly absurdly warped view of the cost of a car. This is at best irresponsible writing, and at worst, an advertisement misrepresenting itself as
Now, now, just because you feel stupid, were stressed, and had a lot of desire that made you pay more for a car than you can afford doesn’t mean you’ve got to justify your purchase. All is good! Enjoy your car. Just make sure you’re not still renting and paying a lot for a car. Then you’ll be really working forever.
Ah, so what you’re actually saying is “I can’t rebut a thing about your argument, so I’m going to commit to an ad hominem attack and attempt to destroy your credibility to make your argument look weak.”
Right? Because I don’t see a single response that actually addresses the fact that I debunked your entire argument.
Not sure how old you are, but the one thing I do know is that cars built this century are way more reliable than those in the 80s and 90s. How could they not be with 20-30 more years of advancements.
Nice how you disabled the reply on your response. My age has nothing to do with anything – all you need to know is that I’m a working adult. Yes, cars built more recently are more reliable. Conversely, however, they are significantly more expensive to repair when they break. All that technology that helps you stop faster, turn better, and get better mileage also equates to complexity, which equals expense.
Electronic fuel injection is vastly more precise, allowing us both better mileage and better performance out of modern engines. It is necessarily more complex – high pressure fuel pumps, injectors, fuel rate meters, fuel rails and much, much more – than a carburetor and some rubber fuel lines. That means it is both more likely to break and that breakage will be more expensive to fix.
Again, I repeat what I said – this article is irresponsible at best and a scam at worst. You know nothing of the subject matter on which you’re attempting to provide advice. You base your ‘article’ on vague generalities and assumptions. You don’t discuss potential repercussions, advantages or disadvantages, or alternatives. You just make an unsound judgement of character based on a single financial decision viewed through the warped lens of your ignorance.
This article is irresponsible because it encourages people to spend below their means to build a stronger financial foundation?
Given you didn’t answer my question, you must be young and either in debt or struggling with these type of responses you have. The best way to get out of your funk is to recognize the hole you are in, stop digging, and really start saving money. No amount of anger towards others is going to help you make better decisions.
I share in this post and others how I wasted money buying a $78,000 G500 Benzo at 25. But I but the bullet, bought property, saved more, invested and made my target financial nut by 28.
https://www.financialsamurai.com/2013/08/12/the-first-million-might-be-the-easiest-how-to-become-a-millionaire-by-30/
You’re free to spend lots of money on your cars. I don’t care. Just don’t complain in the future if you have less money than desired. Only you can decide what’s best.
PS The comment system is the way it is. You are free to start new comments and attack me all you want.
I don’t know Alex, but as a young, educated, financially independent person whose income puts me somewhere between “I’m walking” and “I’ll never buy new because of the ceiling salary of my position,” he has some points.
I own a sports car. It has expensive parts, relative to cars costing the same as it does. I love driving it. It’s a ton of fun. According to the math in your article, it seems like I probably deserve that fun just about never, unless I first become a successful investor to boost my income, or change positions to something I loathe that offers more cash. Maybe I should rent it instead? I can tell you one thing for certain, I’m not going to sit back on my wooden stool in my empty house thinking smugly that I may not be enjoying a nice drive, but at least my bank account has eight zeroes. That’s just silly. Furthermore, a lot of people who actually are in financial trouble would be likely to see your rule as draconian and un-followable. Cultivating that reaction may make the headline more sound byte-worthy, but it isn’t going to really help anyone who the article is supposed to help.
Regarding what auto to purchase, old cars aren’t maintenance proof, and like Alex said, they get more expensive as time goes on. The trick is not to get some cheap pos, but to get a car where most of the depreciation has settled in, but still has lower mileage and age. Furthermore, ease of maintenance and model reliability factor into the purchase as well, as he suggested.
There’s more to life and opportunity costs than just saving money, especially if you enjoy things other than saving money. I have no argument that making financially responsible life decisions is a good idea. Having a good emergency fund, investing spare cash with the amount of risk that you’re comfortable with, choosing a dwelling that will offer return value over time, all these are good things. But it is frankly ridiculous to suggest that someone “punish themselves” for not being fully financially efficient, especially if it is a conscious decision made in moderation as a trade for things that person individually values. I’m not going to go build a special scourge closet for my bloody scourge, to paraphrase a favorite parody.
Life’s good, I feel good, I’m not stressed because I’m enjoying driving like a 4 year old enjoys sugar. If I were to venture a guess, I’d say Alex probably feels the same.
It really is whatever you want out of life. That’s the beauty of free will. I do believe everything is rational in the end and people will spend money on what gives them the most pleasure.
The only time things break down is let’s say someone spends lots of money while working on things like a car, and then asks to get bailed out when they are older. That’s a no-no, but it seems to happen quite a lot.
If you’re not stressed out, all is good. Spend as you will and enjoy!
You may like this article: https://www.financialsamurai.com/wealth-gap-widens-because-of-your-own-doing/
I don’t know, it seems like the arguments boil down to two:
1. Older/cheaper cars have more repair costs (points 1 and 2).
2. You/people can’t control their emotions and/or have hangups about driving a lower cost/status ”inferior” car (points 3 to 5).
Regarding #1: These days, in terms of function, even the cheap Ford Focuses are really great. So if you buy a 2-3 year used vehicle of this type, you’re paying <$10k, and repairs/maintenance should not be an issue.
Not going to address #2. Not a real issue.
To be fair, I do think doing 1/10 is a stretch goal. I think 1/5 is more reasonable. If the plan is to own the car for 10-15 years, the extra 10% every 10-15 years should not be a big deal.
Repair costs have come down with increased reliability. On the other hand, there are lots of complicated electronics which might go out nowadays.
Cars maybe post 2000 have become very reliable compared to cars in the 80s. There are plenty of cases of 200,000+ mileage cars nowadays.
I save about 5% a year for 4 years to buy a new car every few years for the same reason of stress regarding my car and opportunity cost. My family and I want no problems with the car. Time is money and having a reliable, safe car is worth more than 10% for one year, rather save 5% of my money every year for that new/newer car you need.
I know I do WANT more, but I don’t NEED more. Just because I would want a Lexus SUV doesn’t mean I need it and will ever purchase it. This is my “I won 10million dollars” car.
Every time something goes out on my wife’s old Mitsubishi, we complain about the cost. But I point out that spending $300 or $400 a year is only a car payment or two, not including the higher insurance expense. That puts it into perspective. We are looking for something new, however, since it is an 11 year old car. I’ve averaged about 8 years on my cars. The first one, I overspent, but had to commute an hour and a half to my first out of college job and needed something reliable. The $500 clunker kept breaking down and it was either plunge in new (I didn’t have any cash to speak of to buy used, and no credit), or lose my job. I kept it for 8 years until a red light runner totaled it. After that, I rode my motorcycle for eight months (bought a few years before used for $1200) until the Oregon rainy season started. I then bought a used truck. Probably overpaid for it since I wasn’t savvy on car buying, but I kept it for 9 years until I needed a more family oriented vehicle. Coincidentally, my mother needed a 4×4 as hers was going out. I gave it to her and bought something new, a little over 25% of my gross, but I benefited from significant raises the next few years so that made it ok. I also bought a home the same year. My company was bought out so I cashed out some of the profit I made in stock and paid it off at half the loan term (I have good credit and had a low rate, but I figured I had saved around $1200 in interest). I am aggressive saver anyway (max out the 401(k), 10% of my net into company stock, no debt except for the mortgage). Since I am responsible for myself, wife (who makes less than half I do), two kids, my mother to a certain extent due to her foolish financial decisions, and also my wife’s family a little bit by proxy I think I am doing ok.
I feel sorry for anyone who buys a car worth only 1/10th their salary. Considering your average individual U.S. salary is a little under $43,000 we would be talking about a 4,300 dollar car.
Let me tell you what happens to $4300 dollar cars… they blow engines, transmissions, and rust out. No thanks, I’ve had my share of that.
Spend the extra cash and get something that’s going to last and be reliable. 20-25% of your gross pay financed for 60 months isn’t going to break your wallet. In fact, I would argue it will save you money in the long run in repairs. Most people need a vehicle, it’s the other stuff that they don’t need that puts them in debt
What’s wrong with earning more or taking public transportation?
I’ve had my 2000 Land Rover for 8.5 years and it works fine. It’s also worth less than $10,000 and much less than 1/10th my income.
I think your advice is a bit extreme but understand the underlying sentiment – as someone who is pretty firmly in the 1% I am proud to have never bought a new car and the most I ever spent was 9% of gross income for a used one. All that being said – No offense – but you lose all credibility about fiscal prudence when you say you own an off-warranty Land rover – regardless of what decade it was built. Land Rovers are truly horrible on reliability and cost to repair.
No offense taken. Do you say this because you have owned a Land Rover and it’s caused you a lot of problems? Or are you saying this due to pontification and hearsay?
I’ve owned my 2000 LR for 9 years and it has been 100% reliable w/ minimal maintenance costs. My credibility is based on owning the vehicle and sharing my experience. Yours?
Actually, Sam saying he owns a 2000 Land Rover proves his point that much greater that it’s foolish to spend so much money on a car, new or used.
If a well known unreliable car has treated him well, of which he bought second hand 8-9 years ago, then surely many other cars would perform even better in terms of reliability and in terms of draining the pocket book.
That’s exactly what I’m saying.
If I can drive a car for so long and still be fine with it, surely those with Honda Civics, Nissan Sentras, and other cars on the list should serve their owners well, too.
You have a good chance of buying a lemon if you spend less than $1500 or so, especially if the car you are buying was of questionable quality to begin with. $4,300 cars are generally fine if it was a reasonably good car to begin with. Even if you buy a car for $1500 and If you get a 10 year old Japanese import you are probably fine. A 10 year old Detroit product, maybe not so much. Something European, forget it. If you look at the resale values of Hondas and Toyotas they go down very slowly, so you might not be able to get even a 10 year old one for only $4,300, but that is because they last for a long time. I’ve usually owned cheap cars. I can’t see losing 10% of the value of a new car when I drive it off the lot. Forget that.
I’d much rather a 10-year old VW, BMW, Audi or Mercedes than any any 10-year old Detroit product.
Oh boy! I am a millionaire!!! i own a 2012 lexus LS!!! Even though i make $50,000 a year. No stress paying for it.
Cars around here with that 10% rule would be 15-20 year old rusted out and driven to the ground death traps with WELL OVER 190,000 miles plus miles. The “newer” ones with low miles are gas guzzlers with sky high repair cost. I checked with cars.com
That’s just sucks!
What’s wrong with public transportation or bicycle? Where do you live?
Public transportation? Unless you live in NYC, San Francisco, or Chicago, public transit is a joke. Also, bicycles don’t work with 20 miles commutes, do they?
First of all, why would you live anywhere other than NYC, SF, or Chicago? Second of all, why would you live 20 miles away from where you work? Why kill the earth and spend so much on a commute?
Sounds like you are suffering from entitlement Alex.
Rather elitist sounding statement IMO. Not everyone likes big cities. There is a lot more to America than just the cities. Many of the cities are also rather polluted in comparison to the rural areas. The rural areas are also often much cheaper in terms of cost-of-living. As for commute, one doesn’t always get to choose the distance from where they live to where they work, especially in this economy.
Try that crap while lugging groceries or the laundry and that’s not even in the dead of winter or downpours. And do get me started with the crazy drivers that run you off the road!
Trying walking to school 4 miles each way then come back to me and complain about lugging groceries onto a bus. Boo hoo on riding public transportation.
Been there done that! Have fun on your public transportation and keep on walking.
Folks, I’ve lived all over the USA and have been buying 10-20 year old cars for my whole life. My personal maximum price was $2,400 (1996 GEO Prizm LSI with 63k miles bought in 2010). I paid another $700 for new tires and a timing belt at that time and have paid almost nothing since. IT CAN BE DONE!
Most people here sound as though they’re trying to convince themselves. This will be my only post. Thank you and have a good one.
Love it Chris! Good attitude.
I have a hand-me-down geo prism and it’s a beast. Thanks for this article too. Shame. From reading these comments it seems that people’s concern of materialism colors their purchases and blinds them.
Enjoy the beast Eddy! Thanks for stopping by.
I agree that it can be done. I have been driving a 1985 BMW 325e for the last 1.5 years that I bought for only $900. Yes, I have had to invest extra money to replace a number of worn parts, but I have been able to do most of the work myself. Probably have about $2500 in the car, significantly less than 10% of my income.
That said, I am ready to step up to something that duct-taped seats, a cracked windshield, bent rear control arms, and other issues that aren’t worth fixing given the vehicle’s value. What are your thoughts on vintage cars? Obviously, you need a bit of mechanical know-how to maintain a car from the ’50-’70’s, but you can avoid the whole depreciating asset thing. If you look at Hagerty’s classic car values, they are absolutely flat for most models for the last decade.
I work in auto finance, but have actually never financed a car myself. I am actually thinking about financing a vintage car through one of those specialty lenders (JJ Best, Westlake, etc), because I can get a low rate with my credit, keep my cash in the bank, and negative equity shouldn’t be an issue given my down payment and the vehicle’s steady value. The lowest those lenders are willing to finance is just about 10% of my annual income. I’d pay about $1000 in interest over a 48-month term, which is worth it to me to have my cash in the bank.
Thoughts? Bad idea?
I think financing a depreciating asset is a bad idea.
I didn’t do this, and bought a $1600 motorcycle instead (as a backup for my $900 car, haha).
But my point was that many vintage/classic cars do not depreciate. In most cases, they appreciate over time. So you avoid the whole depreciating asset thing. For instance, one of my best friends drives a 1969 Ford Fairlane. Check out the values over time: https://www.hagerty.com/valuationtools/HVT/VehicleSearch/Report?vc=84953
In Condition 2, that vehicle is now worth $800 MORE than it was in December 2010 ($13,300 versus $14,100). Or maybe I’m trying to rationalize my love of old cars haha! :)
Wow! I have to say I was a little surprised to see how a simple post on fiscal responsibility could spawn such vitriol. Though after thinking about it a bit more, it does makes sense. You are poking at people’s sense of entitlement, and that can cause folks to squirm. When I was younger I also used the reliability and maintenance cost argument to justify my purchases, as if every car on the road was a 1976 Pinto, destined to drive for exactly 3 years and then explode.
Recently I’ve wised up and seen the light. Bought my current car at 11,000 miles and 1 year old saving me $6k off of new. In 2011 It was 30% of my income including taxes and fees, but now due to depreciation and increased income I’m down to 18%. I’ve debated selling it, but I’ll probably hang on to under 10% which I should hit in less than 1 year. You neglected to mention one of the best parts about owning inexpensive older cars; They depreciate so slowly, and cost so little in taxes and registration, that you can pretty much swap them out every 6 months if you have trouble with them or just want to try something different for almost no transaction cost. Try doing that with a new $40k car.
I’m amused as well. Entitlement is what is really ruining a lot of people’s finances and making them unhappy. If you are a C student, don’t think you deserve an A lifestyle.
I agree and disagree with the 1/10th rule. With your scale I should only put myself into a car range of a toyota corolla. The first car and only car I bought was a new 2002 Honda accord for about 21k OTD. Its now 11 years old and still going strong, could use a paint job since its all chipping from sun damage now. But mechanically I feel like I can still get another 5 to 8 years out of it, since the mileage is relatively low for 11 years(120k). I have also had zero problems with it, it also had came with a 7 year bumper to bumper warranty. This warranty came in handy when little things broke down, the engine check light went on for no reason etc. These things other wise would of cost me 100s or several 1000 to get fixed if it was not a new car under warranty. But the fact that I plan to keep this car till the wheels fall of which could be 15 years or more in total, I am getting a great deal in terms of the cost break down. Also had the peace of mind of the warranty, reliability and maintenance was no question a no issue since I was the first owner. I also had a beater car at this time, and 89 nissan maxima, but I did not have the confidence to take this car on long hauls because of all the random issues it would have. Maybe its a mental thing about buying a relatively new car, knowing that you will most likely not be stuck on the side of the road on a cross country road trip.
Now if I was one of those guys who likes to buy a new car every three years, then yes thats a bad idea because of the hit that I would take on depreciation. When I am done with this car, I will probably sell it to some one for a 1000 dollars or so. An again probably buy something new that is no more than 25k otd. Probably stick to something reliable that will last a decade or more (honda or toyota).
Wow, there really is a lot of opposition to the 1/10th rule on this site. I understand this response. As a teacher who is single and is debt-free except for my mortgage, I can tell you that if you have a desire to be a “financial hero” you will see that this rule is absolutely accurate. I have used Hyundai accent which is exactly what the writer suggested! I bought that car because it was what I could truly afford when I was attempting to pay off more than $60000 in various debts. One interesting thing I note when I talk to many friends (and some family) is that people mostly think of car buying in terms of the monthly payment instead of the total costs over the life of having the car. This necessitates a shift in mindset to think about the total costs (interest on financials, fees, maintenance, etc.) instead of the monthly payments. Part of the reason I’m debt-free now is that I decided that I wanted to be more in control of my future (I want to travel the world and know that my retirement is solid). That is yet another shift in mindset: Setting a purpose for your financial life and setting/reaching reasonal financial goals. Yes, I’ve had car woes. This summer, both my front and rear struts were on their last legs and I had to have them replaced along with brakes, pads, etc. It was tough but I worked an extra job for a couple of weeks and I used part of my very small emergency savings to pay it off. That response is not for everyone. I’m not any better than any other person. I just have a very clear goal and I plan to achieve it.
Where here is a will, there is a plan, and then there is a way.
Best of luck on your financial journey!
This should be required reading for all high school students. I bought a 98 corolla on craigslist last year for 6.5% of my yearly income. All I do is routine maintenance and it runs like a champ.
I will never finance a car. The thought of paying interest on a depreciating “asset” makes my stomach turn.
Help me spread the word by sharing the post with our future leaders! Thx.
I feel so stupid now. I thought I’d feel empowered…
Most people with your attitude are always going to feel stupid. It’s those who can accept the truth and change that get financially strong in the long run.
What is the 1/10th based on? Why not 1/5th or 1/15th?
Based on my intense mathematical calculations and pro forma analysis having gone through 10 cars myself.
Interesting article. To be honest, I don’t think I could abide by the 1/10th rule unless I was making a lot more than I am now (which is a good incentive)! But it did make me think about what kind of car I would buy next. I’ve never owned a new car and thought it might be nice to have. But what’s always bothered me is that it loses 20% of its value as soon as you drive it off the lot!
It does make me think about buying another used car, albeit a little newer than my past ones. Right now I’m driving a 2002 Saturn (back when they were good cars!) and its reliable and paid off. I’ll definitely be driving it until my financial situation changes and probably beyond that too.
Thanks for a thought-provoking post!
Jeff, if it bothers you, then that’s a good start! Getting bothered is your soul’s way of telling you something is off.
Wait, I’m confused. You’re a financial guru or a philosopher? :)
Whatever I can do to help people grow their wealth!
Bought a 1996 Toyota Corrolla 4 years ago for a few thousand dollars. I do all my own repairs. I bought the car from a neighbour who used it to drive to and from work only and kept it in good shape. The car runs great. The kicker is that we spent about 2% of our annual gross income for the car.
And this is why your finances are loving you!
what’s the point of living without a nice car? I’m not saying if you cannot afford it, but if you can its well worth the price! I bought a BMW 5 series and it makes me feel special every time I go in there. Best decision of my life. yes, it costs more to own and more to maintain, but everything comes at a price. and yes, women love it ( I have modified it and made it look really good). Money is important but there are plenty of other things way more important, like your family, your enjoyment of life, your standing with God, your roles & duties, community involvement, self-education, reading of literature, etc etc. Decisions cannot be made just on money alone. I am a physician and entrepreuner at 30 so I guess I have some discretionary income, but my ideas would still be the same regardless.
You’re right. There is no point living without a nice car.
I’m just saying if you want to buy a $60,000 X5 then make $600,000 or so. What’s wrong with that?
What a silly(dumb) rule. Buy a 4200$ car and you’ll be maintaining monthly and replacing it every couple of years. Quality of living is very important. Better rule is to finance a car with no more than 10% of your income per year.
Dissapointing post
What’s your net worth and how old are you? I’ve had a sub $4,200 car for the past five years and have only gone for regular maintenance.
I retired before 35 with a healthy passive income portfolio. The $50,000 I could have spent buying a car was invested in a company that became $200,000 8 years later. It’s up to you if you want to spend lots of money on a car. But it’s going to be very hard to amass a financial nut.
I encourage you to read the two posts linked above and broaden your mind. At the same time, America needs its citizens to work longer so that they can collect tax revenue from you to support the rest of us who are free.
I am 31 and also a “millionaire” in terms of net worth. Doesn’t take much. A good real estate investment which is also my home, regular savings into retirement plans etc. You’re quite proud of yourself I can see that. Rather than boasting about your accomplishments, which nobody really cares about, just be practical and look at the numbers.
I agree, if I had 50k lying around I would not by a car outright. That’s not what I stated above. Spreading that 50k over 4 or 5 years would likely not have affected your ability to invest in the company you referred to. At the same time, you can at least have the peace of mind that the car you and your family are driving around in will not break down on the road and provide the safety and comfort that is difficult to put a dollar value on.
Your advice is usually sound, save well and invest intelligently. However, this can be done without living like a pauper.
Also, If you are about to say that you’re still in a better position because you earn your money through passive income. I should let you know that I am a pharmacist, own my own independent pharmacy and wouldn’t trade my active income which I make from taking care of the health of my patients for all the passive income in the world.
That’s the key. You still have to work for a living whereas many of us do not. You’re still young, and probably haven’t worked much more than six years since pharmacy school takes 2-4 years after graduation, so I understand the enthusiasm. But trust me when I tell you that the enthusiasm starts to fade after a while. We want you to work for another 30 years so you can pay taxes and support our country. So we thank you. I think it’s great that you can give your customers medicine that their doctor’s prescribed to them. The instructions you give clients on when to take the medicine and how often is very valuable.
You don’t have to feel bad about the purchase price of a car by calling people stupid. Just try to make more money. I know a pharmacist’s salary can only afford you about $8-$14,000 in a car based on my 1/10th rule and you’ve probably spent double or triple that. But I encourage you to get motivated to earn more instead of calling people names.
Interesting post Sam, you’ve gotten a lot of people’s backs up! I’ve gotta say, I was a bit the same when I first read it, how can I buy a reliable car for 1/10th of my income?! Especially in Australia, where our cost of living is so much higher than it is in (most of) the US.
And then I stopped and thought about it – my current car is worth 1/20th of my income and still works like a charm. I, probably stupidly, got Homey brand new 11 years ago as a teenager with no money. Now that I can actually afford a new car, I can’t see the point of it. Homey’s stuck with me until he dies :P It’s not that we need to spend more than 1/10th of our incomes, it’s that we WANT to. Thanks for the eye opener :)
And there ya go! Homey loves you. Don’t let him go!
And btw, Aussies leave a world leading $501,000 in inheritance, so don’t sell yourself short!
Hi Sam, I guess I don’t understand…is this supposed to be a 1/10th of my income each year (as for financing a car, spending 2500 per year for 25000 salary)…or a 1/10th of my income for a year just once on a car (spending 2500 once on a car for a 25000 salary, effectively, if I were keeping the car for 5 years, 1/50th of my income)
Just once for the purchase price of a car. You can finance the car that’s 1/10th your income (suboptimal) or buy it out right. I would own a car for at least five years before trading out. Then once again use the 1/10th rule for your next car. Your NW should have a handsome increase by then.
Okay, I think you probably should have included this bit in the body of the article. I’ve had to go through a whole bunch of comments to find out the ongoing plan. So the suggestion that one would be financially quite well of if one put 1/10th of one’s income into a car every 5-years; and it looks like one gets the benefit of the sale of the old car to add to that 1/10th.
So, over time, if your salary was 1000 times your age; and you sold your old car for half what you paid; and you started car buying at 20; by the time you are 45 and earning $45K, you could get a car worth $8K; and you’d only have spent $19.5K on cars.
As an aside my neighbor just bought a new car for $50K (Toyota Sienna). I bought a condo in Tahoe for $37.5K. I wonder which will be more valuable in 5-years?
I have to start by saying that I’ve spent around the 1/10 mark for my last couple of vehicles. I have to qualify that I do agree with being conservative when buying vehicles. I just have to question the wisdom of calling 1/10 a “rule” and passing it as the best option for everyone.
First, your article does not take into account individual needs for work-related vehicle requirements of reliability or function. It does not account for rural areas of the country without public transportation where drivers can put on hundreds of miles a day. And while someone making 80-90k can certainly find a reliable car using your rule, have you looked at some of the options on the used market today for buyers making 30-40k? Used cars have taken a considerable jump in value with the economic downturn. More buyers and more demand = higher prices. I see you listed that you drive a 2000 with 118k that you’ve owned for seven years, so I’m guessing you may not have done any serious car shopping in the past two – three years.
Some people spend the most on their cars because it brings them the most happiness. Selling the 1/10th as a “rule” is just as bad as making a 1/XXth rule for vacations, electronics or hobbies. Many people don’t want to die with a huge nestegg of money with never have experienced great things in life because they were too worried about the balance of their bank account. If someone pulls money from an account that they were going to spend on a lavish trip and instead decides to buy a brand new car, they should not feel guilty they violated an arbitrary 1/10th “rule.”
So please share, if your rule says you can only spend 1/10th of your income on a car, then what should you spend your disposable income on? I think a lot of commenters are so upset because in your article and even in your responses you are positioning this “rule” as the only way. And if you’re not following it, then you’re making bad decisions. Not true.
This rule is definitely not the only way. The post is written as a guide for people wondering how much they should spend on a car while maintaining their financial health.
Nobody goes to jail if they violate this rule. I’m not sure why some people take this post so seriously. If people want to spend 100% of their income on a car, go for it. They just need to know that they’ll just have to work longer until financial freedom.
Check out The Net Worth Rule For Car Buying. It’s an updated version to be more flexible for those with lower incomes but higher assets.
Say a person with an income of 50k/year wants to buy a USED BMW for about, let’s say, 25k. Obviously they are not paying all 25k in that 1 year, right? Let’s say they pay the 25k over 3 years which comes out to about 8.3k/year. Let’s turn that 8.3k into 9k and year for 3 years.
Is it really that bad for a 50k/year to spend 9k/year on a car? You would still have 41k in gross income. Let’s say out of the 50k/year you only get to keep 75% (37.5k/year). You spend 9k on a car, so now you have 28.5k a year left for food, shelter, etc.
Is this a bad idea?
If you aren’t paying the $25k in one year, it’s probably unlikely that you can comfortably afford the car. $25k is around $33k in pretax dollars you have to earn out of a 55k pretax income. I honestly think that is pretty absurd.
Stick with buying a $5k car instead! Your older self in 10 years will thank you for it!
Hello Sam, In April this year I made the awful mistake of getting more car than I could ultimately afford. This led to me filing bankruptcy in September. I’m finally getting back on my feet trying to make wiser decisions and always go back to this publishing to seek perspective. I purchased a 2001 Dodge Dakota w/70k miles for $2,500 and haven’t had any problems. I’m having a hard time with perception. I foolishly drove a $65,000 car and cared too much about how I would be received by my peers and almost feel embarrassed to be driving a truck that isn’t as aesthetically pleasing to look at. I’ve realized the error of my ways and have pledged myself to becoming financially independent but still struggle with “perceived prestige.” Is there any advice you can offer that will help me cope?
Hi Joe,
Sorry to hear about the BK and way to go about buying a car you can afford! I assume the car was a part of other spending habits? Id just continue to spend within your means, shun credit card usage, and save your money. Takes 7 years to get that BK record off your credit report. Use this time to thoroughly change your spending habits.
Your true friends don’t care what car you drive!
Sam
I definitely agree/disagree with this guide like some others that have posted before me. But overall I do enjoy this article and now that I’m in the market for a vehicle, I like to re-read your suggestions. The 1/10th Rule may be aggressive, but I’m personally leaning more towards spending 20-35% of my income on a car.
I’ve been living in North Carolina for the past few years, I lived downtown Greensboro for about 18 months and it was great to be within walking distance of the nightlife, entertainment, etc. At that time I lived about 5 miles from work and 10 mi from school, and I was able to commute by bicycle rain/shine for nearly 5 days a week, rarely needing a car. And I’m a car nut and have been hotrodding since I was 11. But now I live in a rural community about 20 min from the next town, and commute 45-50 min each way to the city in which I work.
Thankfully I’ve landed a great job at a awesome company, post-Summer internship. Finally I have an income to DD something comfortable. I’ve been in the market for a vehicle for about a month now; holding out to try to get something on an end of the year sale. Prefer something certified or 1-owner. Looked at picking up something @ the 1/10th mark, but reliability is hard to find and I’m pretty sure the commute would kill most 10+yr old vehicles. Plus being 6’8″ thins my selection of vehicles too.
My reply has begun to turn into a bit of a ramble. Just wanted to say I enjoy your posts, and like the reality check this article provides. You’re right about the chain effect that rears its head if you were to spend out of budget on a vehicle, and before you know it you’ll want to live somewhere more expensive, etc.
Mathieu – If I was 6′ 8″, I’d buy the new Range Rover! They are sweet. Alas, I would need to make about $1.2 million a year and I’m not there yet. One day! YouTube videos of the car will have to do, and the occasional dealer stop over :)
I almost completely agree with this rule. I am 25 years old with a net worth right around $100,000. Buying more car then I could afford was the WORST financial decision I ever made. I bought a 2005 Mazda Rx8 when I was 19 years old with $425 a month payments. When you factored in insurance, gas, registration I was paying over $1000.00 a month for this car. My monthly income fluctuated between $2400 and $3000 a month at the time. So sure, I could afford the car on paper. But when it actually translated out to the real world, I was living paycheck to paycheck and racking up credit card debt.
This all facilitated because I was financially naive in all aspects on my life. So paying more then I could justify on a car was just one of other factors that led to my financial downturn at the time. I ended up filing bankruptcy at age 23 on $45,000 of debt. It completely sapped my motivation to work as hard as I needed, so I got by hustling making a couple thousand a month that way, and ignoring all my bills.
In my case, filing bankruptcy was one of the best thing to happen to my financial life. It inspired me to truly work my ass off, and here I am a few years later with my own business, and I’ve socked away 90% of my networth in less then 2 years.
Now I did buy a 2003 mazda 6 for $13,000 the day I turned 18. That wasn’t a terrible financial decision, but wasn’t a great one. Someone hit me and totaled the car, and I thought well, gee, maybe I should go all out because you only live once. Big mistake.
After the rx8 mishap, I bought a 1992 mazda miata with 59,000 miles for $2000 and sold it for $4000. Then I bought a 1993 Honda for $1500 and sold it for $1500. Bought a 1988 volvo 740 turbo for $1,200 and still own that car to this day. I’ve put in $4,000 into it in maintenance, but have gone from 162,xxx miles to 245,xxx miles on the clock. Since 16 I have owned over 30 vehicles, and had a heck of a lot of fun owning them. The cheap used ones I bought were the ones I always enjoyed the most. Not the one that made me in debt up to my eye balls.
I now own a 1984 corvette 68,xxx miles (paid $3,500), 1988 volvo (1,200), 1999 ford e250 ($1,700), 1993 audi s90 ($420), and a 1993 fleetwood pace arrow with 32,xxx miles ($3800). I have a variety of vehicles to choose from, some for recreation, some for work. But I never have to worry about a monthly payment, and I have more variety then if I financed cars.
All of my vehicles are in excellent shape, and if I were to sell them all at full market price I’d net around $20,000.
One thing that helps is knowing cars, knowing how to work on them( at least the basics) and having a good ear and feel for when a car is a good one or a lemon.
My 2 cents.
Thanks for sharing! Filing for bankruptcy must have really been a financial jolt and good for the long run.
I’m 24 with a net worth of just about $100K. I worked hard and paid my way through school. I never follow a rule someone else creates. Every situation is different. I walked to school and work for a while to buy a car. At 18, I financed a preowned car and loved it. Monthly payments were $238 on a $20K annual salary. At that we insurance was like $300. I didn’t go out and party a lot, I ate food from home and I did errands to cover the cost of the car.
Then at 21, I somehow fell in love with a brand new car, cashes in a buy the car. I had buyer’s remorse because I felt like I didn’t need it but wanted it. The remorse went away after 2 weeks. I keep getting myself into comfortable positions in life and setting my priorities. No student loans, no credit card debt. I’m very savvy and only spend lavishly on cars and travel. I’ve tons of investments that I comfortably sit on. I live at home and make heavy contributions to pull my weight. I already told my parents I’ll redo the home so I can have my own living quarters and we live comfortable as a family and save money. I love where I live and don’t want to leave the area.
After multiple promotions, my lifestyle stayed the same. I slowly leased a luxury car. Everyone here will of course disagree and follow a table but I’ve my own rule of thumbs. I own a luxury car, maintain it, insure it and still save 75% of my income. Sounds impossible. I’ve made simple sacrifices and have substitutions that saved me money. I got a new promotion and make 6 figures but only will get a new car when my lease is up.
Does the 6 figure job make me comfortable , no way, I act like I still make $20k.
I’d warn anyone against living the way I do because only I know how to manage what I have. I’d be scare sitting in the outside watching myself drive luxury cars one after the other.
I respect the rule but don’t think not adhering to the rule makes someone less responsible or living beyond their means.
“I already told my parents I’ll redo the home so I can have my own living quarters and we live comfortable as a family and save money.” – Do you live by yourself or with your parents?
Saving 75% of your income while renting/owning your own place is impressive if so!
As you or others get older, your interest may shift towards owning a house instead of a car. It’s one of the biggest hurdles to save up for the 20% of downpayment.
Related:
When To Forsake Stealth Wealth And Spend Up
Buy Real Estate As Young As You Possibly Can
I live in quarters with my parents. I’ve to pay them rent and bills around the house. I’m also living that way to pay my way through grad school for the next Two years.
I do agree that my interests already lean towards a house. I’ve a savings towards my first home in 2 years and recently purchased a property in my home country.
I don’t wake up and lease any car. It takes months to het the best deal. I nailed an Infiniti lease for $300 $0 down and make it clear to people that I’m not rich but scored a reasonable real on the car and afford it.
I still endorse the rule for those not in the best financial situation or are not great at saving money.
Found this through a new GRS link. Good idea for a rule of thumb, especially for aggressive financial independence as well as breaking the consumer/car driven society we live in. We spent $8,500 and $9,100 for our used cars so that $17,600 puts us just a little bit above this guideline. Of course, as with all great FI ideas it would completely screw up the system if everyone started trying to follow this advice immediately. The very cheapest reasonable new car is about $15k for a Corolla or similar, so you’d need to earn $150k, and therefore be in the top 2% of income earners. If only 2% of people could buy new cars and everyone else had to buy used the market correction might see some short-medium term problems. But I like it anyhow :) I’ll try to read more of your posts sometime soon.
Welcome to my site. I’ll probably post about once a month on GRS.
Don’t worry, not enough people will follow my rule to hurt the car market.
The reason this idea is great, is because it is not going to be applicable for the majority of people. And that is great, It is a sad but true fact that most people don’t have the ambition or the same financial drive in life to take these sorts of sacrifices. This is a rule for those that do have that financial ambition to get ahead.
Top that with the fact that in order for us to have a market of quality used vehicles, SOMEBODY has to buy said vehicle brand new. If no one bought new cars, then used cars would become a rare, and therefore expensive commodity. As my dad always said, let somebody else buy that car off the lot, and take the depreciation hit, and if you want that vehicle bad enough, buy it 5 years later when it has taken the majority of its depreciation hit.
There will always be people buying new vehicles. I just want to encourage my community to be smarter than that and stick with a 1/10th rule. They can still buy new, but it better be by the 1/10th rule.
@Joe
Screw perceived prestige. I suffered with it too, but it wore off quickly. I soon realized that (1) clean used vehicles are appealing. Think of all the movies where the character drives a clean, used vehicle. Also, think about the fact that you OWN said used vehicle, and are not making monthly payments on the fancy new car the guy next to you is driving, and that you may have considerable less debt to net worth ratio then that person driving that brand spanking new car next to you.
When I first graduated from college and got a job I bought a car(Honda accord) which I shouldn’t have for around 20k I was making 35k since I was young and dumb and didn’t have a lot of credit I got slapped with a ridiculous apr around 12% so my payment was about $350 I really that I had negative equity so I tried to get out of it by buying a another car that was worth more but cost the same with a lower interest rate to try to get rid of my negative equity. This obviously wasn’t the smartest solution but at the time it made sense. The real reason I bought a new car was because not only was the interest rate lower but it came with insurance for if I lost my job they would cover my payments (USAA) I thought this was real important since Im young and im not really secure in any job that I’ve had. Also my car is depreciating less now since I’ve gotten used to using public transportation regularly. Oh yea and now I make $80,000. Just curious on what you think about my situation?
I think it’s good you recognized spending 60% of your income on a car was dumb. But if you still have the car now at $80,000 and keep on holding onto it, you are making up for your mistakes.
How long have you owned it?
Be nice if someone could find a decent used vehicle in this price range,
The only problem is, Since the cash for clunkers program,
Used car prices have tripled!
Cars that used to go for 5000 dollars are now 10-15000 dollars and
most have 200-250000 miles on them!
No problem Andy. Sorry it’s taken you a year to respond to your comment. Imagine investing money into the stock market in Dec 20th, and waking up today on Dec 30, 2013. You’re 30% richer!
I have been driving a 1996 Camry for the past four years. It is worth 2K at best. Almost never needs to be repaired – just needs gasoline and insurance. To demonstrate the value and peace of mind that comes with owning junkers, I have proudly kicked and dented my car in front of my wife and children while laughing heartily.
It is pure freedom! Who cares what happens to it? Not me. Household income is at approx. 220K annually. The daily swings in my portfolio are bigger that then value of my car. My wife thinks I’m crazy but then whenever there is some serious problem and there is a need for money, who has the money? I DO. Thanks 1996 Camry, you are making me richer by the day.
Wow. So many people buy into the consumerist paradigm they have such anger at a very reasonable suggestion.
Yes there are reasons why this advice might not work for everyone.
Yes, newer cars are considerably safer, and that is a consideration.
However, I think the extreme reaction by many belies the difficulty many of us have when our basic belief system is changed. A financial advisor told me something similar to the 10% rule many years ago and it pissed me off!!!
It IS more and more difficult to get ahead since wages are stagnant over the last 40 years and many other costs have gone up. BUT you can still do what you can to get ahead by changing your perspective about what you NEED vs what you WANT. You don’t need that big of a house, a new car, etc. Science proves that happiness is fleeting from consumer purchases. Google Dan Gilbert and watch his ted talk on happiness.
OH, one other thing… I’d recommend Personal Capital and Mint for a finance tracker tool.
Sorry to be blunt but what a load of crap. How is the purchase of a $5000 junker that will require constant maintenance and keep the owner up at night worrying about a better idea than a reasonably priced new car that will be safer, more efficient and more reliable? And please tell me more about this $20,000 investment that could have netted $40,000 in four years!!!
Dan,
The S&P 500 is up over 130% in the past four years, and up 30% in 2013. Do you not invest in the stock market? This might be what’s seriously wrong with America today: too much consumerism, not enough saving and investing.
My $3,000 junkier drives just fine. He’s 14 years old and has 130,000 miles on it.
Sam
In general I agree with your principle of “don’t spend more on your car than you can afford”. Far too many people (usually kids, I’m ok saying this since I am a kid myself (26)) end up beeing “car poor”, and can’t afford their kids braces because they spent too much on their car.
My problem with this article is that you say your rule is the “rule for everyone”. This might be a good rule of thumb, but I think it is a bit arrogant and naive to say this is something all people “must” follow or they are stupid.
James, never called anybody stupid if they don’t follow my rule. You’re projecting.
Just ask yourself whether you are OK with your financial situation at your age and the money you spend on your car. If you are, great. If not, perhaps time for a change.
Hi, how would you adjust for high mileage drivers. I drive 40K-50K miles a year. I do not pay for the gas related to work travel. I do pay for the car, insurance and maintenance. Mileage is mostly highway in the midwest with bad winters.
I think I can answer this one.
For 13 years, I had a 110 mile round trip commute and was averaging 36k miles total each year between work and ferrying the kids everywhere. About three years ago, I started working from home so I don’t have the commute anymore, but I’ve always driven older minivans and never had a problem.The beauty of highway miles is that they aren’t nearly as rough on a vehicle as city miles,
My current vehicle is a 2004 Olds Silhouette I bought it about 5 years ago for just under 5k. I got a great price because it had 185k on it. The previous owner was a teacher who drove an hour one way to her job every day so since the 185k were highway miles, they didn’t phase me. Like I said, I don’t have the drive anymore, but I still have the van. It has 250k on it, and my only costs have been regular maintenance. Before this van, I drove a 1997 Plymouth Grand Voyager that I finally sold when it hit 300k. I replaced the transmission in that van at 180k but figure in the long run, that repair saved me money over buying a new vehicle. Otherwise, it was still running like a champ when I sold it. But the mileage was starting to make me nervous at that point so I decided to upgrade.
I have kids so I needed a minivan, but I am sure there are other cars just as good and reliable. I live in the Midwest too so I hear you on the winter weather.
As for the 1/10th rule, I really like the guideline. I agree car prices for used vehicles have gone through the roof since Cash for Clunkers, but I’m not sure that means all the good deals are gone. Just means it might take a little more hunting to find the right car at the right price.
The same. I want to keep the rule simple and easy to use. High mileage is a temptation excuse to spend more than the 1/10th rule. 1/0th your income on a car is the ceiling. The reality is it would be even better if we spent even less.
Resist the temptation!
I think this is a fantastic advice that many more people should consider seriously, even if (like myself) we are unable to adhere to the 10% threshold. I have been quite frugal about the car spending even though I don’t think about it as a strict 10% rule.
Granted, it may take some time to work things out before one is in the situation to spend no more than 10% on the car. And in my profession, the joke about the salary scale used to be “take your age and add three zeros”- that was your likely salary trajectory over your career. Raises over a teaching career don’t amount to much more than inflation, and in many cases are not meeting inflation especially in the last decade. (I am sure there are plenty of places where that’s not the case. I am just using my situation as an example of how I’ve thought about car purchases.)
So it would be really easy to spend way too much money on a car and then not have enough money to spend on assets that make money, or that don’t depreciate as significantly as a car does.
My most recent purchase was a vehicle with 65,000 miles on it that had been garaged most of it’s life and driven very gently by a college professor. According to many sources, this car has a high reliability and I can expect to get at least another hundred thousand miles out of the engine. After that I should probably be able to sell the car for several thousand dollars, provided that it is properly maintained. I am lucky to only drive about 10,000 miles per year, so the lower gas mileage and general uncomfortability of the ride are not a factor for me. Having the truck is important for the work I do outside of school on our land.
I spent about 6K on the truck. The seller and I agreed on 10K. I was able to get around 4K for my previous car. Still, 6K is more than 10% of my salary. My work-around (to make sure I’m not spending more on a car than I can afford) has been taking $100 out of each paycheck and set it aside in the special account that is only for a car purchase. So if I drive the truck for 10 years (not at all unreasonable considering the make and model) at the end of the 10 years I should have $12,000 in the account. That 12K will amount to more than 20% of my salary (not adjusted for inflation or considering any gains the account might make over a decade). However, the $1200 contribution from each year amounts to only about 2.5% of my salary. That seems to me to be the best way to ensure that I can buy a reliable and safe car with somewhat low mileage, and I could expect to get another decade out of it before I need to replace it. I make a habit of watching the reliability reports for various cars. If my plan is to buy a car with less than 60,000 miles on it in another decade, I want to know which models are the front runners for having good reliability even over 100,000 miles. My goal would be to buy a car with 50,000 miles on it and to put 100,000 miles on it over the course of the decade.
This is the compromise that I see for someone that is a profession where they make less than $50,000 a year. By thinking about the car this way, in 15 years I have also been able to nearly pay off my home and buy a rental property. And no, I don’t have any other income other than my teacher’s salary. I completely agree that spending for a new car is not reasonable. But for someone in an average to below average earning profession there has to be more of a long-term plan.
SAMURAI, Do you see the 10% rule applying to every individual purchase or do you consider how frequently that purchase needs to be made?
Howdy Teacher,
Thanks for sharing your story. To answer your question, the 10% rule is a rough rule applicable to all folks above a certain poverty level. As someone who used to change cars every year for years to someone who has had the same old car named Moose since 2005, I say the rule applies to everybody in terms of frequency too b/c ownership duration tends to level itself out as we mature.
The average age of a vehicle on the road is about 11 years today. The 10% PROTECTS individuals who have this need to constantly change cars every year.
Welcome to my site. Hope you subscribe and stick around!
Sam
Every time someone gives me a hard time about my car I come back and read this post (I have read it about 4-5 times now). It is a constant reminder of what an appropriate level of spending should be for a tool that takes from you from Point A to Point B.
Worst case scenario, If you must impress someone (ie client) then rent a car for a day or two! They will never know the difference :)
If there was a way to get this post to appear first on your website every 3 months or so…just to remind everyone that purchasing expensive cars have long term negative effects in personal income and mental health!
I love that you love the post! I’ve got some pretty negative comments here which is curious since I don’t think I’m insulting anyone, am I?
I’ll sticky the post on the homepage just for you. Feel free to email the post around and spread the word. Stand strong and be happy with what you have!
I bought a 2014 Mercedes for 33k I only make like 28k a year so I’m at 107% it’s a little over 10% I guess. I’m fine making payments 5 months in 60 more to go lol
And I’m okay with it
Controversial comments to draw the eye and also thought provoking. That said:
Would be nice if there were considerations on alternate avenues with cost benefit measurements and examples of what your financial expectations should be on different purchase brackets. In lieu of snarkie comments a synopsis of how to be a savvy car buyer would have been a better expendature of time. This is not meant in a rude way, but as Michael Jackson would say ‘with love’.
I am not a finra licensed financial planner. I am an insurance agent by profession and network admin/database/programming by profession. By training all decisions should be weighed carefully before action is taken. I am 23 years of age. I purchased my first home at age 19 hope to lease it mid 2015 and buy a second residence closer to work by end 2015. Again I do not read value lines nor do I have alerts about the stock market forwarded to my phone regularly as I dont have a passion for it. I do, however excel in logic and purchasing a car for ten percent of your take home pay is foolish. It was good to draw people’s eye and you acknowledged that it was just a guideline to wake up America. I do appreciate you alerting people to how foolish some spending habits are.
Presently I drive a lexus rx suv purched used. To stay en vogue without breaking the bank I find out when the next model year will hit the dealer ship and buy the second year of the outgoing body style production. Lexus released the current rx around 2009 or 2010…depending on where you start counting model years since they usually come out earlier than than the naming convention suggests. This puts the car close to 50k miles on odometer and 50 percrnt of original msrp with no prior damage. Whether or not this is in your budget you should be prudent and decide. Buy a warranty but shop around and read the contracts…learn about recalls and common issues. Negotiate the first service with dealer either covered in full or you pay invoice on parts.
I have owned 3 infinitis 2 lexus… [lexi?] And a bmw in the past 5 or 6 years without having to roll over more than 800 dollars into a new loan…. payments are usually around 400 a month for all of them with a 2.99 interest rate. If the credit union wont give me that I wont buy. Good credit is a must to play this game at least 740 to 750. On my 03 infiniti I paid 17000 for it with an extra 1800 on warranty. Traded it in 13 months later got 12000 for it and a prorated refund of 900 on the warranty. I was due 800 to close out the loan. Rinse and repeat. Owned a car outright been there done that my budget permits me to finance a car with low interest and still put a few thousand a year in my investments on top of 8 percent into my 8 percent matched 401k. I am a car enthusiast by hobby and spend a lot of time with the car. Translate these cut throat financial tactics into somethinf that will hinder someone else from enjoying their lifestyle or hobby and you run the risk of suffocating motivation to get to the next level. I would rather have 600,000 in the bank with no mortgage by age 40 than 2 million driving a hot mess car and eating ramen to stare at money in an array of accounts. If you decide to have children then you may not have these flexibilies but thats a whole seperate debate.
Sam,
I agree with you completely. My husband and I make $300k combined and purchased a slightly used 2010 vehicle with 10,000 miles on it for $30,000 3 years ago. We paid it off in 2 years and it is nice not having a car payment now. We own only 1 vehicle between us as I am able to take public transportation to work. We could afford $60,000 status vehicle, but then we would not have that extra $1,500 to put into investments every month. We joke about buying something new and exciting occassionally, but we are too serious about our financial freedom to make a foolish, unnecessary purchase on a new luxury vehicle. We’re not that rich!
Lola
Good stuff! And here’s the thing… you say you don’t feel that rich, but you CAN buy a $60,000 car and don’t. Imagine the person making $90,000 buying a $60,000 vehicle with car loans or whatever. The wealth gap will continue to widen if we don’t get our spending inline with the reality of our income!
Well, since everyone else is sharing… I bought my first car, a Mazda, brand spankin new in 2013. Graduated college in 2012, got my first job at a starting salary of $50K, and then bought the car for ~$25K after about 3/4s of a year of saving up first. So I guess I broke the 1/10th rule…But, I am happy with where I’m at. I put a decent down payment on it, and I’m getting 0% APR, so the payments are manageable. I really have no problems with the purchase I made.
FS, I’m curious after seeing some of your replies – what have you got to say to me? Any advice? Chastising comments? Anything at all?
Maybe this isn’t the thread to start the net worth conversation in, but I was just curious to hear your reply in general…
Thanks
Howdy mate, if you’re happy, I’m happy. You might enjoy this post which is a derivative of this post entitled, “It’s Your Fault The Wealth Gap Is Widening.” It’s meant to be a little comical, but also truthful in nature.
Then read, “The Average Net Worth For The Above Average Person.” One thing I can tell you is that your enthusiasm for work will FADE after a while. That is when you will really wish you had saved and invested more of your money.
Hey Sam
I am in college now and going into buisness management and doing pharmacy tech vocation to be able to have an above minimum wage job and then plan to possibly go pharmacy school. Though the thing is i have high taste in things and picky on cars very and not because of my peers. Its just a lot of cars i just dont like. The main point is i am a fan of the Ferrari, bmw m3 and the new Mercedes cla250/45 and wanted a job that could help me there to the Ferrari. Though i was goung to get a basic car but its hard to because cheaper cars i dont like unless its about 12000. Though aftet i got basic i was going get one the cla250/45 or m3 but actully reading your site and all comments its as if i wont really get to my goal maybe even as pharmacist till im pretty old and been saving evweything for years win lottery or start a compony that blows up. But at same time i want to be really successful to support family when happens the cars i like house id want vacations yearly and things like that…
Well i guess what im trying to see/ask is getting the car at cheaper cost really going to help because id hate the car always and wouldnt want to waste money in some i wouldnt like id rather pay over time but there is a lot more it as i see. Ive read all comments and lots people had great ideas and thoughtsand way they did there car situations, but also people are differnt when it comes to cars.. okk im just ramblin but its a lot i have on mind, but what do you see best bet in starting off?
If you start off with a Ferrari in college, your car buying joy after college won’t be as fun.
I’d start off with an absolute beater. But if you’re making a million bucks in college, then go for that $100,000+ car if you wish!
Thanks for the post and for all your other topics-just joined and slowly making my way thru.
I have always been a minimalist to the point many have criticized my “cheapness” and not living life while young. I have done so due to higher education school debt. I have used public transit for the past 8 years but had to purchase my first car 3 years ago due to location. I bought a used Honda civic for $5000 while my salary was 50,000; however, after several visits to the shop it seemed destined for failed and I foolishly trad it in at a dealer for a “new” used car, an Accord.
This was one of the dumbest things I’ve done. When all said and done including 3yr warranty I paid $23,000 for 5yr old car w 80,000 miles on it. This is more than 1/5 of my income but next year I will increase my salary to about 200k. The car currently blue books for $10k and I may be able to get 12 out of it in the private market. I still owe $17 on it;however, and it is approaching the 100k mileage mark. Given your equation I would interpret your advise to sell it at a loss and purchase a used $3-5,000 car?
Your financial advise in this is greatly appreciated,
Jeremy, welcome to my site! If I were you, I’d just drive your car to the ground and simplify. Focus on making money elsewhere and saving money.
This whole concept is depressing for those of us who really are car enthusiasts. This sort of discussion is between car-haters and anti-enthusiasts. The end-game of this concept is, do you want to be financially independent by eating Kraft dinner for 40+ years & driving crap cars? What good is it being financially independent when you are nearly dead? Do you want to give away your life savings to family? Life is WAY too short. Enjoy it. Get that Corvette, or Porsche or whatever turns your gears. BTW original author, you should address house-poor folks. This is WAY more epidemic than overspending on cars.
my 93 buick lesabre is still running strong, bought it for $1200 over a year ago and have spent about $175 dollars on upkeep to the car so 13 months $1375 who here who spends 25% of their annual income on a car can say their car payment is $105 a month. Im just posting this for those who are attacking the idea of his 1/10 ADVICE. My last car was a $25000 car and my payment was just over $400 a month plus just over $100 a month for insurance. So I was paying $550 a month to drive something that was more appealing to the eye and yet now for $105 a month and $23 insurance i get from A to B no problems and I am a heck of a lot happier than when I had the stress of paying a Bank 150% or more of the value of a car that by the time its paid off is worth less than 8 payments… think about it 72 months and only 8 of which will be the value of your car once paid off, thousands of dollars down the drain… P.S. If this car breaks ill go get another one with all the money Ive put in the bank and drive it again for 6 months to a year and pay significantly less than a bank finance
It’s a sobering rule. In my first marriage, I let myself get talked into financing a new Honda Accord for 40% of my gross in my first year of professional employment (engineer in aerospace). She got the car in the divorce five years later, just about the time the car was paid off. Our differing approaches to money was one of the many things that made us incompatible.
My friend had a beautiful old ’68 Mercedes that he was selling for $3K with 150,000 miles on it, and I bought it. That particular car was more about looks than practicality, but I still ended up putting another 120,000 miles on it and selling it for more than I paid (ignoring the repairs and maintenance).
That experience turned me into an MBZ serial killer. Over 20 years, I bought three other large body MBZs with robust V8 motors. I’d buy them with 150K miles for $3 – 5K and drive them to 250 – 300K miles or more. I really enjoyed not having car payments, and I had a very good mechanic within walking distance from work.
I also had some faux prestige. I can’t tell you how many times a co-worker or stranger would size up my car and say something like, “Nice car. Must be nice to have money.” My response was usually to look over their car and say, “I paid way less for mine than you did for yours.”
When I was single, my mother sometimes nagged me about driving a car with minor tears in the upholstery. She said I’d never get the babes like that. I had to tell her I really wasn’t interested in babes that shallow…. Ironically, my mother also gossiped to me about how much other family members were foolishly spending on vehicles. She was a contradiction in so many ways. Gone now.
I re-married to a wonderful woman, a CPA who upped my game on retirement investing beyond what I was already doing. She is frugal with vehicles and finances in general.
After fifteen years of never buying new cars, we realized our financial goals were on track – house paid off, no debt, kid through college and retirement funds on track for retiring at 55 (a couple more years, now). We each bought $30K hatchbacks in the span of a few years. A Mini for her, a VW for me.
I’m comfortable with *our* financial situation, but I sometimes ponder the message I’m sending the younger engineers I manage. I watch some of them spend some serious money on vehicles, and I shake my head. If anybody asks me for advice, I point out that I’ve been contributing 25% of my income to my 401k for a lot of years, and that’s what gives me the options I have. If you can do that, buy a house, pay off student debt and still buy that car, then go for it. …but this 10% rule may enter my ‘advice bag of tricks.’
Hello Sam,
Let me start by thanking you for this real relative information that matters. First time commenter, avid reader. I am writing this comment in search of your advise, I am 21 yr old college student who owns a relatively small pro scooter shop in Fresno, Ca.
I live at home with little overhead (Rent,PGE,Water) expenses. Recently I bought a work truck through Craigslist. To the point, I was hoping to use a business lease in order to obtain a 2014 corvette stingray which is roughly 52,000. However after reading your 1/10th rule and the Land rover 6,000lbs. + article it seems this car is still out of my grasp. Although I am no financial fool, I want this car very bad….Calculating this very roughly it may take a little under a year to make that much….any advise would be tremendously appreciated as I don’t have many people to turn to being the first business owner in our family, I would like to avoid making bonehead decisions.
Thanks,
Joseph ONtiveros
A $54,000 car at 21 while living at home? Why not save up for a downpayment to live on your own first?
Joseph, If you do buy a hot sports car then treat her like a lady. Enjoy life, because it can go away in an instant. TJF
Sam is on the right track. I buy a new car/truck every 10 to 25 years. I once bought a Plymouth Reliant 1989 for $3500, which was 4 percent of my income. My 1986 Dodge Dakota was donated to charity for nothing in 2013.
I bought a new Kia Optima on Valentine’s day this year and plan to trade it in for a new vehicle in ten years. I paid $12000 cash for it and financed for three years. I will invest the other monies I get from my investments to buy my wife a budget car in three years. It will most likely be uses.
And here I thought I was cheap. There are levels of minimalism that I will subscribe too but this I think is a tad much, especially when you get into the higher income ranges of say 150k+; this may be practical, to an extent, for those in the sub 30k range. My wife and I are both Officers in the USMC and while we do alright for ourselves, I could not fathom only spending roughly 20k on two vehicles; I am assuming that you are implying that we should use the 1/10th rule for all vehicles in the household.
How much is too much when it comes to saving? My wife and I both contribute the maximum to our 401k’s and IRA’s each year, which comes out to be for FY2013 $46000. On top of that we placed an additional $60000 into our brokerage accounts, which our comprised of a mix of stocks, low cost ETF’s and corporate/municipal bonds. And this is considered overkill by many of our peers due to the fact that after 11 more years of service we will both have fully vested pensions. Even after you deduct what we pay for housing and food we had roughly 50k in DISPOSABLE income. Once you minus our monthly car payments including insurance, which was about 1600 a month, which puts us close to your category of must love working, we still had something like 30k left over to do as we pleased; a good majority of that went into our savings account only because we where too busy to do any real traveling. Could we save more, sure, but at some point you need to enjoy life and if that means splurging on a car then so be it.
Based on your income situation, I’m assuming you guys are making over $200K to be able to save $100,000?
If so, there are a WONDERFUL array of cars for $20,000 or below today.
Amusing read. Not sure why certain individuals are getting upset at the viewpoint of the author, at the end of the day it is just that, the opinions of a stranger so why let it bother you. Do I personally agree with the author, to some extent, I think the 1/10th rule is a bit extreme almost to the point of being silly but at the same time I am a vocal advocate of living below your means so whatever gets the job done.
I didn’t have any idea about the 1/10 rule before. Thanks for sharing that to me! I will definitely follow that rule before I make any car purchases in the future.
10% is un-realistic, although overall intention of the advice is great.
4k-5k used cars will take tons of time to find a right one, plus you are at risk of costly repairs.
Assuming practicality is a king, I would propose following:
College student: Cheapest car one can get.
Entry level professional: New compact car in the range of $16-$22k, under warranty, own for 10+ year.
Professional: Midsize sedan $23-$30k New, underwarranty, own for 10-15 years.
So your advice doesn’t take income into consideration? I think that’s a dangerous proposition.
In the USA people must earn much more than the UK. According to (https://www.bbc.co.uk/news/business-20442666) the average annual salary is £26,500, and according to (https://www.thisismoney.co.uk/money/cars/article-2408807/New-car-prices-risen-inflation-25-years.html) the average (new) car price is £27,219. If people in the UK followed your rule then we might as well rewrite it as “No one should buy a car”.
I think I fundamentally disagree with your advice in that (again, certainly in the UK) the initial purchase price of the car is actually pretty insignificant in relation to the other associated costs. I don’t own a car any more, but my friend has a Golf. It cost him about £1000 a year ago (I think the car is from the early 2000s), but he’s just spent £600 on new brakes, he needs two new tires at £80 each, and every year it costs £800 to insure the car and £210 to tax it. It costs £80+ to brim the tank.
To be honest, as long as you’ve got the cash, it doesn’t really matter how much you spend on the car itself. It pretty much pales in comparison to the running costs of an old car.
I can’t believe cars are now called “assets” and the bank even lets you add this type of “asset” to your net worth calculation when looking for a loan. That’s absolute baloney. A car is NOT an asset. It sucks you dry and people seem OK with it?!
Oh, and that 1/10 isn’t for every car, is it. It’s for the entire family’s “wheels”. How many families have only one car…not many!
I am a 1/10er myself and it is an amazing feeling not to have to worry about the cost of a car every month. I don’t worry about the car getting stolen, scratched, dinged, etc. Yes, it’s cute, but it gets me from A to B. That’s it. Best of all is purchasing it outright used and not having a monthly payment looming and lower insurance, allows us to save for maintenance and repairs with ease. Though the need for repairs is surprisingly rare because when a car has fewer bells and whistles, less can go wrong!
The additional advice I would offer is, even with a car, drive less, walk/bike/bus more and save on gas, wear and tear and parking!
Happy trails to you!
I bought my 2002 BMW 330i for $42K new when I had more income. My wife was mad at the expense (financed $540/mo payments for years).
I still have it now in 2014 with 130K miles on it. No payments for years now. Cost very little to maintain, as I do the work myself. I’ll drive it until it explodes. Gets 21 mpg around town, 29 on hwy. Insurance is minimum with just liability coverage. If it gets wrecked so be it. Yesterday I hit a pothole that shook the car badly, and I just smiled and thought to myself I am glad this isn’t a new expensive flawless car that I just banged into that hole.
The car is still nice from a distance, close up it looks like an aged movie star. Like me.
I’m 65 and have a sizeable IRA nest egg for my retirement security. Living expenses are minimal too.
I love cars, have had all kinds of exotics, but I really love not making monthly payments. Now my income is minimal. If the BMW dies, I’ll pay cash from savings for a fuel efficient, safe, quality car and drive it for as long as I am able.
Thanks for your post. I think the advice to spend less on a car is great. I also think that there is a flaw in your advice in not considering length of ownership and the total cost to own over those years. This flaw prevents me from even considering the 10% rule seriously. An asset purchase is not isolated in time
Love how you say your wife was made at you :)
At 65, enjoy life to the fullest! Thanks for stopping by!
my country have monthly minimum wage rate of less than USD300 and fresh gratuate are paid around USD800 per month. However the cheapest new car are selling no less than USD10000 and a brand new Merc C180 cost close to USD80000.
If to follow your rule, i would said even medical doctor or other profession should not buy brand new car at all. Those can afford an Merc entry level would have to earn USD800,000 a year!
if so, i would said my country would become the lowest car density per capita in the world.
Just a quick question. What I understood from your article is that if you have to buy a car, %10 of your gross annual income is a good target to aim for. I have been pretty lucky with cars in the past 15 years, and have only spent about $9000 on purchasing cars, with friends downsizing and selling me their used cars.
I don`t need a new car, but living in the country where there is no option for mass transit I have to have a car on the road, so I am constantly researching makes and models, and trying to figure out budget for the just in case I need to replace my car.
The 10% idea doesn’t seem to account for saving or the length of time between purchases. For example if I was to buy a car each year, even within the 10% idea, I would still likely be spending more than if I was to buy one more expensive car every decade.
So my question is, does the length of time between purchases affect your idea of 10%?
On a side note, the next car I buy will be more than %10 of my gross income because I recently got rid of my ’93 Legacy, with a ’01 Focus, and plan to go back to an all-wheel drive car. Getting from point A to B is important, getting from point A to B safely is more important.
The length of time between owning another car makes a difference to allow one to “cheat” a little on my rule if they plan to own the car for a long time. But actually, no. The length of time should not make a difference. 1/10th rule for life! And if you get to the point where your assets are huge and no longer have as much income, then follow the net worth rule.
https://www.financialsamurai.com/net-worth-rule-for-car-buying-guideline/
I really like your article. You could find a car that is dependable even less than 2K if you look hard enough. If not, take the bus or ride your bicycle, or better yet.. walk. It’s good exercise. It clears your mind and can be less stressful than driving.
Remember that every dollar that you spend could be earning you more money. That’s how you need to look at it.
But I guess, it can be different once you have a family. But still, I think I would still take my kids to use the bus, even if I was a multi millionaire. It teaches them how to find their way and how to observe people.
Right on Becky! I’ve included “walk, bike, carpool, bus, train” in the bottom income row. I take the bus to work every time I go downtime and it feels so freeing not having to park or worry about a ticket.
The farther away work is, the more I appreciate taking public transportation as I don’t enjoy sitting in traffic.
Exactly! I hate traffic. I’ve learned early on that things you find convenient is confused with things you actually need. I am working professional that worked in the industry for almost 10 years now and even still that doesn’t justify a shiny new car. If the car has a stereo and gets me to point A to B, I am happy. Thanks Financial Samurai for this great article! I am so happy that I could learn free financial advise online since my parents never taught us how to manage money appropriately.
This is absolutely absurd. Some of us have jobs, children and enjoy an occasional road trip. None of these things tolerate a dangerous and unreliable piece of crap car. Adults have bosses, children and clients that don’t tolerate being stranded on the side of the road.
I’m guessing the real problem here is that you have been lucky and own an old car or cars that have been reliable to this point. You seem completely unable to grasp that some of us have owned similar vehicles, taken just as good care of them and found out the hard way that being in an old car can be dangerous for our children, our jobs and others on the road.
When it’s late in the evening, 6 degrees outside, and my daughter needs to pick her up from an afterschool activity I need a car that starts. Not a “well I guess I need to get this fixed tomorrow gosh I’m glad I’m saving so much money while my daughter freezes to death” car.
You are either the most self-involved dolt I have come across in a while – or a complete and total troll. Both are equally irritating.
Don’t worry about calling me a dolt. But troll? You’ve come to my house, not the other way around. Show some respect.
I’ve had 10 cars in my life, 9 of them used so I have experience. Only one broke down and that car was from 1989.
Not sure why you are so angry with my recommendations. Are you projecting your financial frustrations? If so, know that free will is a powerful thing.
What’s absurd is blaming your poor financial choices on the author of the blog. You have nobody to blame for not studying or working harder. Nobody forced you to waste your money on a car you can’t really afford either.
See my reply. I can afford most cars on the road. My financial house is in order. I drive a Kia.
I have very little formal education. I bought books, studied and worked hard and now have a career with in an income that puts me in the top 5% according to the New York times.
There is a minimum amount you should spend on a car if you need one. If I lived somewhere that had safe, reliable public transportation I would use it. However, there is no such public transportation system where I live, so I require something that is safe, reliable, and runs well so as not to poison the environment. I spent about 7% of my income on my car, but for most people, it would be more like 35%. If you want to succeed in this country, you don’t need a high-end car but you do need a reliable and presentable one.
It’s funny everyone is attacking me based on their perceptions of my income and financial choices. I actually find that people that pride themselves in their crappy, unreliable, earth-destroying cars and more often than not stuck in low-level go nowhere jobs in which they have decided to camp out in for the next 30 years until retirement.
You are right about the house – I sincerely apologize for the insults.
It is not anger in my words, more frustration. I have heard this type of nonsense before. This is really, really bad advice you are giving. You are telling working people to purchase unsafe, unreliable vehicles. Can you overspend on a car? Of course. Can you underspend – most definitely. In addition to that, vehicles are becoming more and more difficult to maintain in the backyard, so is there an additional cost and risk in finding a reliable, honest mechanic.
As far as my situation goes… I can afford any car except for high-end exotics. I drive a Kia and love it.
So, now that I have apologized and restated my case with less “anger”. Care to actually respond this time?
Great, no problem.
Your first comment had no question, just a rant, so I’m not sure what exactly what you want me to respond to. I see so many people out there COMPLAIN why they can’t get ahead financially, yet do very little to try and get ahead. Anybody who recklessly consumed in 2013 lost BIG TIME because the S&P 500 was up 30% and the housing market was in the teens.
Buying a car is a personal choice. Based on my experience of owning 10 cars, I would say that cars are much better build after 2000, which means less maintenance headaches. Hence, the reality of driving a beater has decreased.
Second, people are free to buy whatever they want. If they don’t follow my guideline, they aren’t going to jail. This article is for people who want to retire earlier, achieve financial freedom, figure out how they should spend their money more wisely.
So my question to you is, instead of getting really frustrated, PRESENT US A SOLUTION as I have presented a solution in this post.
Check out these two posts and let me know your thoughts:
https://www.financialsamurai.com/the-average-net-worth-for-the-above-average-person/
https://www.financialsamurai.com/wealth-gap-widens-because-of-your-own-doing/
Sigh. Question/counter argument… tomato/tomato
Most people simply cannot follow your advice. It is unrealistic and even dangerous.
The solution is to invest in your future. If you are planning on staying in that crappy job making 35k for the rest of your life then a 3.5k car is fine I suppose. If you are planning on going somewhere in life and need to actually be to work on time and don’t want to get killed on the side of the highway… Figure out how to come up with a couple hundred bucks a month for a car until you can follow the 1/10 rule because you are now bankrolling.
Just to clarify:
You mention you spent 7% of your gross on a car and are happy with your current vehicle. So if you’ve followed my advice, why so much angst?
“Most people” is actually me and you. It is all of us. We are no more special than most people.
I see no reason why the median household income of $52,000 can’t be more prudent and buy a $5,200 car. What is dangerous is spending $30,000 for a median price car on a median income.
In 2010, half of all Americans made less than $26k. So if “most” people translates to over 50%, then rounding up for inflation would mean this article would recommend a $3k car for most Americans. Sure, you’ll get a working car for $3,000, but it won’t be much. I’m not sure 10% as a “rule” really works for “most” but it’s not a bad place to start.
Also, Jake says $35k a year is “crappy” which I find to be incredibly ignorant. If you have no formal education and still making in the top 5% then you are most certainly a statistical anomaly buddy and shouldn’t be “above” income levels above what MOST Americans make. Let’s don’t even consider $35k USD from a global perspective, because it would make you seem even more out of touch.
Also – Thanks for the links. I’ll check them out.
I don’t know about your 1/10 rule but i had a rule myself which was spending not more than 25% of your Net Pay for buying a car!!
I am 23 and have just completed my grad school and would want to know what exactly would i benefit in the long run by such an investment?
For argument sake lets say i agree with what you say about not spending more than 1/10 of your pay on buying a car(Go for a used car)..okay!! But what next ??
I have never had a car myself and have used public transport till date(Under-grad + Grad) but in no way am i ever using public transport EVER ( Don’t ask me why..Its a personal choice)..But i am still okay with driving used cars though!! If i do start saving early and that too a lot of money by not going for any vacations etc etc but what exactly am i saving for in future??
I am 100% sure i DONT want any kids nor have i any interest in marriage’s// I won’t work after the age of 55(It could be even lesser if i have a lot of savings) but if i don’t live my TODAY then what exactly am i saving money for??
I Had worked out a financial plan for myself and it was as follows:
I have to save 35-40%(At least) of My Net yearly pay and would invest it accordingly.
I have already told you about my car buy % which stands at NOT MORE THAN 25%!!
Lets say i start my job at 90000$ @23 and start saving 40% of it every year. I will think of buying a house only after 5-6 years though i will start saving from now. I would be investing in stocks as well later..now i haven’t done my calculations but still sure that even at this lifestyle i certainly can afford a 25000-35000$ car ( Which i will keep for atleast 6-8 years or even more) and certainly sure that i may be able to afford a yearly vacation as well but even if i do follow your suggestions and i do end up with an excess of money at old age..Wouldn’t i be just spending my young age being pauper for nothing ?? What will i do with excess with that momey?? Give it to charity?? Should i just live my youthful years being pauper just to finally donate my money to someone ?????
I am not saying what you said about money management is wrong..its just that i am a little confused? I believe in savings and as you can see being a single gy for life i would be targeting a yearly savings of anywhere between 35-40% or even more but why should i compromise on the luxuries of life?
Why can’t there be a balance between saving for ones future as well as living YOUR present fulfillingly?.. Again adding I HATE PUBLIC TRANSPORT(Have use it all my life till date and swear to never use it again)
Could you please comment..
I agree a lot what you just stated above about letting the money grow . Let me just add contrary to what an accountant tells you about a CAR being an asset , its actually a LIABILITY !
Now, what Mr.Samurai has said is something i agree quite a lot with about investing your money and growing it for the future. I share a lot with him and what he said about one-tenth isn’t that bad too…One must realize that these posts are made with an intent to help out individuals on not making bad financial decisions but rather carefully plan it in such a way that you have a safe nest when you need the most in future.
However, i don’t agree with him saying one should buy used CARS ..Coming from a guy who has experienced and saw others being fooled by old used cars-I will definitely say BUY A NEW ONE ((If it FITS your budget ))
One must never make a mistake of spending 50%-60% of their salary on buying vehicles as its bound to put you in deep financial troubles. You can certainly live without having a car in your life but having a debt will just make it REALLY hard and its a recipe for stress and only stress.
If your budget permits buy a new car and keep it with you until you squeeze its life out and have realized that it won’t be able to give you anything more .
Final piece of advice to anyone:
Instead of working for the money LET the money work for you
Invest..Invest..Invest
I have noticed that the internet comes alive when car choices is the subject matter LOL
All the more curious to someone like me who views cars as a nasty but sometimes required appliance that pollutes and encourages me to get fat and have back pain.
Is the 10% rule reasonable ? I don’t know because it does not make inherent sense to me. Purchase price is certainly one big part of the cost of car ownership, but one should not ignore insurance, repairs, maintenance, and fuel costs. I much prefer choosing a car with low lifetime TCO/mile (total cost of ownership.) I also prioritize for safety and minimizing pollution when I car shop.
New vs Used is an interesting money question. When I was younger there was no way in the world I would even consider a new car, but that has changed. Nowadays I give more value to the latest safety features, and certain knowledge of the car’s use history. Since I maintain my cars at a high level (DIY usually) and keep them until end of life, I find the early depreciation to be a minor cost over time.
My recipe:
Expect to keep the car 15 – 20 years;
DIY simple maintenance
Self-insure comp and collision. (I may change my mind about comp.)
Buy reliable, low maintenance, and high fuel economy
This recipe has worked out to 15 – 17 cents/mile for my car purchases.
You can pay $3,000 for a car, but it is going to be either old, with problems, or both.
Let’s ignore that case and just focus on cars that give high value. They range in price from $15,000 – $25,000 new, and lose about 40% of their value in the first three years. In general the car goes 10 years easy with minimal to no repairs.
So that said, consider two scenarios:
Car bought new for 20k and kept 10 years, so cap cost is $2,000 a year.
Car bought for $12,000 when it is 3 years old and kept 7 years, so cap cost is $1715 a year.
Over 10 years the used car has saved (2000 – 1715) * 10 = $2850. Opportunity cost on that money in real dollars is say $150, so the total savings of buying used is ~ $3000 every 10 years.
Not bad, but there are some costs unique to buying used we should consider:
For one, that 3 year old car has finished it’s bumper to bumper warranty.
Second, it is right about time to buy a set of tyres.
Third, a major maintenance bill is coming up.
And fourth, an uncertain risk of buying a poorly kept vehicle or a lemon is shouldered. Most of the risk of buying a lemon can be mitigated by a good pre-sale mechanic inspection for say $200.
I cannot accurately quantify the total of these assumed costs, but I am comfortable in saying that little if any of the $3000 is actually saved.
I’d love to know what you suggest for me…
I live in a small town about 25 miles away from work. I work in public transit, so can’t take the bus because it doesn’t run until after I get there or stops before I leave. I gross about $50,000/year. Here’s the catch. I live in the Canadian prairies. Where the temperature for the past few weeks has regularly been as low as -45C(-49F). For safety I buy 4×4’s because of the snow. It’s not awful all the time, but occasionally I need it. 4×4’s are more expensive. If I buy one according to the 10% rule, the chances that I will end up frozen to death on a road somewhere is increased due to the fact that I am getting less vehicle for my money. Even if I was to buy something in that price range, I can’t buy anything that is remotely reliable enough for everyday highway driving in those temperatures. Things break a lot more in that kind of cold.
What suggestions do you have for me?
Sounds like a cold, cold, place. How about a used Toyoya RAV4, Honda CRV, or Subaru Outback, all 4WD?
Can’t get any in that price range. They’re in demand. I like the idea though. I think we might be too extreme for the 10%. But it gives an idea for what to aim for…
Have you searched well outside your local area?
Vehicle values vary a lot by region. Sometimes the difference is enough to either pay for shipping or one way airfare / epic road trip.
I’m facing the new vs used decision right now and my calculations come down to a few important factors:
1) cost of repairs
2) cost of insurance
Resale value isn’t too big of a factor with me because either I’ll be driving the car or it will get passed down to my kids.
It’s impossible to know what the repairs on a used car will be. In the past I’ve replaced everything from timing belts to an engine and a transmission. Another factor to consider is odometer fraud, which contrary to what most people think is not just a thing of the past that could only be done to mechanical odometers. I used to live by the buy used and cheap mantra, but with the price of used cars going through the roof, at some point it actually makes more sense to buy new even you must get a loan to do it.
I think this rule is good, but on the other hand, we only live once and for couple of decades and car is the love of some man. I find it hard to stick to this rule, hope that I will not drown myself.
There is nothing wrong with buying a more expensive car if you can afford it. I started saving money as soon as I started working. I paid cash for my tutition for 5.5 years, and bought a $16, 000 car while still saving for retirement and the future. I worked as a waitress, tutor and substitute teacher while going to school full time. I drove an old Buick, but it started having more and more issues. Buying the new car gave me piece of mind and made me happy, and was worth the opprotunity cost of keeping that money in the bank. I don’t worry that my car will not start or that the break light will go out again without me knowing and I will get pulled over or that I will need to manually use the blinker or my windows will get stuck down. With your income suggestions I shouldn’t have had a car. Where I lived I would not be able to get to my jobs, or college without one.
I am frugal in many areas such as making food from scratch, making and sticking to a strict budget that pays me first (save money first), reparing many things instead of replacing, making cloth napkins so I do not need to buy napkins, etc. When it comes to cars though, piece of mind and safety come first, and I can afford it because of my lifestyle. My husband and I live off of about half of his income and save the rest and all of mine.
This may be a great rule for those that need help getting their finances together, but if you are fiscally responsible and can afford to spend more while still saving money there is nothing wrong with that.
So I struggle with this theory. I agree that taking on more consumer debt that you can handle is definitely a bad decision. I also understand that the 1/10th of gross income is a guidepost meant to get you thinking about how you allocate your hard earned dollars. That being said, I think there is a argument to be made for the utility for your dollars. What I mean by that if I receive more than a proportional level of utility from my car then i should tilt the % of gross towards those items that increase my total utility.
For example if I make 100k a year the rule would suggest 10k for a car, financed over 60 month at historically low rates means I pay less than 200$ a month for the car payment. However I figure I get roughly 2X as much utility for this item vs other non essential monthly items….cable, internet, shopping, dining out etc. Therefore I can allocate a higher % of gross.
That being said, I drive a 05 Nissan altima worth less than $4k and I make well into the six figures…
Given what you drive and how much you make, your struggle with my suggestion is therefore moot! :) Welcome abroad the train to financial freedom!
Well said, Michael. That’s why I am buying a $35k car on a $50K income :) With a hefty down payment, of course. I appreciate the need to have a good million+ invested by the time I retire; but that doesn’t mean I can’t live a little while I am young, too! And believe me, I’ve earned it- “it” being the right to give myself a nice thing. For some people, a car is more than just a car.
Obviously the title of this piece is ridiculous. If someone is making $500K, I don’t see why they’d limit themselves to 10%. They’d still have more money than a person earning $400K who decides not to buy a car at all.
Further if “everyone” did follow this rule, most people followed this rule, then the demand for $5K cars would go through the roof making them too expensive for the rule. It would also decimate new car sales, which would over time effect the used car prices, making them more expensive.
Also the rule is badly explained. If it said 10% per year, or 10% every x-years, it could have some validity. What if one paid $13K for a cheap new car, and kept it for 12-years; as opposed to someone who only paid $3K, but the cars clapped out after 3-years?
Having said all that the underlying (but badly explained) good sense in this article of being careful about how much you spend on a depreciating asset is directed at exactly someone like you Mr. Morgan F. i.e. generally speaking, buying a $35K car on a $50K income is idiotic.
I’ve made over $500,000 a year for several years and stuck by the 1/10th rule. At $500,000 you have to pay about $180,000-$200,000 in taxes. It is not pretty.
Not everybody will follow my rule, but I hope my community will follow my rule and let other people have fun with their finances.
But surely that is the point; it is easy to stick to the 1/10 rule if you make $500K. If you make the median US wage you get to spend just under $6K. Plus in life, if you are in that bracket, you will always have a shitty car. Even if you manage to double your wage, you still end up with a shitty car.
Plus if you spend $50K on a car; it could easily last over a decade with few problems. If you pay $6K it most likely won’t last a decade.
As I said before the rule is not fully worked out. For financial advice it is very poor. Wanting to have a simple rule is no excuse for not putting in more complex details.
The obvious issue is how often do I get to spend 1/10th of my income.
How about if I did it every year and traded in my old car, I could work my up to a nice car over several years?
How does it make sense to compare someone on $50K with practically no disposable income; to someone earning $500K who has loads of disposable income?
A percentage per annum spending on a car, which one could save, would make much more sense.
Last year we made about $300K, but the year before we only made $52K. This year will be between the two. What should I do–cherry pick the year, pick the lowest, take an average?
I agree with the idea of not overspending on cars; and the 1/10 rule is a good place to start a discussion; but it is too simplistic as is.
“Last year we made about $300K, but the year before we only made $52K. This year will be between the two. What should I do–cherry pick the year, pick the lowest, take an average?”
GIven that your income seems highly variable, you should probably be very conservative.
“Plus in life, if you are in that bracket, you will always have a shitty car”
It’s a car. It gets from from point A to point B. Almost any care you buy these days will fulfill that function adequately.
Of course, if your car is also your hobby, spend more on it as your hobby. But that means seriously spending less on something else. Ultimately, what matters is your savings rate and hitting your retirement targets: https://usatoday30.usatoday.com/money/business/story/2012/09/12/fidelity-issues-new-retirement-savings-guidelines/57756922/1
Are you on track with your retirement savings? Great, then feel free to spend a little extra for your car if you really enjoy it, keeping in mind that what you spend today would be worth 10x as much in retirement.
Sir, I have friends who make twice as much or more than you, who pay 1/20th of their income on cars or trucks. Your advice is totally sound. I have done the same used car route many times in the past. I also do most of my own home repairs myself. My house is paid off and my wife of 35 years and I have two pensions and over a million $ net worth. Not rich, but content.
The most important thing in life is following sound advice and enjoying your friends.
Obeying the “rule” if you are rich is no big achievement; the hard part is trying to do it if you are poor.
This is just he kind of ridiculous rule that makes sense to someone who gets to buy a $50,000 car using it. A $40,000 per year accounting clerk who buys a $4,000 car is buying all sorts of trouble. They break, which angers the boss who thinks he is paying you sufficiently to have reliable transportation. They throw a rod or the transmission goes out and suddenly you need to spend another $4,000 to fix or buy another car that will likely break, too. A scooter might make sense in LA’ but let’s put our samurai on one for 15 miles, in January in Chicago.
Next, a car is not an asset, it is a personal expense. Relating it’s purchase price to income is silly. It’s monthly cost should be related to income. The general rule set by the mortgage industry is 28% max for your housing costs and most financial advisors suggest 25%. They generally put a max on transportation costs at 15% and suggest 12% as reasonable expense. For our clerk above, that is monthly total of $400 and after insurance, gas and maintenance, a car payment of about $225. On a lease (10k .miles per year) that will get you a nice Toyota or Honda, new, that you can trust.
I remember being young, poor and driving junkers. They were the biggest stressor in my life. I could never be sure that I would get to places on time or at all. I would suddenly find myself with a repair bill I could no afford but had to pay. Often I would find myself on the side of the road 10 miles from home and not enough money to pay for a tow. So I would write a rubber check and scramble to get the money for it before it hit my bank.
I agree with you that building personal wealth is important, but buying a crappy car is a lousy way to do it. For young people seriously reduce the bars and concerts and get a part time job. And don’t have children until you are established. That will do much more for your financial future than dropping $100 per month (maybe) out of your budget by buying a crappy car.
Michael, cars are much more reliable now than when you were growing up. If they weren’t, they would go out of business.
I bought my car used for $8,000 in 2005 and it is worth maybe $3,000 today and still going strong.
This ain’t the 70s and 80s where cars broke down left and right.
Cars are more reliable now but the doesn’t mean they don’t break down and need maintenance! I have only owned cars from the late 80s and 90s so this is my point of reference. I bought a new car in 2012, I probably bought way more car then I should of but I have also invested 0$ into the car since 2012 (maintenance is taken care of by warranty, oil changes covered, etc). Since I started driving in 1995 I haven’t EVER gone 2 years without maintenance, repair costs, some years that was well into the thousands. I agree that paying interest out over multiple years is mostly ridiculous and there are MANY people driving way more car then they should, but you have to look at everything. My sister is a perfect example she has a 1997 Nissan that she has had for years, at this point the car is 1/10th her income and is paid off yet she puts about $1000-$1200 into the car yearly for repairs – not to mention the stress. Constantly worrying about your “cheap” vehicle is not going to help eliminate your stressors. I think there is a happy medium somewhere there. I do agree that most people have cars to get from point A to point B, but I really like my car as well. It’s more then transportation, it makes me feel better and I enjoy driving it. This is probably only a small percentage of people driving that feel this same way which is why I think where applicable people should not be driving anyway (public and alternative transportation would suit them better)
Buying/leasing a car that costs 10% of your monthly salary? Great idea. Buying a car that is 1/10th of your annual salary? Terrible decision.
The problem with your post is that you are treating a car as a one-time cost. A car has many costs that re-occur. Maintenance (especially on an older car that costs under $10k), fuel, insurance, tires, etc. Your assertion that “cars now are more reliable” has no basis in actual fact.
Having a car that breaks often and costs you a lot of money (in lost wages and in maintenance costs) is the greatest stressor of all.
I agree that many people buy new cars that shouldn’t, but a good CPO or gently used car is the best solution to avoid the huge depreciation hit without getting killed by maintenance costs, not buying a cheap clunker that will break down often.
A scooter might make sense in LA’ but let’s put our samurai on one for 15 miles, in January in Chicago. – See more at: https://www.financialsamurai.com/the-110th-rule-for-car-buying-everyone-must-follow/#sthash.1v8CqrMk.dpuf
HAHA That was so funny! LOL.. im a 21 year old who is making about 45-50
K a year after taxes..very hard work..the company i work for pays for my hotel as long as i work for them and food ect..basically all the money i make (900-1000 weekly) goes straight to my pocket depending if i save majority and not spend..
this is my plan, in about 5 years if everything goes as planned i will hopefully have some where around 200-250k..After i have saved that much i plan on moving back to california, to buy a house for my grandparents and i to live in..a nice house (well for me)like 200k.. if i buy the house in cash or what ever no payments,hopefully i can negotiate the owner or real estate agent for 20% off or at least 15! basically buy a house for 180,000.. and i would have at least 50-60k left give or take..
I would like to seek advice from you successful entrepreneurs in business not criticism.What do you guys think? Would that hurt me financially later on? at that point i wouldn’t mind buying a 6 to 10K car,because i have a house!..but after i move to California i would not make a lot of money probably 20-25K a year..
Also What would be a good way to invest some of my money..lets say 10k..i have no clue about stocks but i am very interested in seeking new ways to advance..
for the record i have no college education just a high school diploma..i was just very fortunate to be accepted to a really nice company thanks to my uncle. please help a youngster out!
I, like you, am a young professional with almost no expenses and I’m taking home 60k/year. My game plan is to pay off my school loans right away, max my 401k, then after all that save for a nice down payment on a house. I’d like to share with you some advice that I have gotten:
The first thing you should do is have an emergency fund. I have $3k in mine because no kids, wife, expenses, and I have a stable job in the best job market in the country. (Bakken Oil fields, ND) 3 grand is just enough for unforeseen car repairs, bail bond from a crazy night, or whatever surprises you. I recommend you start an emergency fund. Plenty of sites like these give many reasons why its necessary.
Next, I’d be putting money in a retirement account. If your job has a 401k, do that. Otherwise, max out a Roth IRA at $5500/year. If you do that for the next 5 years ONLY, you will be at $1.2 Million by the time you retire (40 years at 10%). Think how much that would be if you did that every year! Your best asset right now is your age, take advantage of the compounding interest. Don’t try to pick stocks, just put it in an index fund or a low fee target date fund.
Lastly and most importantly, Invest in yourself. You said you would only make 25k after moving back to California. Take this time to go to trade school at night and learn to be a plumber, electrician, lineman, welder, HVAC, or likewise. Those trades are stable and will always be in demand. You might not start out at a lot of money but having a skill and a trade puts you above min wage workers. You’ll advance very quickly with the age of the current trade force. Usually its union work, so they take care of you and you’ll be making 70-80k in no time. The best return on investment you can get is by bettering your marketability and skill set. Your income will be far greater than any other revenue stream like stocks.
Buying a house is a worthy cause and a good investment to have, but remember the costs of owning a home are more than just the purchase price. Maintenance, HOA fees, insurance, etc. will need to be paid as well and a $25k/ year salary will be difficult to do that for a $250k home.
So, think more long term than a house in 5 years. Think of retirement and your personal skill set.
Hopefully this helps, let me know what you think.
It would be good to see the reasoning behind this 1/10th rule. I can’t see how it benefits anybody except to serve the American obsession of turning pots of money into bigger pots of money (the blogger shows a strong aversion to anything that depreciates not because of the effect on your actual financial health, which is what is really important, but simply because you missed the opportunity to turn that money into more money). That’s how this article reads.
If you earn a good income and are not a slave to the stock exchange, I fail to see how spending a more sizeable chunk of cash on a car is going to hurt you financially. Indeed, if I earn $200,000 a year, apparently I should aspire to a Hyundai Genesis, despite this amount being in the “rich” income bracket.
But if I earn post-tax $200,000 a year, and my living costs are, say, $50,000 a year, I could happily go out and buy an Aston Martin with the savings from that year and get back to saving/investing from there onwards. Even if you put aside $20,000 a year for running costs, you’re still saving $130,000 a year. So where’s the financial faux-pas here?
There are people like the blogger who are not affected by the attraction of driving a nice car, which is great, but that does not mean everybody else should have to deprive themselves based on an arbitrary rule made up by people who want you to live to their standards.
People are welcome to spend their money as they choose. I’m writing based on experience owning 8 cars because I love cars, working in finance, and carefully jotting down my opportunity costs for such cars.
Here are some posts you might like to read:
https://www.financialsamurai.com/8-cars-in-10-years-i-have-a-problem-but-you-wont/
https://www.financialsamurai.com/wealth-gap-widens-because-of-your-own-doing/
Thanks for the links.
I think basically this rule ceases to be relevant after a certain upper threshold. The idea that somebody earning $500,000 a year after tax is being financially irresponsible by buying a Bentley is obviously idiotic.
Whoever came up with the rule probably didn’t think it through that far. Sure, if you make $50,000 a year a car purchase will stretch you, because your budget is already tight, but at higher earning levels if you’ve still got $400,000 left over after all your living costs where is the logic in depriving yourself? Just so you can watch the numbers go up in your bank account a bit more than if you hadn’t bought a car? What’s the point in earning hundreds of thousands if you’re not going to use it?
Money should never be an end in itself.
Do you speak from experience? When I made $500,000, I had about $325,000 after tax. You are saying I should be comfortable buying a $150,000 Bentley? This is the type of spending that keeps people in the rat race for way too long.
Instead, I saved and invested about $225,000 of the $325,000 every year, drove a sub $50,000 car and enjoyed the money elsewhere.
Please tell me what your after tax income is after $500,000, your age, occupation and net worth so I can get an idea of where you are coming from.
Thanks!
“The idea that somebody earning $500,000 a year after tax is being financially irresponsible by buying a Bentley is obviously idiotic.”
Not at all. After all, many of his other expenses also scale, and he may have expenses someone who makes less doesn’t even have.
Of course, many people making $500k/year reason just like you do, and they end up poor and in debt despite their high incomes.
I would invite you to read the second sentence more closely where it says “after tax”.
In any case, one of the flaws with the 1/10th rule is that it disregards the fact that your earnings come every year, a sensible car owner will keep their car for years. So if you keep your car for, say, 5 years, using your figures you’ve earned $1.6 million after tax in that time, and spent $150,000 + running costs (let’s say $100,000) – resale value (say, $65,000) = $185,000. I think that means you’ve spent about 11.5% of your earnings over that period on an asset that is a big part of your life in social, pleasure and utility terms.
Your living costs might come to about $300,000 in that period, so that leaves you with a saving of $1,115,000 in a 5-year period.
For one of the most important assets in your household for work, social, pleasure, and freedom, I’d take that deal any day, thank you very much!
Can you share with us your financials and current age so I can get any idea of where you are coming from? Thanks.
I’m not really comfortable with putting my details out there. 35. Between my own freelance work and businesses I own, over $200,000 and expect that to increase over the next three years with the start-up of more businesses.
Gotcha, sounds good. Thanks for sharing.
You might enjoy this post called “The Average Net Worth For The Above Average Person” to see how you’re doing.
Thanks. Perhaps you have some articles on explaining share investments to laypeople. My strategy is to accumulate money through business because if you do it properly the yield is great but I’ve always been sceptical about what you can earn by investing in shares.
I am an enthusiast. I know much about cars and how to mod them. It is an expensive hobby, but extremely satisfying.
Worrying about parking in a crowded lot or tight spaces does not mean you can not afford the car, it means you respect your things and are happy with your riches and not piss poor, morally.
Now, I am young (19 to be exact) and have probably driven more cars than most people on this page because of acquaintances (dealerships, shops, customization shops), targa trophy rallies and one gumball 3000 rally plus my dad is into cars as well.
Ultimately, what I am saying without having to type a ten paragraph paper is to spend your money on what makes you happy. It doesn’t matter if you make 150,000 a year or 500,000 a year. If you want a nice, fast, 911S, go get it. :)
I love the live young and free mentality. Even if you end up spending a lot of money on cars, at least you’ll have a great time!
Hi,
I liked the article a lot and I am reading through the comments and I am wondering what kind of jobs you do? I am sorry to say but, if you are earning 500,000 $ a year. before or after tax does not seem to matter to me, then I am quite sure you can afford yourself a nice car and not worry about the parking bills.. am I wrong?
though for most people in the USA or anywhere else in the world like me, living in Finland, do not earn over 200.000 $ or EUR, or even close to that.
I earn 30.000 EUR a year, with a normal office job which requires a Bachelor Education (Economics) the salary incl. my bonus by the way. anyway I have the small impression you are all doing something wrong, comparing a normal office man’s rule with a rich man’s salary. 1/10th is of course not meant for the people with a salary of 500.000 $
just to be clear, I drive a Volvo XC90 from 2006. 145.000km on the counter, paying 400 euro Trafi (roadtax) and around 1600 EUR insurance. I drive it around my home town, drinking 15L/100km with a benzine price of 1,68 (25 EUR a week) at the moment of writing. (parking is for free) so average I pay 3310 EUR on just tax, insurance and benzine. (think average 700 euro check up and small repair bills a year) so around 4000 EUR a year which I spend on my car. (Volvo XC90 Automatic, 2.5 7 seat) I have no kids yet, but planning on 2 in upcoming 6 years + I drive my grandparents to the supermarket.
now, we can say that this 4000 EUR a year, is a waste of money. and Yes it is, but that goes for all cars. as the value of a car doesnt go up, it goes down, its like that in the USA, in Europe or in Asia and in 6 years time I have spend 24000 EUR on a car. (excl buying price)
now, just an inside of our life, (wife and I) we own a house, pay bills (such as phone, internet, water etc.) and incl car we spend around 1700 euro a month (incl. 250 EUR saving for tax bills/repairs and 100 EUR benzine costs) now we have around 1800 euro left to spend on food and activities.
what does this say about my life? am I stretching my budget to much? I think not (government pays for education and daycare incase we get kids) we enjoy our car, and I enjoy every ride of it. I must say yes I could have got a cheaper car not a problem, but on the other hand, I think you live only once and as long as you do not bring others within your life in danger with your finances, you will be fine.
Regards
J.M
Welcome to my site from Finland JM! Hope you subscribe and stick around.
Those who make $500K+ can afford a nice $50K+ car for sure. Very consistent with the 1/10th rule.
To answer your question, it all depends on how much more is left in the bank, and your net worth. Saving money more money should feel like an active process. If you don’t feel any type of pain or scrunch saving money, I don’t think you’re saving enough.
I understand how this can be seen as good advice.
However I will not live according to any of it.
I alone make upwards of 200,000 annually.
I do not want to sound arrogant but I feel it is needed for my example.
I have been, and always will be, a petrol-head.
Back in the 70s I built my Impala from stock to street king.
Currently, I own a Dodge Viper SRT-10 (paid in cash), Dodge Challenger (Cash – Daily Driver), as well as an F-350 (paid in cash).
My home is paid for, granted it was only 450,000.
One thing you need to do if you want to be well off in the future is save 20% of every pay check and either invest it or put it into a savings account with interest.
Start when you are 18 or so and just getting your foot in the door so you can plan ahead and force it into a habit.
With everything paid off and have built a sizable portfolio, I am going to retire at 55 and have enough to live off of and still be able to pay for my grand child to go to college.
I forgot to add a few details.
My wife makes, as much as I hate to say it as a man, more than me.
She is a physician making 275,000 annually.
Together we make around 460,000 annually from our employment alone. With investments into businesses, stocks, and flipping we can make more than 500,000 yet we are both getting to old to flip goods anymore.
She drives a Maserati and a Range Rover. She likes imports, I still love her though.
She agreed with me that living in an estate isn’t important as long as we both are comfortable and together. However she has been talking about moving and finding a place for retirement.
I think if you are a multi-millionaire and have your debt under control with a wife who is a physician that can take care of the family, then you’ve definitely got the green light to go wild!
Interesting read, but I must say I disagree with much of it. I see offhand two big problems with this article. The first assumes that users are buying a car and then spends the next few years paying it off. So, if thats the case, how long are they to spend making payments? Since we are talking about how much to pay up front, I think its much more important to say how much you will pay later since thats where the majority of the car will be paid for. How much per month for how many months? Actually, this is what lands millions of people in financial trouble – only looking at the cost right now and ignoring the cost down the road. Also, what if you have money saved up and can afford more than just 10% or a down payment? I would think it would make a difference if someone has 10K, 100K, or $1 million in the bank when it comes time to buy a car.
The other problem is that it just isnt really realistic. This chart shows that in order to buy the cheapest of the new cars available today, you need to make at least $100K, and the chart goes on from there. There just arent enough people making that kind of money to supply the rest of the population with their used cars. Further, when I look at the average new cars listed between $150-250K, there are even fewer of these people. Beyond that, the average American, in the $25-50K range, cant even afford a car not potentially requiring major repairs in the near term. Cars from 2005 (at the newest end of the spectrum) are 9 years old; a quick search for $4000 cars on the internet revealed most such cars are actually 12-13 years old. These are cars with between 108,000 and 135,000 miles on them on average, though they could also be much higher. At that point, I’d be afraid of them breaking down and costing maybe 5% of your annual income just to get them running again. Seriously, if within 1 year you end up spending 15% of your gross income to buy a car and then get it fixed, wouldnt you be better off spending that 15% on the cost instead?
Mark, you’ve got to look at things from a bigger picture. There is a RETIREMENT CRISIS going in America now where 65 year olds are only retiring with around $250,000. If they expect to live 20 more years, they better do so very frugally or else everybody suffers.
Check out these posts and others:
https://www.financialsamurai.com/the-average-net-worth-for-the-above-average-person/
https://www.financialsamurai.com/the-average-401k-account-balance-new-record-high/
Buying $4500 used cars…..you forgot that you’d be buying another jalopy $4500 used car every 4 years, versus paying $25K for one that will last 15 years. Add in the lost work time from babysitting all the extra repairs of a $4500 used car.
No doubt, Americans need to save far more and spend far less, but enough with the hyperbole of $50K/yr nurses in $4500 beaters.
I donno. My car is worth about $2,500 for the past 5 years and there’s been no problem.
I think people are confused about the value of the car and the reliability of the car. My husband bought a car that was worth $3K when he was 19 and drove it for 10 years! The key is to take some time to find a used car with proper maintenance record (and do a good job to maintain your car after the purchase).
By working through college, not buying new cars etc we have a healthy personal balance sheet. BTW we are both in our mid-late 20s. The key is to understand what’s your priority.
Great article! I completely agree and am so glad we fell (serendipitously) into the 10% group.
I have always bought new (since my first couple of cars), while my best friend has always bought old used cars such as you mention. Over the years, the amount of times he has broken down (on the freeway with the family) with different cars, didn’t have a car he could “Trust” to go on a long drive holiday with. In fact in his latest, he just paid $2800 to put a new transmission in (that would have been covered generally for the first 10 years on most power train warranties).
Also, just because you haven’t had a problem with your latest car doesn’t mean that reflects the bulk of the older used cars out there. That’s like saying you haven’t gotten lung cancer smoking so everyone should smoke.
Turns out I did this EXACTLY last year. I make $135k and bought a used car for $13,500. This same car was $35k new and only had 65k miles.
It’s all paid off, unlike any of my previous cars that clocked in closer to 30-50% of gross (when that number was smaller).
It could be more exact if we did a ratio based on disposable income after expenses. I just got married and have no housing expense (lucky me!) even though we will have to move soon. So I have the expenses I had in college and no debt payments. No student debt. I could definitely go past this threshold where someone with a mortgage and such maybe shouldn’t. But yeah, I’m hanging onto my 10% car and saving like a madman!
And that is why you are going to end up with a ton more money than your peers 5-10-20 years from now!
Let’s say over a 10 year period, you drive 100,000 miles. The average speed of a car, factoring in highway driving, city driving, waiting at stop lights, maneuvering in and out of parking spaces, sitting in you car waiting for someone, eating, etc., is less than 25 mph. At 25 mph, it takes 4000 hours to travel 100,000 miles. With the average work week being 40 hours/week x (52 weeks – 2 weeks holidays – 3 weeks vacation + sick) = 1880 hours. So, you are sitting in your car for those 100,000 miles, an equivalent of 2 years and 2 months at work.
If you can find a cheap car that is not a disaster to sit in, safe , truly economical, and that you over all enjoy being in and driving, go for it. If public transportation totally meets your needs, go for it. If not, I don’t see how punishing yourself for 10 years is saving you anything in the big picture, well beyond electronic digits. If I am 30 times more likely to be badly injured or killed in a 2000 Chevy Tahoe than a new Chevy Traverse, probably not a good decision to go with the Tahoe. If I get chronic back pain from driving a 2001 Honda Civic instead of a new Civic, probably not a good investment.
Sure, I think a car 30X safer and one that doesn’t give you chronic back pain is worth buying over one that doesn’t.
I also think flying private is more enjoyable than flying economy commercial.
It’s whatever you prefer.
It must be nice to have made a comfortable living. That’s awesome. I hope one day I can live as comfortable as well. I could only imagine how less stressful of a life you have compared to me. Unfortunately my credit is whack, student loans and medical bills, and I’ve never touched a credit card in my life. I work part time at a small town grocery store and another job just 8 hrs a week. Making around or less than 800 a month. Not to mention I have a 1 year old. I do not receive assistance what so ever. I go to school as well. It’s not that I don’t want to do better, but I never realized how much I needed a vehicle to have more possibilities. I spent what I call an arm and a leg 4500 to get my license back after 2 years for a $100 speeding ticket, long story short… Mom offered to pay as a graduation present and forgot too. Pulled over and handed a driving under suspension. Thought to pay speeding ticket, but in all reality I had to pay for everything. Not much I could do when I was living 300 miles away from the nearest relative. Had to quit school, job, and move back home. Driving home I got pulled over again. Barred my license. It’s pretty embarrassing having a baby and have to ask for rides. So with this joyful rant coming to an end, times can be tough and unbearable. I think it’s amazing how some people can build a fortune or even be blessed to take over a family business. Something like that. I cant wait to overcome this mess I’m in. I play the lottery weekly, in last resort high hopes I win! Haha. Can’t win if you don’t play. Right?! Have a terrific day I enjoyed reading the back and fourth comments. Thanks for the laugh :)
I have a question. I just recently graduated from college and started my job (28 years old), making roughly 60k before taxes. I need to buy a car and I’ve been doing a lot of research. I’ve read this article saying 10% and I’ve read another saying 20-35% and another saying 50%, lol. I have a 50k college debt which I will be starting to pay off soon, my gf owns a great house so I don’t have any living expenses, and I am looking to buy a new car. Originally I was planning on spending 30-40k as this will be my first car and want a nice, new car I’ve been wanting for a long time. I have 8k saved up which I was going to put down as a down payment regardless of how much I spend. Other notes: We have no children at the moment, gf has no debt and really high credit score, we’re planning on getting married within the next 2 years, and I do (more than likely) want to get my masters (or PhD) before I hit 32 (which will require me to stop working for 2 years :/). Is it really, really bad if I spend 30-40k on a car at this time?
Thanks
Please listen to my advice.
If you have $8,000 saved up, you are $32,000-$22,000 short of affording a car.
Go for a used $6 k car. Chances are HIGH with your debt level and savings and impending car payment you will regret not following my rule.
This is sound advice, wish I read this article a year ago when I bought my motorcycle. It cost me $7.5 k but I make $31 k a year. After the note and insurance, I’m out a little over $300 a month and that’s extra money I wish I could be saving to invest.
What type of motorbike did you get? I use to have several. Favorite was a BMW R1200C boxer engine.
Yamaha fz6r, I’m a new rider so I wanted something with less power but has the potential to go.
I do understand the point you are making, but I got to disagree. (Surprised?!?!) I admit, there is some personal experience that goes into this. But give me a chance.
Bad luck. Yeah, my family has terrible luck with used cars. My father has owned a good amount of used cars. Five of which he bought from strangers. Each one of them, he has spent as much fixing them as he did purchasing them. Possibly more. A lot more. Not to mention the amount of work hours he missed because some part in there isn’t working properly. The good side of this? My dad learned how to fix cars by watching people fix it.
So then there’s the great idea to buy a car from a family friend who you know takes good care of there car. Here’s the tricky part. Honda CRV with 110,000 miles. Toyota Previa with 70,000 miles on it. Ford Escort with 90,000 miles. What do they have in common? They were all totaled in rear end accidents. How? I have no idea. Once again, shitty luck strikes and remains undefeated.
What ended up working for my dad was buying a Toyota Camry (base model) new out the door. As of today, the car is 15 years old and has 260,000 miles on it. As of today, it has never broken down once. It’s still going strong.
When time came for me to get a car, I got a new Toyota Corolla. In a little less than two years, I was hit by a drunk driver and the car was considered total. My insurance ended up paying me about 1500 short of the amount I paid to take the car out of the dealership. Got real lucky there.
Here’s where I’m going with this. SAFETY. My Corolla was T-boned on the passenger side. It was supposed to be totaled. The frame was bent, the airbags came out, axel and suspension screwed. SEVEN MONTHS after the accident, I’m coming out of the grocery store and I see a grey Corolla that looks strangely familiar. I saw the driver get out of the car so I went up to them. Guess what? Turns out to be my old car that was supposed to be total.
Like many cars that are considered totaled, they’re sold at auctions. A body shop ended up buying that heap of trash metal and bent its frame back into position, replaced some parts, and gave the passenger side of the car a new paint job. They didn’t bother doing anything to the driver side because the way I recognized my car was the little dent a skateboarder left on the door when they smashed into it two weeks after I bought my car.
I told the guy driving my old car, or his new car, that I was the previous owner and what happened to the car. At first, he was at disbelief because he bought the car with a “clean” title. I showed him the photos of the car accident that I still had on my cell phone. Needless to say, the dude was really pissed off.
I think that this is sound advice for the average consumer. My buddy works as an insurance adjuster and a claim hit his desk a couple months back where a 2 month old Mercedes CLS was totaled. Upon meeting the owner and giving him the adjustment for the claim the owner said that it wouldnt even pay for the car(he was paying $1400/month and the claim covered about 70% of the cars cost due to depreciation of a new car off the lot.) He was paying close to 50% his after tax income each month for a car he shouldn’t be driving and living in a one bedroom apartment.
My fiancee and I are both 25 years old and combined make ~150k/year from our traditional jobs. I work nights and by day I am also a trader. Last year I made 200k profit off of investments after taxes we used the money to pay for our wedding(coming next March 43k affair), I bought a 550i GT 83k with options and tax(cash), and we bought a house(her grandmothers house we took out a 30 year mortgage for only 100k, it needed work so we took 20k cash and put it into the house and the rest went to her aunts and uncles who had a share of the house) The result is that we pay about 820/month + utilities + taxes which comes out to about 2200, but we have 2 legal apartments in the house with separate entrances kitchen and bathrooms that generate $1000/month each. So our biggest expense is my fiancee’s students loans which come out to 1400/month. Meaning that at 25 after taxes our cost of living(including student loans) is about 39% of our income we save 10%/year and currently have 6 months after tax income saved and invest the rest. I have friends that have similar incomes, but don’t invest and are struggling between student loans, an apartment, and that 600/month car they had to buy that equates to 30-40% of their total income.
Having a budget and sticking to it is important and while my car is currently worth 90% of my after tax income it was purchased on money that I do not consider ‘income’. We live off of our traditional incomes with budgets and the investment profits turn into extras like a trip, a car, a wedding, an extension on the house whatever it may be; still not touching our incomes. Once her student loans are paid off I plan to retire to day trading and we are planning on starting a family in about 3 years so that she and I can have our nights together again and I will be a stay at home dad, trader.
Oh boy…this article makes me depress :( but i will say that i somewhat agree with Financial Samurai. My opinion is that this 1/10 theory applies more when your income is on the lower end of the totem pole. The more money you make, the more chances you have to make bad financial decisions and still be able to achieve “financial freedom”.
Having said that, i will share my example. I think i’m pretty low on the income side of things at the moment ($180,000 before tax in a good year). Just recently bought a 600k house (not in cash…have a monthly mortgage payment). I have a financed 2013 honda accord (about 7k left on the lease). Am married and expecting our first baby in a couple of months. I wouldn’t say that I live large. We are very modest…i think. We don’t vacation on exotic islands, eat in high end restaurants, or buy super expensive clothes. We do take a modest vacation a year (approx. 3-4k vacation). I’d like to think that we are very financially sound but i still wonder sometimes. Having said all that, i do have an obsession problem. Once i get obsessed with something i find ways to do it even if it means (sometimes) that i will have to make some poor financial decisions.
Example # 1
As i mentioned that we recently bought a 600k house. Mind you that i was not making 180k for the past couple of years. In fact, the year we bought the house my income was 120k. My income just got bumped up to 180k. Having said that, after buying the house, we didn’t have much left over. Having been in the house for 2 months, i couldn’t stand the empty finished basement so I got obsessed with the idea to put a home theater down there. 2 months later, i ended up spending approx. 13k and got my home theater. I can certainly say that we will never go to the cinema to watch a movie again. I thought of it as an investment in house. My older brother didn’t share the same mentality. He found it unnecessary at the moment. To each their own i guess. I will say that I see his point as well but i was obsessed and did it. I guess i could have saved or invested the 13k for our future instead of something material that we enjoy every now and then. It does give my house a wow factor that i very much appreciate when we have family and friends over.
AND NOW, i’m obsessed with a new car (we have one car at the moment). The car i’m obsessed with is not cheap and comes with a 62k price tag. I’m not looking to buy though. I will lease it. The only thing that is holding me back is the fact that i will essentially pay half the price of the car during the lease term and not have any ownership in it. According to you (financial samurai), this is like throwing money down the drain…i assume. I would not counter you. It’s almost like throwing money down the drain. The satisfaction i would get is to enjoy this car for 3-4 years. Deep down inside i know it’s not a smart decision but remember the obsession sometimes leads me to make not so smart decisions. I may hold off or i may go and get it next week. I’m very confused but reading this article re-assures me that i’d be making a huge mistake by leasing a 62k car at this point in my life. Perhaps a $5k used car is the way to go….or no car since we reeeeally don’t need a second car as i work from home. hmmm…..
One last thing i will mention is that i don’t invest my money. Not really knowledgeable in that department. So for me, any money that i set aside just sits in my savings which is not a bad thing but it doesn’t grow at a rate of 8% or more :)
I understand the obsession well as I had it in my 20s with seven different cars!
What about a sweet 18K used car? 62K is expensive, especially since you’ve already got a car on a 180K gross income.
Congrats on your upcoming child I would suggest that you consider just having one car or 2 cheaper cars. Many people don’t realize the cost of having a new child. If your current car is a lease I would suggest buying after as by leasing you’re doing dealerships the favor of paying the depreciation on the car without getting anything after the 3 years. You say on a good year you are making 180k does that mean it can come back to 120k next year? Investments are a huge benefit while you have extra money sitting right now you can increase your income. I am the Steve that made a lot in stocks last year and bought a house. I day trade with high risk stocks, but with your family starting off look for more stable investments and try to avoid the flashy cars(I know I know coming from the guy that bought a brand new 550i GT). My fiancée drives an 18k car and it’s a nice safe little car look for a nice certified used car or a used car that you can get an extended warranty on in the 18k that is baby friendly and safe. A larger backseat can be a benefit since your wife can sit in the back with the baby if need be. Consider getting the 62k car down the line when it won’t be a huge income investment and not one where you’re paying 700+ a month just to lease it. Good luck and I hope everything works out smoothly for you and your wife.
Perfectly said author. I have always had similar situations and burnt a lot of cash on cars not knowing how much is too much.
I believe 1/10th is a great measure, which was the answer I was looking for.
FYI.. I’m lower middle class income range – 50k per year. Thanks
I purchased a new truck a few years out of college at nearly 50% of my gross salary, ouch. $20K was in cash, the remaining loan was paid off in about 2 years. 11 years later I am still driving the same truck. My wife’s car was purchased with cash 8 years ago at about 18% of our combined income. She is also still driving it. Both vehicles are “value” models, no bells and whistles. We have had ZERO unexpected maintenance on both vehicles. We missed out on some investment opportunity, but does the length of ownership count for nothing? I think you are missing a component to your equation.
I agree with the intent of your 1/10th rule, on average, Americans own way too much car. Your chart makes me laugh to think about all our friends and colleagues (100-200k earners) flaming about owning a Corolla instead of an Audi.
Your rule is a little extreme for lower income people. If you have the discipline of owning a car for longer periods of time, a more flexible rule would accomplish the same thing.
I suggest amending your rule to “You shouldn’t BORROW more than 1/10th of your gross on a car”. This way you can argue to all the naysayers, prove you can be financially responsible enough to save for “more” car. After saving, I think a lot of people will be reluctant to let go of that hard earned pile of cash.
We are expecting our second baby and will need to upgrade BOTH vehicles. I am getting ready to drop about $70K cash on 2 new vehicles by the end of the year, ouch again. (28% of income). If we own them for a minimum of 10 years, the cost per year is manageable.
I can’t quite decide what to do. Recently divorced and I have $70K cash sitting at like 2% interest at a bank from the sale of the house. I now live at mom’s and pay $500 per month rent. Soon my mom will sell this house and I will buy a new house using the equity for a down payment. I will be the owner and assume the mortgage. Mom will live with me, widowed – cant leave her alone, even if I re-marry. So looking at like $2,000 per month carrying costs including mortgage and hydro, etc. I earn about $75K and contribute a combined with my employer 12% per month to a pension plan.
I want to to buy a 2015 Duacti Diavel at $20K. Yes I can invest $20K and make money – but, would it really be a sin to spend that money on the bike, in cash, and enjoy the bike and life? I would have $50K cash left, in addition to pension savings.
What would you say about this purchase, given that it is in cash?
$20,000 on a bike? That’s a lot. I used to have a Ducati 748 and loved it. How is your net worth at your age now? $50,000 left is nice, but it all depends what else you have.
See:
https://www.financialsamurai.com/the-average-net-worth-for-the-above-average-person/
https://www.financialsamurai.com/how-much-savings-should-i-have-accumulated-by-age/
I agree with FS wholeheartedly. I wish I knew what I know about buying cars 6 years ago when bought a Mustang GT conv. For 32k on a 60k after tax salary.
Everything he wrote about, from the stress of the car payments every month, to small dings and scratches on the car, I’m a living proof of that. I finally paid it off and traded it in for a used Toyota Camery hybrid last year, paid 5k in price difference but at least I have no car payments now and I don’t think I’ll be buying another car for the next 10 years, I’m done.
Hi
I loved the article and will follow some of the guidelines listed. But I have a question about buying the cars.
Do you recommend paying for the car in cash up front or using the car payment approach?
Depending on your above answer, why do you recommend this?
Thanks for the advice. Really helps as I’m a young reader.
-G
Hi Gurren,
The post is here to encourage people to spend less than they make. Using the 1/10th rule helps that. Getting a loan that’s not a 0% interest loan doesn’t make sense on depreciating asset. If you stick to the 1/10th rule, pay cash or get a 0% loan it doesn’t matter too much, b/c 1/10th your income should be low enough to keep your monetarily safe from disaster.
Don’t forget to subscribe to my e-mail feed!
Regards,
Sam
Instead of a hard and fast 1/10th rule, why not also select a vehicle based on “economic” characteristics such as lowest operating cost over time and ability to retain value?
Turns out my first stated criteria, is identical to a person trying to make a living as a TAXI driver. Basically to max profits as a TAXI operator one should seek the lowest operating cost over time.
thetruthaboutcars.com/2010/03/curbside-classic-1977-mercedes-240d-diesel-w123/
autoblog.com/2014/05/12/morocco-mercedes-cab-trade/
The problem with vehicle that operates efficiently as a TAXI is it lacks appeal or said another way, an economical basic sedan just isn’t a babe magnetic! There are some sedans like a BMW 540 that can have primal appeal and be perceived as a drivers car. Problem with the 540 I found out from personal experience is they are not only costly to purchase but also to maintain. Since you’re also from California and market wise, ya might be aware that this state has a public pension problem:
city-journal.org/2013/23_1_calpers.html
anyway as related to the car issue, ya might have hit a pot hole (I’m down in San Diego and have in a BMW), the interesting thing is I have a feeling that deferred maintenance such as repairing roads is going to be more of a problem in the future because underfunded pensions are next year (June 2015) are going to have to be official put on a balance sheet since the accounting rules are changing:
articles.latimes.com/2014/apr/09/opinion/la-oe-fritz-pension-liability-california-20140410
One thing about high end cars, like a modern high performance BMW is the tires are low profile and alignment problems happen a car hits a pothole. With “well built” older cars like old diesel benzes, the tires aren’t low profite so hitting a pothole does not cause as much damage.
In order to meet my second stated criteria of retaining value, a car must have some kind of style that appeals. With modern cars, the basic lines of a car are optimized to have the least wind resistance. Back in 70’s and earlier, cars had distinctive profiles.
Long story short instead of purchasing a new car that only depreciates, why not leverage your money and hire a local mechanic to fix up an older car that might appreciate. Here is a link to hipsters do just that:
mercedesmotoring.com
Note my own personal story is I got rid of BMW that was costing me 7k in annual maintenance. I was kinda inspired seeing what the hipsters had accomplished, so recently jumped on a “local” opportunity when a mercedes 300cd that was in immaculate condition was listed on eBay and paid just over 14k for a vehicle that might even appreciate in the future.
Sam, I generally agree with your guidelines, my wife and I net well over 200k post tax most years and we own 8 and 9 year old cars which are reliable and are probably optimistically worth about 10k each at current market value. I love seeing my ad valorem tax bills decline every year and have pulled the collision insurance on one as I can easily replace the car if necessary. Both my wife and I own our own respective businesses so we are able to take the IRS mileage deduction on each car as a business expense (which nearly outweighs the tax and insurance costs in our Federal and State tax bracket). At the 33% Fed tax bracket or above if you have your own business you could actually own extremely cheap cars and see a net positive on a tax basis if you drive for business quite a bit.
However, there are some interesting alternatives to your guidelines when it comes to electric vehicles. In Georgia you can essentially lease a Nissan Leaf for nearly free when you account for the State tax credit (not to mention fuel savings and virtually no maintenance) – yes the mandatory insurance costs will go up but it really works out to nearly a wash for driving a new vehicle. While I generally prefer owning cars and buying them outright – in the case of leasing a Nissan Leaf there is no cheaper car to own on a per use / annual basis. To put it as simply as possible, in states that offer as generous electric car tax credits as Georgia, it actually makes more sense to lease an electric vehicle than buy a cheap ICE car. Of course you’ve got to be able to live with limitations of an electric vehicle (limited optimistic 80-90 range) but if that works for you – you get use of a 32K new car for a fraction of owning an ICE clunker.
Gotta love Georgia. And subsidized college tuition, if not free for kids with over a 3.5 GPA!
These guidelines are really interesting but as an Indian I find them extreme.Here in India we have a lot of taxes compared to the US,the gas is so expensive,not just gas but every costs in running a car is higher compared to the US.A gallon of petrol costs $4.8
But the rules are different. A person can spend up to 3-year-salary on a car and 20-year-salary on his house.
Though I like these guidelines,I have a question.Does everyone who own a car in the US earn as much as they should according to the car they own as mentioned above?
Not at all, which is why there is such a retirement crisis in America. We Americans spend like there’s not tomorrow and don’t save enough for our future. Americans love their cars.
Thank you for your reply.I like to state some of my experiences.All my friends’ parents with an annual income of around $35,000 own a house which is now worth around $210,000.Almost all of them after the economic boom in India purchased luxury automobiles worth more than $50,000 and they all have secured retirement plans and a pretty good monthly income of around $3,000.and they live peacefully with really rich lifestyle.don’t mistake for cost of living,they are almost same in fact after the boom they became higher.
Here in India we have a lust for luxury vehicles,according to the last survey Luxury Automobiles were in 3rd position of top imports with Crude Oil and Gold in 1st and 2nd position respectively,Though we don’t have good roads and face frustrating traffic.But a lot of efforts have been taken to build new roadways around cities.
In America where you have better driving conditions is it not dangerous if a person spends 50% of his annual income in a car which he wants to own?
Final question-
A person can own a house which is worth his 10-year-salary and car which is worth his 3-year-salary,along with reasonable Bank Balance and safe & secured retirement plans?
theses are the simple rules which we use in India well not everyone but at least the middle-class.Are these rules applicable in USA?
why I ask this question is,when we people in India have successfully accomplished our life goals whilst following these rules I mentioned,why can’t the people of United States a country which is portrayed as a superior country to us do it?
I don’t understand your question because it sounds more like a statement. What are the life goals of a typical Indian person?
Not sure who is portraying superiority of country.
Perhaps you’ll enjoy this post more on: The Stealth Wealth Revolution
I am not sure about India’s financial culture, I know they typically save more than Americans, but math does not lie. If ANYONE spent 10 year salary on a house and 3 years on a car, their finances would be in ruin.
For example:
The average American family has a salary of $51k. Their home would be $510k and drive a $153K car. That is $663K that would need to be saved or borrowed! Lump that into a 30 year loan at 5% and the principal and interest alone would add up to $41k a year. That is more than the take home salary after taxes.
Sorry Abhishek, your simple rules are mathematically impossible. It does not matter if you make $100 or $100 million per year, the math is the same.
The cheapest I can find gas here in California is $4 and it can go as high as $4.50–not too much different to India; although average incomes in the Bay Area are probably somewhat higher than India.
This is radical. This would make many people feel poorer. Imagine making 100k+ and driving a Honda Fit. This goes against everything every American (and would-be American) has been told. It’s not like people are paying full price on purchase. Most people stretch it out for a few years.
Suppose I make $50K/yr and plan on keeping my car for 5 years. Can’t I buy a $20k car without worry? Taking everything into account the cost would end up being around $5k-$7k a year depending on how much driving you do and on where you live.
I do agree with you that we spend far too much on cars. Wasted money that could be more smartly handled. But in this car-obsessed hemisphere of ours your theory ain’t gonna fly very high.
Having said that I’m never buying a new car again.
While older cars “cost” less, they may cost more to own. Suppose you buy a 5 yo car, out of warranty for $30k and sell it 5 years later for $10k. It only cost $3K per year, but you’ll have to pay for everything that breaks; and the older the car, the more that breaks. I spend 2K/year for maintenance on my 10yo BMW.
This is bad advice. Here is some good advice: Don’t scrimp on items that you enjoy every day, which includes but is not limited to: Your TV, your Mattress and your Car. The concept here also doesn’t distinguish between disposable and gross income. The idea that someone making 500K per year with $2M in the bank should drive a BMW 328 to keep within these bounds is preposterous. Also, a Car is a 10 year purchase; an $80K car will cost you 7,200 a year if you keep it 10 years (and sell it for $8K). I’d argue that the cost per year should be 1/10th of your DISPOSABLE income. If you make $42K you have little or no disposable income. If you make $300K you have enough to justify a $100K car without much risk.
really good article. lots of dumb comments “..millionaires can afford better cars…” are missing the point. plus it seems like a lot of folks reading your page make a lot of money.
I found your page here because i am having trouble fitting my head around the simple fact that average new car prices do not match average wages. the ratio is way off. kudos to you for putting a number on it 1/10! i love it.
Car inflation has been huge as opposed to wage deflation over the past decades. I just can’t believe the median household income of $51,000 is buying the median priced car of $31,000. That is financial self-destruction IMO.
You may enjoy this post: Maybe It’s Your Fault Why The Wealth Gap Continues To Widen
Your comparison is skewed. The average NEW vehicle price is $31k, and the average American family earns $51k. Your assumption is that every American is buying a new vehicle. That being said, I think an inordinate amount of the middle class purchase new cars as status symbols and it destroys their long term savings.
I have been lucky enough (or worked hard enough) to break out of the “Middle Class” and I still cringe at the price tags on all vehicles new and used.
After reading the post and most comments along with input from friends and family I’m stuck in a dilemma .
Right now I drive a 93′ BMW which I love and is very reliable I spend about 200+ IN regular maintenance a year and it hasn’t given any problems I’ve had it for 2 years bought it for a little under 2k. I am starting to notice that the clutch is starting to give out and I suspect that it still has the original one since the mileage is 118k, the previous owner kept documentation and clutch isn’t mentioned at all. the parts and labor for when it does give out will be approx half the value of the car. Also since I’m 21 with the attention span of an ant I’m bored and want a new car.
Just recently I’ve set my sights on a car that is around 10K everyone says that I can afford it and woud be a good way to build credit. I recently started a job making 25k a year with promising ways to get raises quickly but not in any substantial form (2-4k raise in the first year) and have very low financial responsibility.
I don’t know what to do with my money and putting all my eggs in one basket or investing and losing because the people I gave the money to weren’t on their toes sounds risky to me . If I buy the car I know I’ll have a hell of a lot of fun in it, and I’ll thuroughly enjoy every penny. I feel like if I buy a pos car as my next onr I’ll go crazy from having to deal with the mentality that I have a pos car.
Might seem like an easy choice to some of you but growing up in the situation where I didn’t get anything I wanted is, for some reason or another, making this decision tougher than I’d like it to be.
Any input is appreciated. Sorry for the huge wall of txt
Have you considered replacing the clutch yourself, maybe with help from a more-skilled friend? Saves money, increases your understanding (and interest) in your BMW.
That’s a typical activity for a low-ish income car enthusiast. Keeps it interesting, gets you involved in the enthusiast community, and you didn’t drop half your income on a car.
This is not realistic.
If you make less than $25,000, but you work in an area that does not have reliable public transportation or bicycle lanes (which is most places in the U.S.), how are you going to get to work every day so you can keep your $25K job? You’re going to buy a car. Carpools aren’t always feasible either, since poor people often know other poor people who don’t have cars and/or they can’t rely on another person’s goodwill to drive them to work every day.
I mean, I can understand the concept – we probably don’t need to buy as much car as we buy, on average. But suggesting that low-income people try to make do without a car just compounds the problems they already have.
How much do you recommend someone making $25,000 spend on a car without exacerbating their finances then? Let’s discuss solutions.
So, analyze this one: I make $80K/yr. drive my vehicles for 13-15 years, have a commute of 85 miles per day, and have NO credit debt except a mortgage and my car payment. I feel I can justify buying a new car that gets 15 mpg more (remember LONG COMMUTE) and has no more maintenance issues, rather than 10% I jumped to 20%. I’d like your feedback.
Thanks and thanks for the great website.
If your sister puts $1000 to $1200 into maintenance per year, that is only 3 months worth of new car payments. What does your sister do with the other $3,600 she saves by not having a car payment. I think having an extra $3,600 in your pocket per year would eliminate at least as many stressors as a moderately reliable car.
Can you translate that 1/10th rule to a per annum rule instead? Buying a new car every year that’s 1/10th my income is the same as buying a car costing my full income lasting 10 years.
Also, for a family making $200K/yr with $400K in assets, are we considered well off (wife is 26 and I’m 30)? If so, can I afford a used 4 series bimmer ($60K after tax)?? :)
Thanks!
I’m new to the site and I just wanted to say that, thus far, I love what I’ve read. I agree with the premise of this article. I’ve seen far too many of my friends and family finish college or grad school, get their first job paying decent money and immediately lock themselves down to a $400/month car payment for the next 5-6 years, failing to realize how little return they get on that investment, besides the status of having a new car.
With that being said, I do identify with some of the comments above that the 10% rule, as a hard and fast guidelines, may be too restrictive. I lived off of graduate stipends for several years after college and was constantly juggling car repairs. I bought a “new” car in the $5000 range two years ago, which did fall in line with the 10% rule as I make right around $50,000, but was still constantly paying for $300-400 repairs in addition to maintenance associated with a car that has 100,000 miles.
From this perspective, it’s been a great stress relief to buy a new car and not have to worry about constant maintenance and repair bills. I stuck with a modest car, a 2012 Hyundai with 25,000 miles that cost $13,000. I had saved up to pay cash for the car and hope to get 7-10 years out of it. Based on the 10% rule, I almost tripled what I should spend, but the car will likely last 3-4 times as long, with likely less maintenance/repairs, than another $5000 car would. I totally agree that people spend way too much money on cars that is a terrible investment, but I fear that sticking to such a restrictive percentage, on a modest income, would leave people like me buying a car every few years and perpetually having unexpected breakdowns and repairs to deal with.
this article hit one of my hobby horses – my net worth is over $3M, increased last year by over $700k – and I drive a 1991 Honda Civic worth about $1k – guess that means my car rule is 1/700 at the moment.
Bought second-hand in as-new condition in 2003 for $5k which I thought was top dollar back then, it needs brake seals sometime but is otherwise perfectly maintained and runs sweet as a top.
People driving shiny new cars can feel free to mock my choice, but I recall from working in real estate sales that most guys in suits and shiny new cars had car loans, no money in the bank, and net worth in minus figures.
I’ve been frugal in my lifestyle, and as a result the other day when I worked out a new thing I read about – Investment Wealth Ratio (income-earning assets on total assets) – or how much of my assets were earning an income – recommended to be above 55% – mine worked out to be 84% – which may be why my net worth increased 27% last year.
I like a tip I gave to a work colleague when he was thinking of buying a car – ‘buy the cheapest car your ego can afford’ …
otherwise – “We spend money that we do not have, on things we do not need, to impress people who do not care.” – Will Smith
I think ‘keeping up with the Joneses’ has generally been found to be a cause of hedonic treadmill dissatisfaction and never quite having enough.
I like the story – ‘At a party given by a billionaire on Shelter Island, Kurt Vonnegut tells his friend, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history.
Heller said, “Yes, but I have something he will never have: Enough.” ‘
‘buy the cheapest car your ego can afford’ …
Fantastic advice!
So your saying I have to make between $150-$200 thousand a year to drive a Civic? You are a blooming fool I will say don’t buy more than you can afford but that’s just insane.
Indeed. What’s wrong with making $150-200K first or buying a second hand Civic for $5,000-$7,000? Their reliability is legendary.
I may be a fool, but at least I don’t have to work any longer for money. Freedom is priceless and the 1/10th rule is one of the things I’ve discovered to share with others who want financial freedom sooner, rather than later.
I live in Colorado, and a Civic is not even going to get me out of the driveway in January.
Also, if you have a vehicle with less than 200 horsepower, and you plan to drive it on Interstates where speed limits are 75 mph (and actual speeds are about 85 mph) – then you are taking your life into your hands with a cheap vehicle.
If you make less than $200,000 per year, but you still value your personal safety, and you want reliable transportation and a modicum of comfort – then you need to find a old, used car that has new tires, new brakes, a new timing belt, a new water pump, a new fuel pump, a new power steering pump, a new air conditioner condenser, a new transmission, a new catalytic converter, and a new muffler.
Or you could just spend a reasonable amount of money ($20,000-$30,000) and get something that is going to fit your needs and will last much longer.
Zane, Getting a new car for around $25,000 every ten to fifteen years is a great idea. If one is retired then it is possible to put under 2000 miles a year on the vehicle. Most of my buddies keep a car for 50,000 miles and then trade it in. They have realized that car repair is for dummies. The ten percent of income is something I did in my youth. If you have a net worth of one to three million dollars and expect to live only another twenty to thirty years, then splurge. TJF
So I have a question. I fully agree that the sole purpose of a vehicle (at least for me), is to “take you reliably from Point A to point B”. Yes if you make over lets say 150,000K a year then it is reasonably easy to find a reliable car for 10% of your income but anything under that and it gets harder. You can definitely get reliable used cars for under 10K but at some point there is a trade off between the original price of the car and the amount you end up paying in repairs and how quickly after purchase you begin making those repairs. For example, someone making the national average income of 42,000, spends 4200 on a car. If they are really lucky they might get 18 mnths- 2 yrs without having to put too much money into it but after that it quickly becomes a sinkhole. On the other hand if they spent lets say 10K on a car (~ 25%), they could probably get something used with a decent warranty and have a least a few years of relative reliability (dependent on make/model of course!). I really don’t know that much about cars so my numbers are probably off but you get the point. I think there is a case to be made for paying more than 10% so that you can save in the, sometimes not so distant, future on maintenance costs. I always buy used cars but am confronted with this dilemma every time. Is it financially more advantageous to buy cheap but end up paying more in maintenance sooner or buy more expensive and pay less in maintenance. I’ve tried to come up with some magic number of what is the optimal price to spend on a car. (Assuming you really don’t give crap what it looks like and just want to spend as little as possible)
Any thoughts?
Hi E, I’m not sure what your question is.
But I drive a $2,500 car and make much more than $25,000 a year. He’s been great for 10 years now, and he’s 14 years old. Go Moose!
Getting rid of my $20K sports car and buying a car only worth $5K last year was one of the best things I ever did. I finally crossed over into a positive net worth just this month for the first time since being an adult. Not only that but my stress levels have nearly disappeared by getting rid of the performance car and other useless consuming debts/bills like cable.
It is amazing how reliable a $5k can be, all I have to do is gas her up and change the oil a every so often.
This strategy makes more sense to me than the 1/10th rule. You can get a runner for under $5K, but if you want a decent car that is versatile in its abilities and uses (e.g. commuting 30 miles a day, plus the odd 400 mile trip) then you probably ought to be looking at the $5K cars.
Buy $5K cars until you are rich, then up the price somewhat.
This doesn’t makes sense without considering operating costs. I have ALWAYS followed this rule, and the most expensive car I have ever bought was $4K after being out of school for several years. But I can’t count how many cars I’ve bought and run into the ground because they were a cheap POS. Focusing soley on purchase price is leaving out a huge portion of the equation. I followed this advice before ever reading it and I agree with most of the comments on here that it does not work in most cases. 1/10 of your YEARLY income to OWN/OPERATE (purchase, maintain, insure, gas is too much of a variable to include) a vehicle makes way more sense (and is also quite frugal if you ask me). If it exceeds that, sell it and figure out how to make it work.
I like the concept, but this idea only works in a vacuum.
If you are like most NORMAL people and are in the $100K-$200K income bracket, you can easily afford a mid-level Audi or BMW and still invest plenty for retirement if you have the ability to set priorities and exercise a bit of self-discipline in other areas of your life.
I’m 47 and make $110K per year (not counting my wife’s income). I have been investing at least $2000 per month for 12 years and just passed the $500K mark. I also have more than $60,000 in personal savings (including my wife’s savings).
Here’s a typical budget for me.
Monthly Income: $6850
Monthly House Payment/Escrow: $1700
Monthly Utilities and Insurance: $720
Monthly Groceries (for 3 people): $700
Monthly Spending Allowance: $1000 (usually less)
Auto Fuel/Oil/Maintenance: $500
Monthly Investments: $2230 (usually more)
By the time I retire, I will have well over $1 million, and I will be able to draw an annual pension of around $70,000. My wife should have more than $600,000 and will draw an annual pension of around $60,000.
I am buying a new Acura TLX next month. After taxes, it should set me back around $52,000.
Normal people don’t have $70,000 a year pensions.
Check out: https://www.financialsamurai.com/the-average-net-worth-for-the-above-average-person/
Great blog, I recently started reading it, and you provide financial literacy which really should be taught in middle school.
I moved to the US 10 years ago, and was just shocked at how much the average person spent on a car. Being in my early 20’s at the time, I had no peers in Australia with new cars, but suddenly many here who earned as little as $20k, had brand new cars.
I have only owned a car when I needed to commute to work in a car. I sat down about 2 years ago, when I owned a car and wasn’t using it to commute to work. I discovered that I had effectively spent $500 per time I had driven the car over a 6 month period. The average distance of each trip had been 15 miles. I quickly sold the car, bought another investment property, and haven’t needed another car since. With property booming at the time, those dumb 6 months cost me in excess of $30k in net worth.
The 1/10th rule is a fantastic starting point, but I think it could be expanded upon. A car depreciates every year, especially in the first 1-3 years. This is probably the largest cost involved in owning a car. A brand new civic/corolla at $20k, will cost more in the first 3 years, than a 3yr old BMW at $20k. I think the true cost of a car is the sum of;
Car depreciation for current year (you can sell your car at any time, it is an asset, but is depreciating).
+ insurance
+ parking costs (or what you could let your parking space for)
+ car payment / lost investment cost (ie I would consider a $20k paid cash car, to cost $1500k per year in lost investment opportunities).
What proportion of annual income do you recommend spending on using the above cost formula? I think anything over 1/15th of gross income is excessive unless you consider it a hobby.
Saying you will own a car bought new today for 10+ years, just means you are paying today’s money, to subsidize your costs in 10 years time. On a $30k car bought new today, compared to a $100k investment property ($20k deposit, financed 80% for 30yr loan and buy $10k car with change), you are close to $100k better off with the property in 10 years time.
I’m just going to disregard this rule as nonsense, here’s why: Buying a car has many variables such as maintenance cost, fuel efficiency, resale value, etc etc. A wise investment in a car comes from a lot of research into those factors. Like it or not, a car is a status symbol. I make $60k gross a year. If i were to roll up to a client meeting in a beater car I bought for $6k, they wouldn’t want to do business with me because they would think I am not successful enough to buy a respectable vehicle. Lets also discuss the length of ownership. A $30k car can be a wise investment if you drive it for 15 years, but a terrible idea if you keep trading up every 2 years.
The nice thing about the American car market is that there are options for every need level. If your needs are a reliable vehicle, than anything under 10k is a bust. If you need a truck or van for your work/life than you’re spending at least $20k on something reliable. If all you need is a ride to get you to and from your POS min wage job, go for the clunker.
I feel like $30k is the line between practical vehicle and luxury purchase. No average person should spend more than $30k unless they can justify it as a hobby or interest and account for it accordingly.
In conclusion, i don’t believe that a simple rule does car buying justice. You would be doing a better service encouraging people to evaluate their needs and not succumb to the glitz of a luxury vehicle, making a sound purchase.
Ryan, if you feel you can afford a $30,000 on a $60,000 a year salary (less than $50,000 a year after tax), then more power to you.
Take a look at theses post for more reading:
The Average Net Worth For The Above Average Person
The Recommended Net Worth Allocation By Age Or Work Experience
How Much Should I Have In My 401k By Age
But that’s just the thing, is that the rule takes nothing else into account. 60k is a lot to me when I’m a single guy with no kids or debts, decent E fund, and 20% contributing to my 401k. I live on about $18k/year.
Now, say I had 3 kids and a wife. My expenses would be significantly higher and would definitely justify a more conservative purchase.
Also, in my part of the country a truck is necessary to handle the rural lifestyle. I’m not gonna dump 45k-50k into a new one, but I can get a decent used one for under 30k.
Ryan, it’s whatever you think is best and makes you happy. This rule is my simple guide based on my experience. Each person is different.
This rule is not accurate at all…
Lol… I worked a part time job and purchased a $16,000 dollar 99 honda civic Si Coupe when I was a teenager. I paid it off in 5 years. After my wife and I got married in 2009 we purchased a 2005 Honda Civic Sedan. We paid it off in 5 years. Stuggle free… We paid $80 bi-weekly… It was like chump change you would spend on buying lottery tickets and booze every friday lol… So I disagree with theory. My orthodontist makes about 200,000-400,000 a year and drives a Audi R8 and hes only 30. I just got layed off but my wife is working hard to keep us going and she wants a new Mercedes. You know what life is too short to keep all that money because your dead and gone where does that money go!!! “you get my drift” So enjoy life while you can and screw the automobile, gas companies… Enjoy Life!!!
That’s a pretty bullish sign that even thought you just got laid off you guys plan to buy a mercedes.
No wonder why the stock market and property prices keep going up. I hope you guys continue to spend and never run out of money!
The whole world nearly came apart just 6-years ago because of thinking like this. Have we learned nothing?
I think there are problems with the 1/10 rule as laid out; but it is a much better plan than a family buying a Merc after a layoff.
There are plenty of people enjoying life without a Mercedes.
I think I agree with most commenters in that there is obviously good advice covered in generalities here. Interest rates on the loan must have a place in the conversation. For example: I bought my car (2012 VW, 20k, about 25% of my yearly) with 0%, $0 down. In my situation, this had two directly financial benefits, 1) I was able to use my savings as the necessary down payment on my house, and 2) any 0% loan is free money, no? Why not take it and use the saved interest towards other higher interest things (like the new house).
Just discovered the site. Will be following.
Why is the Tesla in the 250k-500k category? That doesn’t match the 1/10 rule, is that due to lower maintenance and gas savings?
This is interesting advice, and quite short-sighted and situational. My wife and I are 49 with a 10 year old daughter. We have net worth $1.6M with over $1.1 in cash assets. Only bill we have is our mortgage on our new house of which we have 60% equity. I’m a senior engineer and my wife is a stay-at-home mom (former professional). We’ll easily semi-retire at age 56 and that is the plan. So, we have always been financially prudent, but we do enjoy life. About 5 years ago we go the stupid idea to get away from our new Lexus vehicles (RX 350 and GS 350) in order to “save money.” So, I sold the RX 350 (which we planned on trading in for new) for a great price (same what a trade-in would have gotten us) and bought a used BMW 3-series sedan with low miles. Within a few months that BMW left me stranded on the side of the road, the sunroof got stuck open more than once, and a few other issues. I spent several thousand dollars in repairs and dealt with a whole lot of nonsense in the process. Not to mention my wife and daughter hated the car due to tight suspension, tight steering, and cramped back seat (I actually liked the car). Within 3 months I turned around and bought another new Lexus (which we were going to do anyway had we not had the stupid idea to “save money”). We are on our 4th Lexus now, absolutely trouble-free. Everyone is comfortable, these cars have 10 airbags each, and are just a joy to drive. Lexus even gives me a loaner if I just get my oil changed – so there is zero down time with the Lexus and just no hassles. So, trying to save money on something that you use every single day of your life, within reason, is a losing proposition. Get a nice car that you can afford. Only you can decide what you can actually afford, but in the end, you only live once – I get a tremendous ear-to-ear smile on my face every time I drive my GS 350 – it is fun, safe, and most importantly, reliable. We have spend $0 on repairs on any of our Lexus cars in 6 years. The same applies to a house – we built our 3rd house new, very high end quality but low-bling (Sub-zero, quartz counters, copper (not plastic) plumbing. Why, because we put $150K into our previous $250K house in repairs and renovations – what a waste of time (we did make a lot of money on that house when we sold it, however). We have been in our new house for over 6 years – zero issues, low utility bills because of all the efficiencies we put into it. We come home, we relax, we enjoy. I have been to Home Depot zero times! Let me say that again, I have been to Home Depot zero times! In contrast, in my last house we lived at Home Depot and it really sucked a lot of time and money out of our lives – it would have been cheaper just to build a new house and be done with it. Gee, how much money did I spend just in gas money going back and forth to Home Depot every other day?? Again, look before you leap – as many astute folks on this forum have pointed out, the cost of maintenance and upkeep on old cars (and houses) will devastate your time and money portfolio. We like to spend our time on family, vacations, and entertaining – not waiting for tow trucks, rental cars, and car repairs. Lesson learned, do the life cycle math on any purchase. Buy solid wood furniture – not engineered wood. Buy any new Toyota or Honda over any used BMW, Audi, or Mercedes. Let me give you specific example. Most Lexus cars (and Toyota) use “normal sized” tires that cost about $1K to change and last about 40,000 miles. A typical Mercedes uses tires that cost about $2500 to change and only last about 20,000 miles. So you can do the lifecycle math on that. I stress, however, that if you like the Mercedes, then buy it, as long as you know the lifecycle costs of that car. If you don’t enjoy the car, then you are wasting your money. Leasing gets a generic bad wrap – I never lease, but I did lease my last Lexus (a demo with 6K miles) because it was mathematically cheaper to lease the car than to buy it outright (due to zero money factor and low capitalized cost due to demo). In fact, I bought it at lease end because the residual value was about $5K less than what the car would cost to replace used! The answer to all these discussion are that the right answer depends on the specifics of each situation. But don’t buy yourself into a maintenance and time-sucking disaster.
Finally, everything that we buy is disposable, but for some reason we focus on cars. Perspective? A pair of $70 jeans at the Gap is worth $0 the day you take the tag off and will probably last a few years. If you tear them or spill wine on them, they are a throw-away item. Now THAT is depreciation! In contrast, you can drive a new $70K Lexus for 5 years and it will still be worth $35K in 5 years and STILL be under warranty! Oh, and it is a repairable item, of course. Which purchase makes more sense? It is nonsensical to compare these two, yet both are “purchases.”
I appreciate any advice to be frugal, live simply, and be happy. The 1/10 rule is actually a good starting point for dialogue, but beyond that it is purely situational. Sorry for rambling, but my experience and practical sense tells me to buy a few quality new items over a bunch of used junk whenever possible. You also have to look at the type of item. For example, I play electric guitar. Used guitars are a great deal. Used guitars are either in working order or not and there is really very little to break- so you’d have to be completely out of touch to not know the difference. You basically can’t lose. Buy solid wood furniture – it WILL last forever. Buy particle board garbage and it will last, well, a few years at best. Want proof? Drive down a low income street on bulk garbage pick-up day – what do you see? A bunch of particle-board wall units, dressers, and other plastic engineered crap – poor people are poor because they get sucked into the cheaper syndrome. So, they buy a new particle board bookcase every other year instead of buying a solid wood bookcase once. We switched to all Apple products 3 years ago. My Macbook Air works exactly like the day I bought it. We have nearly $10K of Apple products in our home and they all work flawlessly. I cannot say that for the PC-based computers and peripherals I bought over the years (I threw away too many to count). Measure twice, cut once. Look before you leap! All good thoughts.
I wish everyone happiness and success in whatever form makes you happy. Enjoy.
Well, this article isn’t directed at those with $1.1 million in cash. This article is here to help folks looking to build their financial nut and get to where you are.
If it pleases you, as it has pleased a lot of other wealthier folks, follow my Net Worth Rule For Car Buying. It’s for folks father a long the financial journey.
Cheers
I’m not sure what everyone is complaining about… either there are people on this thread with absolutely no sense of knowing a good deal when they see one, or they’re attempting to convince themselves that they made the right choice of buying that new BMW when they got their promotion.
When I got to college my Saturn was consistently breaking down on me. I saw a 2000 Monte Carlo SS with 130,000 miles our local Chevy dealer and stopped to ask about it. The price listed on the window was $7,000. I asked if they would take $3,500 plus my Saturn (worth at most $700) and they agreed to it. Simple as that. I kept that car for several years after graduation, which with my $40,000 salary, would have placed me in the 1/10th rule. I will admit that when I got my first job making $60k a year, I went out and bought a used 2008 Tahoe LTZ for around $20k… but that was prior to reading this article and I convinced myself of its value because “I earned it.” Since reading this, I’ve decided to sell it and shoot for a used pick up (we have pretty bad winters) that I can pick up for $5-8k.
Good stuff Ken. I hope that new used Tahoe treats you well. Those are beasts!
300,000 to get a 30k car haha. I am in the military and make around 1,500 a month after taxes. I’m financing a 40k car and paying around 700 a month. I’m living pretty good. You dont have to be rich to own a nice car. You just have to know your budget!
Do you think that’s wise to spend almost 50% of your after tax income on a car? What do you do for food and savings?
I was about to buy a used BMW xdrive 535 for about 35k but i accidentally read your article(the night before going to the dealer) and followed your advice and instead bought a used accord for 16k and the remaining money is sitting pretty in my 401k.
-Thanks
Awesome! You’re going to love your choice!
If you are in Minnesota, put a max price of $2000 to $5000 dollars in to “cars and trucks” search in Craigslist. Find a car below 70,000 miles with little to no rust and some kind of fuel injection. If you find something older that is carbureted but is almost mint (you will find one), make sure you know how to start it in all weather. Older people drive Crown Vics, Caprices, Continentals, Acclaims, Shadows, Spirits, etc., and they tend to put few miles on their cars and baby them. Do the math on your annual mileage and fuel use to see if a low mileage yet safe V6 or V8 is feasible. Foreign cars tend to be way too expensive for the mileage.
While I’m also glad you didn’t spend 35k on a used BMW… please tell me you did not take a loan out of your 401k. Your comment suggested that you were going to pull money out to buy a car which is not a great way to save for retirement.
That’s not how I read it at all. I think he means that the money he didn’t spend on the Bimmer ($35k – $16k = $19k) is going INTO his 401k.
buying I new car for $30000 and keeping it for 10 years cost $3000 per year, so I only need to make $30000/yr to afford it? or am I way off?
Nah bro, it is 30,000 times 10 so you need 300,000 gross income a year
Sounds like a great decision!
This article is just excellent: a car purchase is the worst investment one can make.
While i think that many of FS’s nuggets of wisdom are right, I think this car rule thing, especially buying the used car suggestion is ‘soul deadening’. I have bought both new cars and used cars in my 25years of working and now that I am 50, I can say with a few years of wisdom under my grey hair that the joy of buying a new car is like falling in love. Yes it may last only for 3 months but those 3 months are worth it. Buy a new car I’d say even if you need to tighten up on other things for a few months BUT use it till it becomes 10% of your annual income as he says.
It’s not the new car or used car that’s the point, as I recently leased a new car, but sticking with the 1/10th rule to avoid financial blowups.
Why not make more?
It’s easier to say “go for it” if you are financially well off at 50. But the key is to get to that stage first.
I bought two new vehicles in six months and traded the first one in on the second and did’nt too bad. I actually did fairly well but both vehicles just made me sick. I’d open the garage door (from the house) and curse, cry or both. I did’nt need another car (especially new), I already had one that I bought new but was about 8-9 years old at the time. I had a POS live in girlfriend with no job and no vehicle amd I wanted her to her a job. No excuses about transportation.
Second one I got because I could barely get in and out of it it was so low. I’m not tall amd I’m not fat. Second one I knew before I got it I would be putting $5K in it to get it where it is now. Can’t buy em’ like this. I found this article because I want both vehicles gone and I may have just been talked into fixing up the older one and selling the newer one. I would lose $5K on it but again, it’s too small.
I find this solid advice. You may be able to go 15% with no kids and things going well at work. Most people should probably not exceed the 10% rule. I’m very long-wave bi-polar. Meaning I get depressed a few times a year and manic a few times a year, about twice each annually. I KNOW HOW TO PISS $ AWAY!
I know more than one retired millionaire under 50 years old that will not buy a new car. They say it’s the worst investment you can make. They have boats and second and third homes but refuse to buy a new car. A clean, newer, low mileage vehicle is the way to go.
Thanks for the article! I bookmarked your site and already sent my brother and sisters a link to this article.
Buying awesome used cars is another art of being cheap. I drive a lexus LS, according to that chart I should make half to a million a year. But I bought a 12 year old one in great shape with reasonable miles for $5200 from a lexus dealership. That’s my second Lexus V8 and I’m in my mid 20’s. Blows the doors off buying a brand new piece of junk, and more reliable. You are taking a much greater risk with the German makes as they are much less reliable. Most people looking for a cheap reliable car buys civics, corollas hyundais etc, so there are no deals on them and in my opinion are excessively expensive used.
Deals on larger luxury vehicles that burn a bit more fuel are a dime a dozen compared to small cars, and the gas difference between my car and a civic is negligible (IMO).
Just like anything else, if you know the car market, you will always drive a great car as deals are ubiquitous.
Other than ignorance, I’ve never understood why the average joe would want a new car, spend $18000 on a new kia rio or he could buy a 6 year old LS460 that cost like $80000+ just a few years before, and will outlast the newer car 9 times out of ten.
Because a 6 year old LS460 will have more expensive problems sooner “9 times out of 10” than a brand new Kia Rio that will carry a warranty for at least the next few years.
Buying used luxury cars is a great idea if you want the feeling of luxury without the price tag imo. But don’t try to make the argument that a 6-year old luxury car is more reliable than brand new car because that simply isn’t true.
And also one thing that never changes is the cost of maintenance/repairs on luxury cars. It will always cost more to fix a car with an $80k MSRP than a car with an $18k MSRP.
9/10 tims, Drew has no idea what he is talking about.
Ask anyone familiar with Lexus, and they will tell you they, even though they are luxury vehicles with big V8 engines, are more reliable than alot, if not most cars out on the road.
Mass produced, plastic junk like Kia Rio’s don’t hold up for nothing. You can scour the classifieds and find tons of high mileage Lexus LS’s and GS’s, but how many high mileage Kia Rio’s and the like will you find?
That “warranty” also isn’t as reliable as it seems, as everyone who’s been to a dealership knows what to expect when they start going in there for the service work, and for serious problems that “should” be covered on the warranty. If you don’t mind playing phone tag with the service and dealership managers, mechanics, regional headquarters, all to just get what you thought the warranty would give you effortlessly, then go right ahead and play the games every dealership plays.
They don’t make money on the sales of new cars. They make it by bleeding you every time you step into their service centers from then on out. The manufacturer already has your money they need once you pull it out the lot.
Unless you are completely financially secure for years to come, there is NO reason to buy a brand new or within 2 year old car from the manufacturer’s dealership. It’s nothing but never ending hassles and games with them, and you automatically literally lose 10-25% of the value driving it off the lot.
this is ridiculous. a person can easily own a 5 series bmw by spending approx 1-4k in the first months to have it more solidified, newer cooling systems/hoses, etc. their engines will run to 500k with proper bmw maintenance schedules. dont expect a luxury german car to run like a camry, they just dont work like that period.
I for one did not follow the 1/10 rule, I never heard of it before and since I keep my cars forever how does this factor into the rule?
I believe in spending a little more to get something nice and I know will last longer. In the long run you are saving money when you don’t have to replace or repair it as you do with cheap made items (this is my mindset with everything). Also never pay interest on anything, do without and save until you can buy what you want. Using this idea since a young age I was able to build a new home and be totally debt free in my mid 30’s. I see it all the time with people around me, my one expensive item outlast 3-4 of their budget items, after several year they are spending 2-3x more and still have a cheap item they will need to replace again.
Back to the cars, Don’t be afraid of old German cars. I have been driving German cars for over 20 years and still have the first one I ever bought. They have all been problem free, you just have to take care of them and do all the maintenance as recommended. Also wash, wax and detail them often, inside and out, including the motor, trunk and wheel areas, all my cars look like they just came off the showroom floor. Also if you are a DIY type of person you will find they are some of the easiest cars to work on. Doing your own maintenance on any car or around the home will save you money. For parts only use OEM or brand name performance part, prices are less then most domestic cars.
As for how long will they last. I currently own 5 German models, sport and luxury, I bought them all used and paid cash for all of them. I have a car from the mid 80’s that get over 40 mpg, 2 from the 70’s that start and run like new (yes they were fuel injected in the 70′) as for our daily drivers my wife has a 2001 VW with over 300k miles (said she is excited to be on the way to 500k) and I drive a 1999 Audi with over 200k miles.
If you keep your car is in great shape you might not have that feeling of wanting something different. If you do you can upgrade the radio, get a new set of wheels or change the color with a vinyl wrap for very little cost.
An added plus of keeping your cars and keeping them nice is that my 70’s and 80’s models are worth 2-3x what I paid for them. That’s an investment you can enjoy!
Preach!!! Thanks! I absolutely needed to read this.
All in all, wonderful site. I’m turning 24 next month, have just over $10,000 in the bank. I’m getting antsy as to what to do about my money/lack of money. Your blog is really helping. :)
$10k is a good start but I hope you’ve been investing it not just leaving it in a bank account losing value every year. You’re young enough that you can manage the risks of the market. Put it into an S&P 500 index fund, ideally Vanguard since they have the lowest load (fees). That $10k may very well become about $500k by 65 years old. I assume you are in the 10% or 15% tax brackets, if so a Roth IRA would be perfect.
I don’t like this 1/10th rule. It does nothing to account for how long you hold the vehicle. If Chuck earns $50k/yr and buys a car for $5k every three years but Steve earns $40k/yr and buys a car for $10k and keeps it for 10 years, who is the winner here?
Why are you assuming that a $5k car only lasts 3 years, but a $10k car lasts 10 years? Seems like convenient math.
Seems like convenient math to conclude either way.
Please re-read the comment. I’m assuming you keep any car, be it $1k or $100k for 10 years. The point was that the amount you spend on a car should not be a percentage of your annual income but the best ROI. I drive my cars for 10 years. I spend a higher percentage than the article recommends yet over a 10 year span spend less than someone who could be following this guidance..
Actually Jake, you should probably re-read your own comment. You did actually say that the $5K car would only be kept for 3-years while the $10K car would last 10-years; not both for 10-years.
And I think you raise a very fair question, but I’m not sure how one can answer it. I’m sure there must be the information out there that can estimate the life of a good $5K car compared to a good $10K car.
I did hear somewhere (maybe here) that the sweet spot in terms of age and depreciation is to buy a car that is 4-years old. Autotrader.com has over 500 cars for sale nationally that are 2010 or more recent, with fewer than 30K miles, costing $10K or less.
I completely agree. The idea behind this rule is good, but the rule itself is overly simplistic. If I’m being honest I’d say this is actually poor advice.
1) He factors in parking tickets and traffic tickets, which doesn’t make sense as you can simply stop speeding and parking in handicap spots if you want to eliminate those cost.
2) He uses maintenance as an argument against a new car when it’s really an argument against a used car. A heavily used car will be out of warranty, and will be getting to the point where expensive things need to be replaced (timing belt, etc). A newer car will cost you much less in maintenance.
3) Insurance cost is definitely a factor, but my wife purchased a new car and our insurance went down.
4) He completely leaves out the most important factor which is the need to replace your used car. If you buy a new car you can bet that it will last at least 10 years, probably more like 20. If properly cared for something like a Toyota or Honda will definitely run over 200k miles before it NEEDS to be replaced. If you buy a heavily used car you are already well into the lifespan of the vehicle, and you will need to purchase more cars throughout your life.
5) The argument that you should have put $25k into the stock market in 2009 instead of buying a car is a good one…..except that most people finance their cars and don’t drop $25k in cash on one. So realistically that $25k in 2009 was more like a $5k down payment. That would be around $10k by now….just in time to buy another heavily used car to replace the one you bought in 09 that doesn’t work anymore and has cost you a bunch of money in repairs.
6) He mentions the stress related to car payments, but what about the stress related to not knowing if your car is going to get you to work?
You should almost always buy a used car over a brand new one, but something certified pre-owned, or a couple years old that’s already taken it’s major depreciation hit. However, using a 1/10th rule is frankly a little absurd. That would mean my wife and I would have a total of slightly over $8,000 to spend on 2 cars. What are you going to get for $4,000 a car? You may get lucky, but you’re most likely getting a car with over 100,000 miles, that you don’t know how it was cared for previously, that will require maintenance, and will need to be replaced sooner rather than later.
I bought a used car that cost $6,000. I owned it for 4 years. It cost $6,000 in maintenance and I had to give it away because it was so broken down. I bought a used car a couple years ago for $16k (well over 10% of my income at the time) I’ve yet to have to do any real maintenance on it.
So yes people. Buy a used car, but don’t buy an old piece of crap that costs 1/10th of what you make in a year.
Too many people think they have the right answer for how much car you buy, or how much house you buy, or how much you should spend on an engagement ring, or how much to spend on an annual family vacation and they are all wrong… It’s how much car AND house AND ring AND vacation you can afford. Let me explain…
I created a promise to my wife and myself shortly after graduating college and getting my first job. I swore that I would never have a monthly mortgage payment greater than 15% of my gross income. If we need a bigger/more expensive house I will have to wait. Because my saary has increased since buying my home I still make payments equal to 15% of my income so that I’m paying off more of the principle.
For a car I made the commitment to never buy a car unless I have the money in the bank to pay it off. We will probably be buying my wife a car late 2015 and plan to spend about $30k but I aready have that in the bank and Toyota and Honda usually have .9% interest rates, meaning I will still be making money off my money (my investments averaged 13.5% this year, so whil making car payments I anticipate about 12.5%)
My final rule is around saving money. Between 401k, 401k employer match, IRA, general long term emergency savings, etc. I need to save a minimum of 25% of my gross income.
Banks will tell you it’s okay to have debt to income ratios of 55%, but that will just buy you a poor life. My current DTI is about 14% and I couldn’t be happier!!
I like the thought process of all that stuff! That’s thinking holistically. Good work.
Holistic thinking is one of the key cornerstones of Personal Capital, where I manage my wealth for free. It’s all about looking at one’s worth from a top down perspective and then making decisions to optimize one’s finances. You should check it out. My net worth has really taken a turn for the better once I started tracking it online.
Hi
I came across your site randomly, but the advice seems very sound.
currently i’m in my fellowship and training to become a cardiologist, and will be done in 2.5 years. as most people know, salary in fellowship is around 50-60K a year.
I already have $150K saved up in an account ($150,000).
I’m planning on buying a new car within the next 12 months or so. i was initially looking at a brand new lexus LS (~80K) or a lexus RX (~$60K). i would most likely pay half in cash using my savings and pay the rest in monthly installments. is that a sound decision to make or am i setting myself up for disaster? i’m asking because after reading your article i’m starting to have second thoughts. and yes, currently my salary is around 50-60K but when i’m done in 2.5 years my salary will be $250K at the absolute lowest (i believe median salary is around 300-400K and rising).
thanks.
First off, I wouldn’t buy a car based off the salary I HOPE to receive. I’ve known several people who went to school to become doctors and either didn’t like it and had to quit or couldn’t find a job. Wait until you get a job to see what payments you can afford.
Secondly, assuming you buy the car regardless, I think how much you put down depends on the interest rate you can get. It looks like Lexus offers a 0.9% interest on most of their vehicles. If you can get that rate I would put down AS LITTLE AS POSSIBLE and invest the rest of your money somewhere low risk where you can get a minimum of 5% return. That means you’ll be making 4% per year return on that money.
Forget projected future earnings. You don’t buy a $30k car just because you may be making $300k+ *someday*. You make $50-$60k *now*, you buy a $5k-$6k car *now*. And a $60k – $80k Lexus?! That’s 100%+ of your GROSS EARNINGS IN A YEAR. That is foolish.
Do you have any debt (especially med school debt, which I know can be high)? If you have no debt, then congratulations! You now get to buy a car based on 5% of your net worth. 5% * $150k = $7,500.
You are obviously not a car enthusiast.
I’m a weapons enthusiast. I don’t buy brand new SCARs or ACRs, and I don’t spend all my money on restored Panzers either.
This rule does not take into account the entirety of someone’s circumstances. A single person making $50k living in a smaller town can afford alot more for a car than someone making $50k with two kids in a big city. The first person mostly likely has tons of disposable income, whereas the second most likely has none. The first person could save to buy a $30k car without even trying, whereas the second would have to pinch and save.
In addition, some people have longer commutes than others. People living in large cities can take buses, trains, etc, but people living in small towns may commute 50+ miles a day. They may be forced to spend more than 10% of their income to get something reliable that gets good gas mileage.
In addition, we all spend money on things that are personal luxuries to us. We east out at restaurants, invest in hobbies, go on vacations. For some people owning and driving is enjoyable. They may spend 20-30% of their salary on a car, but its because that car is more than just transportation. They’re willing to go out to eat less, to go on fewer vacations, because they find owning the car more enjoyable than those other things.
Its all about balance and looking at the whole picture.