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 hurl.
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 $36,000!
A median income earner buying the median priced car that now costs $36,000 in 2019 is financial suicide. Who spends ~81% 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 per capita, you’re now spending almost 100% 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% Gross On A Car
1) Maintenance costs: The more you drive, the more you will pay to maintain your vehicle. With thousands of parts per car, something will inevitably break or need upgrading. Not only do you have to pay for maintenance costs, you’ve also got to pay for insurance, 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.
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 since 2009 instead of paying for a car?
3) Stress. When you pay more than 1/10th your income for a car, you will become more stressed. You’ll feel stressed whenever you get a door ding after parking your car at the local grocery store. You’ll get stressed whenever you incur wheel rash after parallel parking too close to the curb. Sometimes when you’re driving in traffic, you’ll feel more on edge because you don’t want anybody damaging 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 more you want to spend on 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.
5) Makes you feel stupid. Deep down, you know that if you can’t pay cash for your car, 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? The thrill of owning a nice car fades after about six months. But the payment stays the same for years.
Depreciation Chart
If You’ve Already Bought Too Much Car
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 financial 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 high 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 ahead and spend more than you can comfortably afford. After all, we’ve only got one life to live.
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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.
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Updated for 2020 and beyond.
I find it humorous how aggressively some respond to this advice. I’ve spent much of my 20’s in a cheap sedan because I wanted to save money. Also, cheaper cars normally have cheaper repairs. Despite what some may believe I didn’t live at the repair shop although I did live with annoyances. My left door eventually wouldn’t open well, my A/C broke, and the car had other small gremlins. I also saved a lot of money and started investing in real estate as a teacher. The point is to live frugal and shake up many of our preconceived notions. The notion is that we don’t need expensive cars. If you’d like a nice car then that’s your call. No one is suggesting that it’s some sort of moral shortcoming. It’s just that many of us have more car than we truly need and we find great ways to justify them to ourselves.
The response is such because the advice is simply wrong. No bearing on real life. There is a difference between marginal cost of luxury and baseline cost of reliable transportation. For someone living in a modern world with busy life and optimistic outlook, it is simply more economical to buy new or near new car under warranty with very low probability of issues. That baseline would be 15k-25k.
If someone is making 20k a year, missing 1day of work or spending money on repairs – is much more expensive relatively as compared to someone making 200k.
1/10 rule advice might be ok for those who value their time at exactly $0/hr or even less
Unfortunately, for someone who makes only $20,000, it is even more imperative to not own a vehicle. They will be stuck in financial quicksand forever with car payments and maintenance issues.
Focus on making more money instead.
Absolutely horrible and unrealistic advice.
This is the problem with financial frugality blogs…while claiming to be not about money, the obsession with money is enormous.
No value of time – older car have much higher probability of breaking down. Do I want to impact my career by being late or spend my weekend time in the shop/garage?
Waste time looking for this used car on craiglist – how much do you value your time?
Car is not an asset. it is a running transportation expense. Leasing an economical car at $200/month is a great way to greatly reduce potential time wasted on car repair. 1 major repair on old car can be 2 grand, which is 1 year worth of leasing a brand new vehicle.
Try taking public transport and see how much it will cost you a month.
We live in a modern world.
Interesting article. Cars are my hobby and yeah I have typically 3-4 at a time which probably makes you go REEEEEEEE. I’m a single man, no kids, and I make around 65k a year in my early 30s. I have several rental properties that all cash flow within the 2% rule and I have roughly half a years salary saved. None of my cars have payments as I hate payments and typically pay things off in 6-12 months ish.
Things I sacrifice for my cars.
TV and movies
Nice clothes
Fancy restaurants
Traveling/Vacationing
Shoes
Pretty much anything that isn’t car related I don’t spend any money on.
I do wish I had a couple years salary saved away but I just can’t not have my cars.
Thats my ONLY vice.
I have spent most of my adult life making a monthly car payment. As a young adult, I was told and believed that it’s “a part of life”, like taxes and utilities. So, being a truck guy, I consistently made payments on the newest truck, trading in religiously.
When my wife and I payed off our 2012 Prius C (50mpg, thank you very much) in August of 2018, we swore we’d never make payments again.
We bought an 02 Silverado with only 171k miles earlier this year for $4200 cash. Truck was owned by one family and meticulously maintained.
You are absolutely right that vehicles are far more reliable from the 90s and up than they were in my youth (I am 46).
Thankfully, we are in a good place financially. Though we gross lower than the US median, we are wise with our money and have a nice cushion in the bank. Plus a sub $1000 monthly mortgage payment and no credit card debt.
Much as I would love a fully loaded 2019 Ram Rebel, I refuse to pay $50k for a truck! It’s financial suicide! My 02 is just fine and by purchasing it so cheap (including much cheaper sales tax and reg fees) I was able to spend some money having fun with the truck. More aggressive BFG tires, Flowmaster exhaust, smoked lenses, etc. plus since my wife and I have clean driving records, we pay less than $70 month on insurance for two vehicles!
At the end of my long rant, let me leave the reader with something that my wife and I tell each other whenever we feel like doing something stupid…there is no car or truck that would feel better to drive than the feeling of having some financial independence provides us.
Excellent advice. Wish I would have seen this when I was younger. Mostly learned the hard way. Thank you.
I make $150K a year and mostly live a frugal live but it is hard to buy a decent car with your 10% rule. I am doing a lot of research and most likely will buy a 2018 Avalon XLE rental car with 37K miles for $18K from Hertz. I can’t believe this car is $35K brand new.
Why don’t you look at a 2014 or below model from a private seller instead of a late year fleet model? You certainly can find a well maintained, reliable Korean / Jap model for < $15K.
I think this article is well intended, however your points are ridiculous.
Unsure why you are assuming everyone is buying their car out right.. if everyone followed the “total price of your car should be 10% of your income” the luxury car market wouldn’t exist.
You also should realize it’s beyond absurd to simply say “ figure out a way to make 300k” so you can afford a low end Lexus. I am baffled at the fact that anyone would take this article seriously.
If this holds true, then let’s consider housing costs . You should aim for 20-33% of your income to go to housing. So you would need to make 1 million a year to afford an average house.
Crazy this thing called Financing exists that allows you to buy something you wouldn’t be able to buy outright today.
This article is worthless bc it goes against what I believe in.
Mike, it sounds like you shop for things based on if you can afford the payment. Save up and pay cash. My base pay is 225k so achieving that 300k he’s doable for me. I’m in need of a car and I’m considering, coincidently, the Mustang on his recommended list. I only want to spend 12 to 15k max.
“The luxury car market wouldn’t exist.” – Exactly. Just like the luxury space ship market doesn’t exist. Or the luxury private jet market is exists but is a minuscule size of the automobile market. The purpose of your life shouldn’t be to perpetuate the existence of a luxury market that sells depreciating assets to a population with sub-zero savings.
Financing exists that allows you to buy something you can’t afford – Isn’t that exactly the problem with the entire leeching financial industry. I wish most people had basic arithmetic abilities before they jump into financing things they shouldn’t buy anyway. Financial security is traded away for knick-knacks. An older generation that lived through depression would be shocked.
I am reading this and laughed at someone making 200K should buy a mazda3 hahaa, seriously.
I understand that knowing how to “wisely” spend your money and saving/investing your money is very important, but why snag a car worth 20K while making 200K is a good compromise? but accounting for parking tickets and traffic violations is fine to “budget” on? If so, your priorities are wrong and your financial management needs tweaking.
I’m not sure if this article predates another one you wrote in which you say in essence, “By all means buy a good car if you can because you have to protect your family from the war zone that are the streets.”
Still, I have to disagree with the 1/10 of gross income rule stated in this article. It’s pretty impossible for most people to do. That means you’ll have to make $250,000 just to buy a run-of-the-mill $25,000 new car. Of course, I know you’re saying to buy used (which is what I did when I bought my luxury car). Still, I about 30% of my gross income for my car because I was tired of the road noise and low crash safety rating of my old car. I was also willing to consume the cost of the 5-year loan because I know very well my return-on-investments will more than cancel out the cost of the car loan.
In the end, personal finance is personal. To say “must” does a disservice to people. They have to find the solution that is best tailored to their personal finances, wants, and needs.
It is true, everybody should do what they think is best for themselves. I don’t think it’s a disservice to share the 1/10th rule. I have gotten feedback from hundreds of people since I first introduced the rule saying how much they appreciate not spending too much on their car and investing the money in this bull market.
Nobody has to do anything if they don’t want to. It is only the people who feel the worst about their car purchase decision who will get the most offended by this post.
I think a $20,000 to $25,000 car is great. And some people want more and that’s fine as well. But when people spend big bucks on their car and wonder why they don’t have as much money as they want, that’s when things got kind of funky.
For god’s sake, stop spending 50% or more of your take home on an automobile. Why is that so impossibly hard to understand!!!!!!!!!!!! Argggggggghhhhh!!!
It sounds like simple math but everyone is incredibly worried about what their neighbors will think and incredibly insulted that they can only afford to drive a jalopy. Well, sometime the truth is hard to hear.
Anyway … I make over 200K per year and wouldn’t ever consider paying these insane car prices. It’s insane. Please stop!!!!
New or late model cars are much safer than old cars. Newer cars offer an array of safety tech that can avoid accidents and not just save you from injury or death but others as well. Following the 10% rule will mean 95% of people would not be able to benefit from technology that can save lives. So I completely disagree with the 10% rule. To the point where I think it’s patently absurd advice.
John the world is overpopulated anyway. If some buyers affordable cars lack 10 airbags theyll either drive better, slower or the population will “correct” for their shortcomings. I make around $26k, live in expensive New Jersey & drive a 280,000 mile chevy cruze. So i dont wanna hear it bro!
I think it’s reasonable.
1/10 of household incomes roughly 11k,
That covers our cars a 2011 odyssey and a 2012 Nissan Leaf.
The leaf would have been covered by someone making $35k following this rule, and the odyssey around 60k.
Neither of which I would say were unsafe or Jalopys.
I think the tone of the post is to be reasonable, in your vehicle consumption, you don’t need a 25k car when you make 27k a year.
If your worried about safety, you’d be much better served by owning a 20 year old sedan that you drive 1k miles a year than a brand new car that you drive 20k miles a year, statistically speaking.
Some food for thought:
If you live in a rural area with inclement weather, 2wd vehicles will generally not be a worthwhile option. If you have a 2wd vehicle there will be days when it is NOT safe to drive to work. What is the new plan? Are you just hoping your boss will understand? What if you work on commission or hourly? If you drive a 4wd vehicle, the cost isn’t going to be comparable at all. Show me a 4wd/AWD vehicle for $4k and I am going to show you a vehicle that HAS or WILL HAVE serious issues (I have had MULTIPLE of these vehicles, one of which was even a Toyota). And a lot of times these issues are not cheap. Twice the amount of differential work, high and low gears, overdrive, not to mention it probably has a larger engine to help push the vehicle along. Meatier tires, because if it is 4wd/Awd doughnuts likely wont cut it. What if you use your car as a part of your work? Maybe you are a traveling salesman and see 50k-60k miles a year. Maybe it is a part of your hobbies/side jobs. I am an outdoors man and contractor, and would have a really hard time loading up myself, 4 friends, and my dog with all of our gear in a Civic, not to mention it will be nearly impossible to access the locations that we need to get to. Some lumber? Nope. (Well, you could probably figure something out.)
I know that a used $8,000 Land Rover is mentioned above, but what do you really spend on maintenance? How many miles do you put on each year? In these rural areas 20k-30k is not at all uncommon. What if you are not very mechanically savvy, how much are your repair bills really costing you now? If you are mechanically savvy, how much is it worth to you to take away from recreational/family/friend time to have to work on your car? Is wifey going to be happy because your Ramen noodle dinner date was interrupted by you having to replace the fuel pump, otherwise you don’t have a way to take the kids to school tomorrow?
What happens when you find out that your alternator is shot at 7:00 a.m. as you are getting in your car to go to work and your battery is dead. Are you hoping the manager understands? Is that worth getting fired over? Would the extra money spent put a smile on your face as you drive places, or at least keep you from worrying about turning the key off cause your aren’t 100% sure it will start back up again? Is it worth saving that money to have to dry the inside of the windshield with a paper towel continuously because your A/C fan motor is blown and it is going cost 10% of the value of your car to change the motor out?
Then there is what I call “micro-stressors”. To me, small stressful items add up to a lot of stressful tension. Does the headlight being out, the dent in your passenger door, and the cracked windshield keep you from getting good sleep at night? How many dollars is this worth to you. Are you a jerk to loved ones cause you can’t get over the hole in your exhaust that wakes all of the neighbors dogs up? What if you are in a line of work where appearance really DOES matter (i.e. real estate agent, talent agent/marketer, car salesman?, politician, board member/appointed individual, etc.). Are you worried about the resale, or maybe if it will even be worth anything at all besides scrap?
I am not saying that older/used vehicles on a budget are a bad idea. I have had multiple, and I absolutely adored them all, but most of the issues listed above are actual issues that I have had with those vehicles. It needs to be understood that there IS a diminishing point of return in vehicle value and that people need to be cautious of a “One Size Fits All” budgeting approach to vehicle buying. I know it is safer to tell people to spend less and hope they follow suit, but my examples above are strictly to provide the understanding that you need to do what fits your lifestyle, and budget. You need to be very honest with yourself when asking, “What is this worth to me?” Quantify your life, your free time, and your needs. There is no guarantee that a more expensive vehicle will keep you from experiencing issues, but I will tell you again from experience, my most recent and most expensive vehicle, has had none at all. (I also really enjoy driving it.)
Globally speaking, only 80% of people even live to see the age of 65. 1 in 5 of us will not even SEE the retirement we are saving for. You are welcome to eat your Ramen, and spend your morning commute sweating through your polo, wiping the front windshield with paper towels while listening to the drone of your leaky exhaust through your duct-taped window, but I would rather make a plan with more critical thinking involved, that allows me to drive something that is reliable, comfortable, and enjoyable.
*I love Ramen.*
hi Sam,
I’m tempted to try the Personal Capital resources but part of me is quite nervous about giving some corporation access to all my finances! I know the info is out there already in a decentralized form, and I do think I could benefit from having a clearer more centralized picture… But I’m on the fence.
I notice they’re in SF. Have you talked to them in person by chance? You must feel they are pretty secure and upright. What about their system security? Am I kidding myself? How can a layman even begin to gauge corporate system security? Aaaaah!!!
A friend once said to me: Use the technology, just don’t let it use you. I love that statement but it’s a real trick figuring out how to do that in most cases.
Open to your feedback
Thanks!
Sonia
Yep, I actually consulted with them part-time from 2013-2015. I’ve met all the founders and c-level executives. The founders founded an online security firm called Passmark.
If you don’t feel comfortable using technology, don’t use them. Paper and pencil work too! Just don’t lose the paper.
For some reasons, I’ve always been comfortable using technology, credit cards, buying things online, etc. Online, there’s a record, so I trust things will be resolved.
Related: Is Personal Capital Safe To Use?
It is fascinating when an article stirred up strong emotions. It reminded me of the college years when I used up three cars in 3 and ½ years and finished my B.S in Engineering. Each one of the car was 1/30 of the income at the time.
I chose to drive $400 cars because it is the only way I attained the college degree – a dream beyond the reach of both of my parents.
The author of this article has his heart in the right place, but he may have crossed the boundary of telling others on how to exercise their hard earned resources.
Financial Independence is very simple. It is not rocket science and it based on simple math.
The following proposed money plays are based on the Trinity study.
85/15 Money Play – spend 85 cents and save 15 cents on every dollar of income. Put the saving in investments with the return between 6% to 7% for 35 years – after 35 years, the accumulated saving along with the compounded interest will give a 30 years of income with 95% or greater probability of success.
60/40 Money Play – spend 60 cents and save 40 cents on every dollar of income. Put the saving in investments with the return between 6% to 7% for 20 years – after 20 years, the accumulated saving along with the compounded interest will give a 30 years of income with 95% or greater probability of success.
50/50 Money Play – spend 50 cents and save 50 cents on every dollar of income. Put the saving in investments with the return between 6% to 7% for 15 years – after 15 years, the accumulated saving along with the compounded interest will give a 30 years of income with 95% or greater probability of success.
40/60 Money Play – spend 40 cents and save 60 cents on every dollar of income. Put the saving in investments with the return between 6% to 7% for 10 years – after 10 years, the accumulated saving along with the compounded interest will give a 30 years of income with 95% or greater probability of success.
None of these Money Plays require the specific incomes, and they do not tell you what to buy, what to eat, where to live and how to live.
You just have to pick a play and it is your creativity and resourcefulness that will make the play a success.
Good luck!
Great principle….while we are at it. Everyone needs to spend 10% max on their vehicle (vehicles to multifamily units), then spend no more than 10% on their mortgage, then spend no more than 10% on utilities/food/entertainment….that way they can save 70% of their income every month to invest.
What rock are you living under? I get the principle, but that is not the way society operates today. Great, lets all go back to the 1940’s and get our priorities aligned right?!?!
This is whimsical thinking and not something that most people will follow even a little bit.
My advice is give advice that is applicable to today’s society and social norms and you will get a whole lot more bang for your buck.
P.S. – I have a net worth of 5.2 mil. And even I don’t subscribe to the 10% of income philosophy (I make 450k yr.) and I am doing just damn fine.
The author has a parallel calculation of 5% of net worth; and one can go for the higher recommendation. So unless you are motoring around in Koenigsegg, you’re probably within his guidelines.
The “social norm” about money is to be broke because people buy things they can’t afford (poor) or go into massive debt buying things they can’t afford (middle class). I think the whole point of this website is NOT to follow social norms. But for some reason the car has became fused with most Americans’ identities, hence the constant flames on this old article. Believe it or not, you are not your car.
If you ever worry about being judged by others (especially strangers) because of the car you drive, you have problems way beyond what you pay for a car and financial freedom/security will likely always elude your grasp.
Well said. The average American is not getting ahead in their finances because they’re not saving aggressively, not investing properly, and spending too much on things that are unnecessary.
$38,000 after-tax for the average new car price in 2019 vs. a $62,000 median gross household income is completely out of whack.
Student loan debt, credit card debt, everything debt is keeping people from achieving financial freedom.
It’s what people want. I don’t want to be average with my one and only life. Time is way too precious.
Why not add the Model 3 to the $250K-500K bracket?
This is not good advice.
If you only spend $4000 on a car there is a good chance that in 2-3 years you will be spending another $4000 on another car because the cost to repair it—the gear box, for example—will exceed the value of the car.
You can find well running, 8 year old Honda Civics for $4,000 – $5,000. Up to you if you want to spend more of your $40,000 on a car. It really is your choice. Don’t let me tell you otherwise.
I loved my used Civic and used Land Rover Discovery.
Can’t see where to post a new comment. Please respond to this repost:
“Yo says
May 12, 2019 at 1:24 pm
is this assuming you change your car every year? If you plan to keep your car for 5 years do you mean 10% x 5?”
The awful, horrible truth is that most Chinese (especially mainland Chinese) people who grew up or whose parents grew up under Communism are so focused on wealth, money and how to get rich that they have absolutely no clue about what it means to a) actually live and b) what it means to be truly content with what you have. I highly doubt the author’s wealth was earned merely by his intelligence and hard work; it’s virtually a certainty that he started out without much but, that his family or relatives gave him the financial power he needed to get where he is today. For example, where did his $million education at Harvard come from? His pocket money or savings? My point: don’t preach to others about things you know nothing about. Your advice won’t be worth what you think it is.
This is a great tangent. How did it come about and what does race etc have to do with not wasting money on cars?
Some related posts:
https://www.financialsamurai.com/rich-spoiled-clueless-work-minimum-wage-job-at-least-twice/
https://www.financialsamurai.com/what-if-you-go-to-harvard-and-end-up-a-nobody/
Wow!! You can sense the emotional attachment to car spending in these replies! I wonder if people felt so strongly about paying more for their wooden wagons back in the day?
Anyway, good read and mindset reality check-in. Alas…it will be difficult to overcome the big auto marketing machine. We all know undermount blue lights on hand holds are required to get from point A to point B after all.
But I digress…I actually have what is probably an inane question but will ask it it anyway because it’s applicable. In a single-earner, two person household…10% PER (assuming two vehicles)…or TOTAL??
(You have to admit…it’s kind of funny to think how yesterday’s top of the line luxury is now considered a clunker that half the replies here suggest is unacceptable to own! is there such a thing as luxury inflation? my iphone suggests so…)
10% total if you can make it happen. GL!
I have benefited from the articles on this website before, but I must join the chorus of those concluding that this article contains terrible advice. I would advise those reading this article today (June 2019) to take the principle behind this article to heart (“don’t buy too much car!”), but ignore the specifics and establish a more reasonable standard than 10% of gross annual income. There are two primary reasons for ignoring this advice:
1.) The advice is impractical for most of the country. F.S. treats vehicles as if they are pure luxury desires in the way chocolate, entertainment, or vacations might be. They aren’t. Most of this country requires a safe, dependable vehicle to get to work each day, to shop for groceries and run errands, and to raise a family.
The reason that F.S. has overlooked the impracticality of his chart is that he has spent almost his whole life in NYC and SF, two cities with extensive public transportation systems and clogged roads. These are cities, in other words, where real alternatives to cars exist and where driving a vehicle to work is often more a headache than a luxury. That situation is not the reality for most people. Dependable vehicles are necessities.
2.) The advice will likely prove costly. Does F.S. have any practical experience with what a $4,000 vehicle is actually like?
In the same breath that he complains about the associated costs of maintaining a vehicle, he recommends that someone making $40,000 a year should purchase a $4,000 junker?
Thought experiment: what should that same person do when (s)he learns, six months into spending 10% of their annual income on a vehicle, that the transmission has failed and that the cost of fixing it is $2,000? What about the next year when the brakes require total replacement for $1,200? These are not fantastic or rare examples. Anyone familiar with vehicles in the 4K to 8K range will know that such things happen often. You are guaranteed problems at that range, no matter if a mechanic checks it out beforehand or not.
With this advice, F.S. puts someone in an impossible situation. Either dump their broken vehicle for a terrible depreciation (likely less than 1K), or reinvest 50% to 75% of the vehicles worth just to make it functional again. Not even to mention the non-existent resale value a 4K vehicle will offer, no matter how much money you waste making it functional.
I suspect, once again, that this advice comes from a place of practical ignorance. F.S. is not someone who has much, if any, experience with vehicles in this range and thus unwittingly leads his readers into a terrible financial trap.
Note to readers from someone who has tried this path: don’t waste money on either a clunker or a new vehicle. Save money for a strong down payment (4-7k), take out a modest loan (again 4-7K), and purchase vehicles anywhere from 8k-14k, depending on your financial situation and auto needs. It will save you money so long as you maintain the car well.
I drove a $2,100, 1987 Toyota Corolla FX16 for 6 years up to 160,000 miles while in Virginia from 1993-1999. The car was fine.
In 2004 I drove a 1997 Honda Civic for two years and it was fine.
Then for 9 years, I bought a used Land Rover for $8,000. It was fine too.
So yes, I absolutely have experience driving economical cars.
But you were also single, and just a student. For a family (with kids), buying a car that cheap is risky, unless you are a solid mechanic by profession. As much as you are correct about the depreciating factors of cars, for a family in rural area, you have to have a solid vehicle. For those people, a 4-5 year old car has already gone through a great chunk of depreciation and yet, such a car can go easily another decade with normal maintenance. Remember, the situation is different for a young single student in his early twenties versus a family of living living off 50K a year. different situations need different advice.
I agree with you about safety. It is a must. But more importantly, be a safe and defensive driver above all else.
Plenty of non junkers for 1/10th income.
See: https://www.financialsamurai.com/the-safest-cars-to-survive-a-crash/
Your modest loan of $7k is worth $10k over 5 years which pays for 4 transmissions, 2 brake jobs and a massage.
lol stellar reply. Sometimes we think that spending way more for something more reliable will save us money, when in fact it just means we end up spending more than our “worst case scenario repairs.” It comes down to doing your homework and researching which models are more likely to fail. They’ve been on the road for years and surely some info must be available on which gremlins each model has. Even your 8k-14k car is not guaranteed to be free from failures, especially if not well taken care of.
I’ve never owned a car worth less than $5k, but in my experience, most people who own cars cheaper than that don’t bother to fix the A/C or cosmetic damage. They just concentrate on keeping the car moving, even if it means having to wipe the inside of your windshield with a cloth when its raining because of condensation. I could add other annoyances like having everything rattle, noisy engine/transmission, rough ride, a slow car. Either way if you want a car that cheap, it’ll get you from A to B, just not very gracefully.
is this assuming you change your car every year? If you plan to keep your car for 5 years do you mean 10% x 5?
I think teaching people to be frugal is good especially given that on average Americans are spending a lot (saving rate is low compared to other countries).
But I also have to say that 10% is extreme and putting too much emphasis on saving things; do not forget that (i) life is not just defined by how much you save or how financially successful you are, and (ii) sometimes saving too much means that you have to DIY a lot (e.g., repairs) and all those hours of DIY work could be used to earn income (i.e., the so called opportunity costs).
On (ii), for example, a doctor or lawyer or consultant or alike is usually paid a couple hundreds $ an hour, and sometimes a car breaking down can cost him/her a client. Let’s say you lost 5 hours a month to doing repair or driving to repair shops after you bought a used car. 5*12*$200 is 12k annually and 5 years means 60k which can buy you a Audi A6. Well, this is not completely truth because income is taxed, etc. but you get the idea. Not to mention the business interruptions you got from car breakdowns.
And this is just purely financial aspect. There is the invaluable memory of driving a cool car.
So there are many aspects to consider… and I think the article here is bit on the extreme side and does not apply to an average American. Perhaps it worked perfectly for the author’s circumstance and the author’s values, but perhaps not for an average American.
I am a university professor in CA (not to validate my argument but just some background info.; people from different background have different perspectives).
Why are parking tickets and traffic violations used to bolster your argument? Aren’t those independent of what car you drive? What does that have to do with how much to spend on a car?
The problem with this advice, and the staunch stance of the author, is the lack of nuance. The REAL answer is “it depends”. There are many factors to consider that the author, well, didn’t. Why not? Because 10% is easy advice to give, it’s more marketable to throw out this nice round integer and be dogmatic about it then it is to consider all the myriad of situations people can be in, all the factors to consider, and actually consider the intrinsic value of driving something you like. Think of how much longer and harder to write this article would be if the author actually considered multiple perspectives. Sorry, but this is just lazy writing.
If you like nice short fluffy phrases, “Follow those who seek the truth, run away from those who claim to have found it.”
Wow… Happy new year 2019!
After a careful reading of this post, I have come to the conclusion that 10% of annual income spent on a car is a lofty goal to attain, but simply impractical for most people.
I get the need for savings and investment, and I am an almost religious user of a budget.
With that being said, penny pinching and eating noodles so you can amass a fortune after your productive years is not the way to go.
There is joy for sure in a pile of stash in the bank, but happiness is always relative – there is no state of absolute happiness for the human soul.
In lieu of the fact that misfortune may well happen to you before you are ready, and that low income earners may very well remain at that salary level for the rest of their lives through no fault of theirs and regardless of hard the work, I say it’s a bit cold-hearted to suggest they never own a car until they can manage six figures salary – which may be NEVER.
I say buy a car (used or new), just let it sit between 10% to 30% of your YEARLY INCOME, and you’ll still attain your financial goals on schedule.
Personally I’m a used car fan, buying from 100k miles to 150k miles and driving till 200k miles to 300k miles.
If you are a car enthusiast and would not mind spending really BIG on a car purchase, or you earn minimum wage and a 30% annum car is not safe in your books, I say spend up to to 50% of your annual income and draw the line there.
But have it at the back of your mind, that you have increased the time it would take to reach your goals NORMALLY.
50% annual income should be the maximum you spend on a car, so you can have enough to eat, live and change that car oil..lol
Spending above 50% is very risky and should be discouraged.
At over 50%, you would not recover quickly if your car were to immediately breakdown, also you would have lengthened the period it will take for your wealth and savings to grow.
Therefore as a general rule, I’d say try not to exceed 50% no matter what!
You see, we WANT many things in life but the reality is that we only NEED a few things in life.
Always let your car buying decision be governed by NEED and not WANT.
Satisfy some of your wants in some other ways, preferably with the lesser expenses in your budget.
And NO, you’ll never be fully able to satisfy all your wants no matter how wealthy you become
Apologies for the long sermon, I do tend to ramble at times, but I hope I have been able to assist someone, somewhere.
Full disclosure I am 30 years old with median income, 45kish per annum.
PEACE!
P. S.
The percentage values I stated above represent a single or lump sum car payment, not loan or lease.
I totally agree! While spending 10% or less on a car is probably sound advice in some situations (young person, someone with a very low salary, anyone with lots of other debt), I think it is extreme for many. I just purchased an almost new $70k vehicle and am quite happy about it. I actually own 4 autos, and one of the others is also a $70k vehicle. I am a crazy budgeting fool, love listening to Dave Ramsay, and like reading things by people like the financial samurai. However, my goal in life is not to be majorly wealthy. I like being debt free except for a car payment, having a good retirement plan, owning a nice place, eating very well, driving very nice autos, traveling, etc. In other words, while I love managing my money and controlling it, enjoying life is more important to me than being rich. I enjoy life, consider a car payment to be acceptable debt for the moment (although before long I should be able to drive very nice cars without debt – yay). I also like spending on vacations, expensive foods, etc. But, hey, why not? I make decent money, manage it well, and live well. Yes, if I was very frugal I could be very wealthy some day, but that is not my goal. For those of you who want to be rich – fine. I understand. I do. Happiness and not being enslaved to others because of debts is good enough for me. I will leave becoming billionaires while driving older, untrustworthy autos and eating beans and rice to others. And, I HAVE driven many 10yr+ autos. Two of the ones I own right now are such. They have their place for farm vehicles and sometimes local driving, but I love road trips and need reliable autos for that so that I am not stressed about breaking down everywhere I go!
Blah blah blah… I this I that. Stopped reading at the 3rd “I”
Spot on Brian
Is fun reading all the comments.
I think the article is bang on.
The purchase price of your car at 10% of income sounds perfect to me.
If you are making 40-50k you can find 100’s if not thousands of cars to choose from in the 4-5k range. You take them to a mechanic before you buy and they will tell you if is worth it.
A new car still needs tires, batteries, wipers, oil changes, fluid changes at same interval as an older car.
If making less than 50k it become more cost efficient for you to take a couple days off work if you need the time to fix your car yourself. Than pay 1000’s of dollars for a mechanic to fix in one day. I do my own repairs and have never had to take more than a weekend to repair my now 14yr old that I bought as a 9yr old used car. I’ve had people comment mistaking my car for a new one just because I redid the headlights.
At 5-10k the options open up to pretty much any make model. At 10k-20k you can get used Porsches to even some Ferrari’s.. 20-50k will get you pretty much any enthusiast car could want.
People spend 60-70k as much on a new SUV or pickup truck as some people spend on a used Lamborghini 70k that looks every bit as good as it did when had a 300k price tag a decade earlier.
You can get a new 20k-30k economy car or a used 20k-30k Porsches that most people can’t tell the difference to what year it is.
In the end is your own money to do as you wish.
Thanks for the article I reference it whenever I try to help someone with car buying budget. I can’t remember how many years ago first read it.
I know this is an old post, but I just had to add to this because I think everyone is missing the point about how much to spend on a car. I love all your articles and you have helped me with finances for sure, but this article, meh ….. I drove my last car I bought brand new for 17 years, then gave it to my son 2 years ago and he is still driving it. If you spread the cost over the time used, it averaged out to a little over $1300/year – not bad. Maybe the 1/10th rule would make sense if you looked at it on a per year basis. Don’t spend more than 1/10th of your salary A YEAR on a car, but to say 1/10th total seems unrealistic. “Regular people” new cars are around $25000. If you spread that out over 5 years with 0% fianancing, then 1/10 would be $2500 per year, which hopefully is less than 1/10th of their annual salary. But the absolute biggest reason I would not follow this advice is because you are talking about driving around in a beater and there is no way on God’s green earth I would ever drive my 4 year old grandson around in a beater. That is why I got rid of my 17 year old car that was still okay to drive – it was okay for me to be in it, but not my grandson. I bought another car that had all the safety features I could find to make sure he was as protected as possible. I would be negligent to drive him around in a rust bucket. If you would drive your kids around in a beater just to save money when you are a millionaire, that would be almost criminal. Also, a junker out on the road is a hazard to all other drivers. It’s not always just about money.
You are welcome to believe what you would like, but the believe that all vehicles that are 1/10th of someone’s salary are unsafe rust buckets would be completely inaccurate and fed by feelings and not actual data. In case you haven’t checked… there are a lot of very nice vehicles that are all newer than 10 years old that cost $4-6k (right around the average income. Just to preempt the $6k higher than 1/10th the average, try negotiating.
A quick search on craigslist shows there’s nearly 600+ for sale that meet that criteria in Nashville alone.
https://nashville.craigslist.org/search/cta?min_price=4000&max_price=6000&min_auto_year=2008
If you believe those are unsafe rust buckets that are dangerous to all other drivers, you are in the minority.
Pete, I know this is about a year later, but you have bumped your head. This article also mentions 90’s vehicles. 90s vehicles are some of the worst cars you can buy, when it comes to reliability. Even worse than the Detroit crack years. There is a reason there aren’t many on the road.
And back to bumping, private sellers are the worst way to go, unless, you have a few grand to repair and refurbish, or the private seller can produce all service records not on a Carfax.
The advice in this article is for a young person just starting out, and is evem wrong there, because with today’s new prices, used cars have gone up. I recently bought a used vehicle, and what sold me on it? 3 years old, certified, warranty, new tires, checked from top to bottom by manufacturer certified mechanics, and those small problems fixed Before I bought it. Yup, a few hoses were bad, even after just 3 yrs, and if I bought as is, or private, that was another $800 right off the bat. Just like when I did buy as is, a while back, 4 yr old car. 3 months and $600 later I had a running car for a full year, then evey 6 months I had to park it for 6 months to a year until I coild afford, or someone helped me get intake manifold fixed, computer fixed (after 1200 in other repairs that didn’t work), and after 14 yrs, I sold my 9800 used “gem” to the scrap yard for $350.
So, to you, and the OP, 10% a year should be a better buying tip in financing.
Hi,
I agree with you. It is not advisory to spend more than 10% of your income on a car. It is interesting materialism has lead to the point of cars becoming financial symbols in our society. I personally enjoy commuting to work by train. However, should I want a car it would definetly be a Lexus as this is a small dream of mine I have had since I was a small kid. In case you live in an area where a car is a must, financing services can help you out.
While I totally agree with the logic behind de 1/10th rule I also disagree with the way is transformed into buying advice, as it doesn’t provide guidance to all variables involved in the adventure of owning a car.
Let’s say I follow the rule strictly , I still can run into trouble (buying gas guzzler, buying a 10+ year old car, etc).
A better approach is to calculate the TCO (total cost of ownership over a 5 year period) and then calculate what percentage of your earnings it represents.
Let’s say you make 70,000 USD a year and drive 15,000 miles a year.
Option 1 (Buying a USD 7,000 2008 Ford explorer)
Over a 5 year period you will have the following expenses
1. Depreciation: USD 3,500 (half the price)
2. Gas: 15,000 miles a year (15 mpg @ 2.8 USD/gal) = USD 14,000
3. Repairs and maintenance: USD 6,000
4. Insurance: USD 5,000
5. Total= USD 28,500 for 5 years = 5,700 a year (8.1% of yearly salary).
Option 2 (Buying a USD 20,000 2015 Honda Accord)
1. Depreciation: USD 10,000 (half the price)
2. Gas: 15,000 miles a year (25 mpg @ 2.8 USD/gal) = USD 8,400
3. Repairs and maintenance: USD 3,000 (newer car)
4. Insurance: USD 5,000
5. Total= USD 26,400 for 5 years = 5,280 a year (7.5% of yearly salary)
In option 1 you are following the 1/10th rule while in the second option you are clearly violating it (30% of your yearly salary!!! God forgives us!). But over a 5 period time if cheaper to own the Honda than it is to own the Ford Explorer. I am already listening the cynics saying that I am comparing different types of car, but before you shoot me, the 1/10th rule also doesn’t account for this either; in fact I chose the examples on purpose.
Another advantage of this approach is that you can factor all the cars in the household and the total shouldn’t be more than 10% of the household income, ideally it should be closer to 5%.
Sounds like you enjoy your new(ish) Accord and there’s nothing wrong with that but you’re omitting significant costs from your analysis. First of all, analyze similar vehicles.
Option A:
1.$20,000 2015 Honda Accord
2. Gas: 15,000 miles a year (25 mpg @ 2.8 USD/gal) = USD 8,400
3. Repairs and maintenance: USD 3,000 (newer car)
4. Insurance: USD 5,000
5. Loan interest = $1500 (most people cannot afford $20k without auto loan)
Total cost after 5 years = -$38,000
After selling car = -$28k.
Option B:
1. $5,000 2007 Acura TSX
2. Gas: 15,000 miles a year (25 mpg @ 2.8 USD/gal) = USD 8,400
3. Repairs and maintenance: USD 4,000
4. Insurance: USD 5,000
5. Compound interest + investment savings of spending $270 per month ($15k car payment with $5k down) on low interest index fund: -$21900
Total cost after 5 years = +$1371.
After selling car: +$5371
Therefore driving a slightly older, though similar car for 5 years was completely free.
Thanks for pointing out that I didn´t include the financial cost. I normally use my savings to buy a car, and since interest rates (low risk) where around zero for a while so I didn’t find it relevant to factor that in the analysis. But you are absolutely right that doesn’t apply to everyone and I forgot to mention it in my analysis.
I compared different cars on purpose, to point out that blindly following the advice on the article is a mistake. There are other factors to consider like the ones we seemed to agree on (plus the financial cost).
Owning and driving a car is never free, is you hadn’t buy a car at all, you would have probably +26,000 USD after five years. Comparing that to your estimate of +$5,371 there is obviously a cost.
At the end of the day, financial analysis is just one factor we actually use to make a final decision (otherwise nobody will get married and have children based solely on the financial numbers). It depends on how much you drive, how much you enjoy driving, how important is reliability or having the lastest features in a car. Obviously the more you want the more you’ll end up paying.
P.D. I have never owned a Honda. Just data I found with a quick search on google.
Sounds like you’re still missing the point of the 1/10 rule. Your attempt to debunk it using TCO isn’t convincing when you look at the numbers we provided. We assume that someone making $50k a year needs to buy a car and has narrowed his options to a newish Accord or a used TSX. Sure you can fudge numbers by deliberately picking unreliable clunkers, but let’s assume a basic level of intelligence/financial acuity.
The original difference in price between the 2 options is $15k. After 5 years the net worth for the person picking option A plummets by $30k while option B remains the same. Unless the TSX requires multiple engine rebuilds, there is no way the Accord would ever be the better buy for someone making $50k since the opportunity cost of getting a $15k loan is so high. To correct your analysis you need to include opportunity cost in your total cost of ownership which includes loan interest and 5-8% return from your average mutual fund.
The reason the 1/10 rule works is because it allows you to use the markets to offset your depreciating assets. Someone making $500,000 can easily afford a $50,000 car because if he invests the same portion of his income as option B, his car will essentially be “free” as well.
Ran across this article this morning and totally agree. I’ve only owned 2 new cars in my life and after the second one regretted it completely. Since 97 I’ve been buying good used cars and investing the rest in property which is now paying off our dream home and also putting enough away for a stress free retirement. All my cars have been around the 10-15K mark and driven until they could be driven no more. Yes it is a choice but I personally know what that choice will give me now and in the future. I have employees that buy a new car every 3-4 years yet they own nothing, are drowning in debt and refuse to listen to any advice because of that so called lifestyle. Maybe they will figure it out, who knows. But I digress, thanks for the excellent article.
I agree with the author of the article. Buy used cars that have a proven reliability record. Since 1989, I have spent $47,800 on automobiles. I estimate that I have spent $4,500 on repairs. That is a total of $1800 per year. Yes, this is extreme, but I have invested the savings into my 401K with remarkable success. I do not believe in spending money trying to impress people who I don’t even know. If the people who know me don’t like me because of my car, tough! I got over peer pressure when I was in grade school. The point is that we do have an easy opportunity to accumulate wealth if we are wise about automobile purchases. Alternatively, I have travelled to 14 countries, and don’t hesitate to go out to eat. With vanity ruling, I could have easily spent $126,000 on automobiles in the 29 years, rather than the $47,800.
1. $47,800 for car over 29 years. You must not know what new automobile technology is! Try to live once!
2. You don’t need to impress anyone. It’s for your own enjoyment.
3. If you have money to afford luxury, pay for luxury! Of course, after retirement saving!
I know you are right about my ridiculously low amount of expenditure on automobiles. However, everyone cannot have high salaries or wages. I have chosen a lower stress occupation, and others legitimately don’t have too many open doors of opportunity. So, for middle class or lower middleclass, choices must be made. Perhaps it is twisted, but I enjoy seeing how far I can stretch my “automobile” dollars. I could not have spent much on automobiles and been able to travel, unless I choose a high-stress occupation. I appreciate your comments, but I do not feel at all “cheated” in life after my automobile choices. My current vehicle is a 2005 Nissan Titan, 4 door, 4 wheel drive and it doubles as my work truck. It is comfortable for a long-legged 6’2′ guy. Great sound system, quiet, and smooth ride for a truck. It really loves gas stations. Your comments are OK, but some people are so hostile to other opinions. When this author wrote the article, it was not intended to be applicable to everyone’s circumstances. Old saying- “if the shoe fits…”
This post is so wrong. Do you even know what you are talking about, Mr. Executive Director?
I agreed with Lou above. Making $200k/year and driving a Toyota Camry is miserable. Enjoy life a little before you die!
Current driving a Mercedes Benz and I am total happy, financially independent, have no issue with car payments. Plus, I also maxed out my 401k $18k/year for the rainy day plus stock trading account for annual bonus.
Knock on wood. If I crash, a MB will save my life, I don’t think a Camry would do munch. My lief is worth more than just a few thousands dollars a year.
My net worth is a bit less that Mr. Lou but I think I can afford a lifestyle of driving a luxury car which has pilot parking, 360 camera for my own safety and convenience.
Thanks but no thanks!
—————————————————————-
“Lou says
June 7, 2018 at 2:25 pm
Thank goodness I have never taken advice from someone who makes 35K a year. I am 49, working, and have a net worth of 3.8 mil. The thinking in this article is what I loath.
I spent 2 million in the last 30 years on vehicles that brough happiness and memories, otherwise id have 5.8 million and be living in remorse. At death you better have spent some of the fortune amased….otherwise it was all for not.”
If you spent $2 million on cars in the last 30 years you are missing a lot more than that from your current net worth. If you would have driven more practical cars and had invested in something like the S&P 500, your net worth would likely be double what it is now. I get it, I lived in California for the last 2 decades and many of my neighbors have the same attitude towards driving nice cars as you do. I drove company cars and my wife drove mostly used cars in the $12k – $25k range until 2008(at age 43)when we spent $45k on a new vehicle that she drove for 6 years until handing it off to our son. We paid cash for that car in 2008 and sold stock in the tech company she worked for at the time. Those shares of stock would now be worth $460,000. Maybe we should have bought a used car or something practical like a Honda Accord at the time, lol.
My point is there is a big opportunity cost, especially when you are young for driving expensive cars that depreciate 50% in 4 years or less. We were super frugal with cars when we were raising kids and it helped us become financially independent before age 50. Had we purchased all the toys and expensive cars that many of our neighbors did, we would certainly not yet have a net worth and passive income that puts us in the top 0.1%. We are now 53 and I’m retired and my wife only is working because she loves it and we still have our youngest child living with us. As soon as she is off to college my wife will retire and we will enjoy spending time at our 3 homes and traveling the world.
BTW, I have nothing against expensive vehicles, I just couldn’t bear the opportunity cost when we were in our 20′, 30’s, or 40’s. Our current vehicles are a 2015 Audi S5, 2015 Tesla, 2018 Range Rover, and a soon a new Boxter S.
I make 200k a year, base. No debt. Total comp about $250k, and I drive a 15-year old Honda Accord without a working radio. My net worth is about $1.6m (I made much less money until recently). This article has convinced me I might be able to spend more for a car than I might otherwise. Maybe I’ll splurge on a new, base Accord or Charger (if I can dicker the price down to about $24k).
AGAIN… another completely out of touch post… you’re writing posts about how everybody makes $300k a year and now all of a sudden people make $24k/year. whoever takes your advise must be incredibly gullible and inexperienced.
if you’re buying a clunker, your service cost will outweigh the cost of a new car, you put yourself and your family in danger, you put other drivers in danger. it’s true you shouldn’t spend 100% of your salary in a car, but you’ve made it clear in other posts no one earns so little… so make up your mind. either they do make money or they don’t.
used japanese cars tend to be bullet proof and these are great for college kids or people with low income jobs, once you break $60k/year move to a city where you can live comfortably and buy a normal new car.
you write about getting out of the rat race and your pushing everyone into the same generalization… not everyone is as clueless as you are.
I admit, I am clueless many times. But at least I’m free.
I did not feel bad driving an $8000 car For almost 10 years that depreciated down to about $2000 when I sold it. It actually felt incredible investing for savings in the stock market and real estate market since 2010.
How about yourself? What’s your background?
The rule does not talk about cost over time. You need another rule for that.
If you are spending 10% of your salary every year, that’s a lot more than spending 20% of your salary every 4 years. The latter has been my experience.
I have been calculating the purchase cost per mile (purchase cost plus major repairs minus disposal price divided by miles driven). I’ve had cars that I drove for $.02/mile.
I always have a fund setup for the next big car expense. I’ve never had a car loan by doing this.
I usually keep my car for a long time. I had two cars for over 13 years. Unfortunately, I had to replace them at the same time. I probably would be ok paying of these two cars. I just feel like I’m always in debt for long period of time and I guess I’m just tired of of owing money.
There are quite a few things to consider age, total asset, and your goal. Fifty eight thousand dollars in debit for all of your assets including a house is not bad, if you are young. However, if you are about to retire than it is not so good unless you have a assets that will support your retirement. Like you said should be able to pay off the 58K in a year if you cut down your spending. The problem seems like it is your family spending habit that keep you in debt.
FWIW. I don’t disagree with you on that. My wife is the one who doesn’t spend much. I’m the one that spend way too much on toys. I’ve always like the new gadget new toys. Cars has always been my love. This year, I have curbed my spending but I just free like I want sell the car and get a fresh start. Even if I sell this car, I still have one great car and a commute car. I am considering to buy an old 05 Lexus LS430 around 9k to replace this vehicle and make it as my commute car. Give me current commute car to my son when he is ready to drive in few months.
Chuck, I can understand not including minor costs of keeping a car such as oil change, or wipers, as that cost, while not a constant, probably wouldn’t vary much. But I was just wondering is there a reason why you don’t include the cost of fuel in your per mile calculation?
I wish I follow this rule sooner. I would said I enjoy my life way too much and seems to be always in debt. I have an Audi S7 which I brought used last year for 44k. I have been thinking of selling to get out of being always in debt. I will only get 35k selling to the dealer, but I also don’t want to deal with the hassle of selling it privately. I also brought my wife a lexus suv which will still owe about 25k. My wife and I have total income of 200k. I own about 15k on the Audi. I have a total debt of 58k with CC and Car and the mortgage. If I am frugal over the next year, I probably can paid off most of this debt. So my question is, should I just get rid of the S7 and just take the loss?
I had an internship on the West Coast about 5 years ago and was under 25 at the time. Was told that car rental for the two months that I was going to be there would be ~$2,200 for an average American sedan. Wound up buying a 1994 Corolla with new tires, a new clutch, and no rust, but 215,000 miles on it, for $2,200. Drove it around for a few months and took it everywhere (I did a lot of sightseeing on my weekends since I didn’t know anyone out there). Wound up driving it home (to New Hampshire, a ~3000 mile journey, with some detours) and still drive it today; it now has just under 300k miles.
Total maintenance costs during my ownership have been about $1,500 (tires, brakes, including rotors/drums/2 calipers, 4 tires, a used set of steel rims ($80) to replace a rim bent from an incident with a pothole, a new, cheap radio, a door handle, an exhaust manifold, a flex pipe, rear brake lines, a fuel filter, plugs, wires, a distributor, and some other minor stuff). The car has only stranded me once, and that was a relatively easy fix (the distributor).
Parts for cars of that vintage are incredibly cheap and readily available and I do all of my own work on my vehicles (lots of space and no fancy electronics make this relatively easy). Registration and insurance are also dirt cheap (Its around $200 a year without collision, but with comprehensive/liability). There are also very few electronics to go bad (manual locks/roll down windows) and the car is pre-obd II, so no real annual inspection since the garages don’t have the right equipment to interface with the car; visual inspection only. That Toyota is the best car I’ve ever owned and, although its underpowered, its also light (105hp/2300lbs, 5 speed manual), so reasonably peppy.
I gross ~$125k and my wife grosses about $60k (she drives a 2006 civic with 255k miles that we bought with 130k miles). I see friends who make much less drive far nicer vehicles, have issues with them, and trade them in at a loss while I still drive my same vehicle. I restore older vehicles/motorcycles on the side for fun, drive them around for a bit, and then make a (typically) small profit on them when I want something fun to drive. Would never consider buying a new vehicle and having to take the immediate depreciation hit.
I didn’t own a car until I was in my late 30s as I had lived in NYC and didn’t need one. Now I live in the burbs and bought an old Japanese car for under $2000 3 years ago. I love it, it’s reliable and I will drive it forever. I would never buy a new car, but if I need to replace it I think I would be ok sticking with the 1/10th rule which would be about a $10,000 car.
I am not sure how dead of a post this is but I was looking to see how much I should spend on my car, obviously. What math did you use to come up with this 10% number?
I make 70k, ~58k after taxes.
I am about to finance a 50k car.
With this car payment, per year it is only 18.5% of my salary.
Rent is only 16%.
Everything from groceries to electric to eating out and gym is 23%.
AND I still save(invest) 37.5% of my money every year with 5% left over in case of “emergencies.”
Obviously I could spend less on my car and save more but how can you justify that saving almost 40% of my money after taxes is not financially stable because you claim by you chart that I would be in huge debt. I am just trying to understand where this large chunk of spending is in your scenario.
Shoot for a $7,000 car and save/Invest the rest.
I agree with FS here. I now make around $200k and have been driving an $8k truck I bought a couple years ago after my $5k car sent a deer flying down the interstate. Out of full disclosure: I also bought a $5k motorcycle last year and last week bought a $6k car because the truck is a diesel f-350 and I finally grew tired of trying to parallel park it downtown. But, I got along just fine for years having vehicles in the $5k (or less) range. Now that my income has grown, I choose to have my 10% spread between multiple vehicles, each with a different purpose, instead of just one $20k vehicle.
If I was in your shoes (which I was only a few years ago) I’d spend follow FS’s advice above. Then instead of spending 18%/year of my income on a vehicle I only have to spend 2%/year in maintenance on it and I’d continue to invest the other 16.5%/year. I know that next month or next year something else will come around that I want. If I’m already spending 16.5% of my money on the car I locked myself into, then I can’t spend it on the other things. Whether that’s traveling, kayak, new mountain bike, charity, RV, etc. You’re talking about spending $800/month on something that plummets in value. You’re investing a lot already, which is great, but you’re talking about locking yourself into payments for a single thing you want now and not considering all the things you will want later as well.
Something else to consider: did you know you can take just about any vehicle and have them redo the seats with new leather and add heated AND cooled seats for about $1200? You can also have a fancy radio with touch screen, camera, wifi, etc for under $1k more? All those fancy things the new cars are selling are not that expensive to add to any other vehicle. If you find a well maintained vehicle for a good price, you can just add the actual features you want without spending anywhere near $50k.
This is a great article. The best car I gas ever owned to date was my 1992 Geo Metro 5 door. It was a 3 cylinder, 49 horsepower masterpiece. It cost me a mere 1100 dollars and got 45 miles a gallon regularly. It was dirt cheap to insure, dirt cheap to fix and downright fun To drive. I will forever miss this car. It leaked oil, it leaked gas, and the ignition key had to be perfectly aligned otherwise all the interior electronics didn’t work. It was fantastic. I’m truest bullish on cheap high mpg vehicles.
I don’t see how simply stating 1/10th income is enough of a guideline. It really needs to account for how long you keep the car and then decide what percent of you income that costs you for the life of the car. It really should be what percent of you annual income every year you should spend on your car. If you spend 10% of your income on your car but have to replace it every 5 years then that will cost you more than buying a car for 20% income and keeping it for 10 years because the purchases every 5 years will cause you to pay 2 times as many tax and transaction costs.
Paying 10% of income upfront for a car does not include all the maintenance that will come with it over the next few years so that is another reason you should be looking at the cost per year of owning a car relative to your income instead of just the 10% cost without including how long you will own it or estimated maintenance.
Again FS offers sound advice, although I disagree with Yoda FS on a ROTH account.
The 1/10th rule limits your ability to purchase depreciating assets that suck your wealth building power.
It’s insane how car payments for 60 months, then repeated for life, can impact your chances at financial independence.
Save up, pay cash, drive for 12 years. Invest that money you saved. Boom! you will have some wealth built up.
Never underestimate the power of modern marketing and the Dark Side of the Force to separate you from your wallet.
Long, spirited debate!
I think the recommendation is practicable with some caveats. As many have mentioned, the rule will put lower income people into cars that are more likely to be unreliable.
In my experience, it’s very hard to find a car that will run reliably without near constant maintenance (like feeding it a quart of oil every other week) under $3k. Cars in this range are really just stop gaps because they’re likely going to have some sort of major system failure (rust on the body that compromises safety, transmission, engine) within 18 months that will require either a significant investment or, more prudently, the purchase of another car.
Above $3k, you start to find cars that will run reliably with only routine maintenance. For 3-5k, you should be able to get 3+ years out of it. Above 6k or 7k and the car may last closer to a decade. I’ve had my Toyota Camry for over 8 years now and I originally bought it for $7500. I’ve only had to do routine maintenance and I’m sure it has another couple years before it really needs something major.
So, to get back to the 10% rule, I think those that make less than $30k should have the allowance to go up to 20% so they can get a car that can reliably support their career and salary growth. Having an unreliable car IS stressful (I’ve had a couple) and can limit someone’s career and income growth.
Above 50k though, this rule is definitely practicable and, really, if you can ignore the marketing out there and focus on function, there isn’t much actual “NEED” to spend more than 10k on a car (though I thoroughly support people with the means spending as much as they want on a car). I’ve owned more interesting cars in my life but this used and slightly abused Camry has helped make my net worth interesting.
Thanks for this important topic. New cars burn up money fast. Over the next couple of years, we need to be careful of cars with flood damage following two years of hurricanes. Those flood damaged cars could wind up being sold anywhere in the country. Rust begets rust. A talented young guy who worked on our house thought he got a terrific deal, then spent $1000’s as his truck rusted away.
Our 2004 that has been so incredibly reliable, etc. (only 90,000 miles) that we decided to repaint it, suddenly needed $2100 in repairs this month. Because we paid 0.00% over 4 years (yes, ZERO %,) the car has cost approximately $2335 per year (purchase price + major repairs, not including routine maintenance, insurance, gas, etc.) Assuming we drive it another 5 years and it needs another $2500 or so, our average yearly cost will be about $2000 per year. Our second car (1999 model) that will be donated or driven straight to the junkyard (whenever we get a super deal on our next car) was purchased 5 years old for cash, has 185,000 miles and will average approximately $1100 per year (purchase + major repairs.) The difference in average yearly cost is simply the difference between buying a new car and buying a five year old car (they are different models, of course, but the same brand and essentially the same style.) I wouldn’t buy new again. I would buy, for example, a five year old BMW (super reliability as well as comfort and driveability,) with the idea of driving it for 20 years. Other than that, I would look for a new style that people have been crazy about (remember, you are buying 5 years old) so that the car will look newer and fresher for longer. If you are in sales, especially in Real Estate or corporate sales, this is all terrible advice. You need the image of a new car (and sharp clothes.) Sales people might be best served by leasing.
Hey Guys,
I have a hard question that I’ve been trying to figure out. I drive an old beater 98 civic that only has 150k miles on it and should last at least another 100k miles, or about 10 more years. However, my dad wants to get my brother a car and he’s willing to sell me his car for prob around 13-14k plus maybe give me enough for a down payment in exchange. His is also a honda (2015 accord) with 50k miles on it so I’d be getting a good deal bc it wouldn’t be sold through a dealer (saving 2k approx) but I feel like I might miss out on opportunity costs if I invest the 200-250 per month it’s gonna cost. I’m already investing like crazy at 22 yrs old but still not sure if this would be a smart move or not. Also my current yearly is about 45k (after tax).
Thanks I could use advice on this.
Don’t spend money if you don’t have to. How much do you drive and rely on your car? Do some research and find out what the average per-repair cost is for a 20-year old Civic. How have you done with preventative maintenance? At that age things like gaskets, seals, hoses, and some fittings need to be replaced, which can be expensive and potentially catastrophic. Is it a manual or an automatic? Honda autos tended to be troublesome, and again, potentially expensive for an older car. Luckily parts are a dime a dozen and if you have a good mechanic, even a full engine/trans swap isn’t TOO terrible a prospect. But also factor your time. Say you do have major issues – can you afford to be without your car for a week?
That said, just because a car is newer doesn’t mean it can’t have problems too. It’s just far more likely that a 20 year old car, even one as remarkably well-engineered and built as that generation of Civic, is going to give you trouble. The question you have to answer is will that trouble cost you more in the long run than buying a great newish car that you could easily keep for 15-20 years.
If it were me in my early 20s, I’d sell the old Civic to a high schooler for a few grand, buy out the Accord, and keep it for a decade or two.
First off thanks for the advice. Yeah repairs are definitely something to consider I have had repairs in the past involving oil leaks and hopefully that nightmare is all over with but you never know. I think I’ll probably end up buying the newer car thanks!
Definitely consider safety as well. My previous car was a older Civic as well. It’s really an amazingly reliable car, but it’s a tin can compared to my new car. I would not want to crash that car and I’m not going to put a value on my life. So for me it’s worth it to pay a little more to be in something that meets modern safety standards.
As a father now, I am 100% for safety. I’m not willing to compromise the safety of my family to save money, or as much money anymore.
See:
https://www.financialsamurai.com/safety-first-family-car/
What would you recommend an individual do with all the extra money not spent on a car? Diversified investments? What’s the point of saving, investing, and amassing great amounts of wealth for the sake of wealth? I’d surmise that having a reasonable safety net, living comfortably, and having the means to being happy would apply to the majority of people as opposed to draconian cost reduction schemes imposed on every aspect of life. What good is a large lump sum at age 50 when it only took the past 30~ years of penny-pinching to accumulate? I can easily see young folks dedicating decades of their lives accumulating wealth only to realize later that they never got to do the things they wanted to do in life while their bodies were younger and more able.
tl;dr I’d like to know what your core values in life are and how they guide you in your financial decisions as well as the viewpoints expressed in your website.
These comments have been interesting and I would like to know what the thought is for our situation: We have a 2001 Nissan Altima – 170k miles – car needs ~$2k in repairs. We drive it less than 5k miles a year so I think we should just repair it.
Our other car, a 2013 Toyota Camry (bought new, on clearance, 0% interest) is almost paid off – 5 months left.
I would love to be w/o a car payment but my wife is concerned with the safety of the Altima.
Thanks FS community!
I like your blog a lot. I even recommended it to somebody last week :)
That out of the way, this post is less about spending money on cars and more about you advertising you are not a car guy and see no value in them. Telling a guy who makes $190k that he shouldn’t buy anything more than a new civic is only possible if you get nothing whatsoever out of cars.
A guy who makes $400k, but he shouldn’t buy more than an avalon? I drive an avalon now (I am below your avalon income bracket). I leased it with $0 out of pocket and I pay under $400/month for a brand new, safe vehicle, that’s luxurious and that I enjoy driving. Even if I bought a brand new car for $500 it would still cost me money in repairs (more than my new car), gas (more than my hybrid avalon). Meanwhile I’d hate the car, and it would be significantly less safe, as newer cars are continually releasing safety updates. I have run the numbers and the difference between driving my avalon and something cheap like a new toyota corolla is around $150-200/month.
I wear the same $30 watch I wore when my household income was 1/4th what it is now. I wear the same kind of clothes, too. I live in the same house as when my income was 1/3rd what it is now. In fact, I haven’t changed my lifestyle at all except for basically driving slightly nicer cars. I still don’t vacation, don’t spend money on gadgets, etc.
It’s possible to be a ‘car guy’ and spend less. I remember having my VW in for service and driving a loaner base-model Golf. I was pretty impressed (as a car guy) at the ‘value for money’ proposition. And that’s just a new car off the top of my head. Used? Tons of options. The hard part is breaking the mindset that you ‘deserve’ to eat $10-12k in depreciation each year.
Thanks. It’s all good and personal preference at the end of the day. I just don’t want people to regret buying something they couldn’t comfortably afford or get sick of years from now and regret having spent so much.
I absolutely know that if you spend 10% or less of your gross income on a car, you will not regret the expense because it is insignificant. And if you take my message trying to earn more to get that fence your car, you will actually feel awesome to be able to afford such a nice car and have a nice income stream.
I didn’t mind driving a Honda fit for three years, nor do I mind driving a Range Rover sport now. Both followed my rule.
I’ve always been mystified by how much our California neighbors were willing to spend on a car and I’m 100% sure that driving expensive vehicles has delayed retirement for 5+ years for almost all of them. When we bought our first new house in a nice suburb of Sacramento in 1998 for $230,000 the neighborhood was full of Mercedes, BMW’s, and luxury SUV’s. The homes were all tract homes and none of them were worth more than $350k. My wife drove a VW convertible at that time that we bought used for $12k and I had a company provided mini-van. We bought our first new car, a Buick Enclave, when we were 43 years old. We felt somewhat guilty spending $45k on a vehicle even though we were paying cash and my wife was getting reimbursed about $700 per month for mileage from her company for that Buick. We waited until age 50 to buy our first luxury car, a new Tesla Model S. At that time the Tesla was less than 1/20th of our annual income but we still had to think long and hard about it because it was exactly the same price as our first home in 1995. We are now in our early 50’s and I am retired and my wife is only working because she loves it and we still have our youngest at home with us a few more years. I’m convinced if we had spent like our neighbors the last 25 years on cars, motorcycles, boats and RV’s, I’d still be working and our retirement nest egg would be a couple million dollars smaller.
Guys (and gals) who make $190K or $400K can avail of the author’s other suggestion which is spending 5% of net worth on a car.
And if one makes $400K, and if one’s net worth is less than $800K, one definitely ought to opt for a cheaper car.
Think you’d get a kick out of the new Kia ad https://youtu.be/m7L9XRfGULo
Hah! That’s great.
I think this is a great rule. My husband and I make about $100k between the two of us. We have been on a debt crushing crusade now for the last 4 years and have paid off everything (88k) except for my school loans which will be paid off this year and then no more debt.
Now, no more debt means no car loans. During this time we have been able to save for two used vehicles (8k and 13k <– partial business expense) we were able to pay for our wedding and honeymoon (15k) in cash.
My vehicle is a little Mazda 2 that cost us 8,000 that we paid for in cash. when I bought it, it was 3 years old. I have had it for 3 years no issues. Wonderful vehicle and we also bought it from a dealership.
So not only do I think this rule is great but I also love the fact that you advocate purchasing the vehicle right out. When you do this, you get ride of the extra couple grand you would be spending on finance charges and probably the extended warranty since you are most likely purchasing a vehicle you can't afford and therefore can't afford to fix.
When you purchase a vehicle in cash you make better money decisions and what I mean by that is you weigh your wants and needs. I went from a SUV with leather heated seats and a sunroof and more perks to a Mazda 2 manual tranny that the only real feature is the electric doors and windows :) When you have a set amount to use to purchase rather than a payment (that might extend for 84 months!!!!) you really say to yourself…do I really need that. 99% of the time your answer will always be no.
Now, the plus side to saving all this money on something the depreciates so quickly is that you can invest what you would have spent into something that will actually gain you income or even pay off other debts. This helps lower the amount money that is getting flushed out of the household on unnecessary interest charges or even pay off your home early and save thousands and thousands in interest :)
It pays all around. :) :) :)
Awesome! Now this is the attitude that Gets it. Especially in this amazing bull market.
“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.”
Perfect example of the false dilemma fallacy. What you can afford is an entirely subjective term and you haven’t defined it, so you cannot possibly say what someone can afford. If you take afford to mean “having spare money to invest” then maybe, but if you take afford to mean “being able to pay bills and love comfortably”, then you might also be completely wrong.
Also, why is having a nice ride lower on the priority list than other pleasures in life – like stopping working earlier? Some people enjoy their work, and would also like a nicer car.
Here you go. https://www.financialsamurai.com/how-much-have-americans-saved-for-retirement/
And you just have to look at your own finances and see how you are. You can do whatever you want.
If by 10%, you mean 10% of your salary per year, then fair enough. If however you mean that someone on $50,000 should only buy a $5000 car then you don’t live on planet earth. Someone on that salary can easily afford to have any reasonably priced car they want. I’m on about $37,000 per year (by current exchange rates – I’m in the UK) and I wouldn’t hesitate to buy a $15,000 car – although I don’t need to as I own mine outright currently.
This is my problem with this article. Yes it’s general good advice to not splurge on a car to take you from point A to point B. The problem is when you buy a $4000 car for example you may not be getting a reliable vehicle. Of course you can pay $30,000 right out of the dealership and your car can be a lemon but at least there is some sort of warranty backing that up. Though most of the time you’re in a fresh car, you chose what you like and you’re happy with it. That’s just one example.
I think the problem lies with where people spend their money overall. Going out to eat food whether it’s fast food junk or a fancy restaurant is not wise but people do it and do enjoy it. Some people like expensive sports like skiing or snowboarding. Some people like attending sporting events that are also expensive.
If you have the budget and you do like cars, I don’t see how buying a car you like that is reasonable is a problem. I think the 1/10th rule is awful. The initial problem lies with the person and how they spend/save their money in the first place. Sure you can drive a shi*t box if that’s ok with you, but some people enjoy what they drive. While others may live in a downtown condo with no car but enjoy $200 dinners every weekend.
The Mr Samurai, think you need to commit Seppuku !! You show no connection to reality! A $4000 – $6000 used car today will have from 120,000 to 200,000 miles, and will need everything from tires to a new transmission. Not to mention the lost days from work when it leaves your ass on the side of road, or won’t crank in the morning. And forget about driving anything over 40 miles one way! (uh oh, want be taking it on vacation!) Unless you are mechanically inclined and do most of the work yourself as a “shade tree” mechanic, I would advise your readers to “get real” and go to the auto parts store and check prices.
What crack pot advise!
Bro, have you been living under a rock? Cars with 120,000-200,000 miles are barely broken in these days. If you’re car isn’t going to 200,000 miles with relatively low repairs you’re doing something wrong.
A $2,000 Civic for 150,000 miles on it will be pretty trouble free.
And tires?! You can’t count consumables as a negative on a used vehicle. ALL cars go through tires even new cars believe it or not. My Focus goes through a set of tires every 20,000 miles, I’d have to be buying a new car every 15,000 miles if I didn’t replace the tires!!
Really liked the article! I have a question as this is something I may do in the near future:
Car I want: Porsche 911 (7 year old) goes for about $70,000.
Resale Value after 5 years of ownership will be about $45,000-$50,000.
Cost of owning the car: $5,000 a year, Gas will be a little more than I currently spend, Insurance will be similar. Maintenance may average out to about $150 extra a month. Porsche are known to be reliable.
All other expenses aside, wouldn’t you agree that someone making around $100,000 a year can afford a car like this. (Your chart says $1,000,000 which would make this nearly impossible for the average Joe).
Looking forward to your thoughts!
Don’t worry man. If the car only cost $70,000, you only need to make $700,000 and not $1 million.
Goal of this article is to help younger folks especially think about the ridiculousness of buying such an expensive vehicle when public transportation is cheap, and ridesharing options for cheap and easy to use.
The people who disregarded my advice years ago are in much worse financial shape today because they could’ve use the money to invest and watch their money double or triple. And in a bear market, those who have expensive toys they don’t need will feel the weight of 1000 boulders on their shoulders because their jobs may be at risk.
By what you can afford folks! And if you need the thrill of a fancy car, just rent one for a day or two.
this is an old thread but still very interesting in 2017
i only make 32k a year while my wife makes 50k
my wife pay the house , electric/tv/internet bill and the food
i pay the car and most tools/hardware/appliances that we need for living.
i bought a fully equiped subaru 2017 at the price of 35k . (60 months payments.).
as of today i have 18 months left to pay… buying a new car means no repair and most of everything can be done under warranty.
i have not missed any payment.. it is tough, difficult and stressful.. but i have 18 months left… im sure i can do it. i have zero debt on my credit card.
i simply do not see myself taking the bus. and my needs also include my image, my pride, my ego.. drinving an old rusty car look dumb in some situations and i don’t want too look poor..
we also travels alot and driving a brand new car is qlso much more safer.
i fully agree with the article but the 10% thing does not fit my needs
“the things you own end up owning you” Tyler Durden
I read your 1/10th rule a while ago and thought how unfortunate that I didn’t have that advice when I purchased my brand new dream car, a 2008 Toyota Prius. I am now faced with the decision of buying a car because Hurricane Irma flooded my car and totaled it. I’ve had 3 weeks to decide what to do about a replacement car and as much as I want to be a devout Financial Samurai, a car costing 1/10th my income would not work for me because I’m afraid of the mechanical issues I’ll have to deal with having an older car. In the long run, it would make more sense for me to get a $15,000 Prius that’s about 3 years old. I thought long and hard about how to follow the 1/10th rule and this is what I came up with. Because I don’t want to take any money out of investments/savings for the replacement car, I’m going to ride 5 miles to and from work for the next 5 months to save on car loan payments/insurance/parking/gas. These savings in addition to the insurance payout would be 1/10th of my income, $8,300. Then I would take the $8,300 and invest it to earn enough money over the next 4 years so that the investment would pay for the car. The plan is to take out a 2.64% car loan in 5 months and have the investment income pay for the loan. The benefit to doing this is that after the car loan is paid off in 4 years, the $8,300 will still be available and earning me more money!
Since the most recent post mentioned the 1/10th rule I thought I’d return to my comment here to provide an update on my car situation. The $8,300 I invested returned $2,100 during the last 7 months so that was good but I didn’t use the earnings like I thought I would. I did ride my bike to work for a good 5 months and was loving how fit I got and the money I was saving. Unfortunately, I had to stop riding the bike when I got hit by a car on the way to work. Fortunately, I was able to fully recover after 5 weeks. I couldn’t get myself to continuing biking to work after I got better though. Although the physical benefits were great it wouldn’t have been worth it if I was ever seriously hurt or dead because of another accident. It’s funny how a person can get used to whatever becomes the norm. I got used to riding my bike so I thought I didn’t need a car. While I was healing, I was driving a beat up loaner car, a 2005 Mitsubishi Lancer. As first, I thought the car was the crappiest thing I had ever seen because this car really needs a new paint job, the glovebox hangs open due to a broken latch, the plastic part of the gear shift floats on tops of the metal part, the driver’s side window no longer rolls down, and there’s a large yellow paint stain on the back seat. However, the car has been reliable despite its looks and that’s the most important thing to me in a car. So, I’m now the owner of that $800 vehicle. Even when I got promoted with a 10% pay raise a month ago I didn’t even consider getting a new car!
Glad your accident wasn’t even more serious! Stay safe and good job saving money.
Can you create a rule-of-thumb like this for CELLPHONES!
I made this mistake in 2013. I bought a brand new car as I thought that it’d save me trouble with warranty and maintenance. I paid off my loan in 2 years instead of the required 5 so I ended up paying less. But it was still a lot of money. Even though looking back, I would have bought a used cheap car; my car has served me very nicely giving me absolutely no issues and has a great 35+MPG! I get the point though, a car is really just a liability.
This is a great article, I have always been a proponent of buying with cash, and driving your car until the increased maintenance costs out way the benefits of buying another car. Vehicles are the worst investment (although necessary) you will ever buy. Where else do you spend thousands of dollars only to have it consistently depreciate overtime.
Baced on your theory of 10% of your income on a cheap , unreliable car would be foolish if your jeopardizing getting to work on time & your livelihood. The title should be , buy the best car you can within your budget. Spending a little extra on a better quality or more reliable car is the better option in the long run as repairing an old car could cost more than you think. Pick a 3-5 year old car as most of the depreciation is within the first few years, and is still in good working order & condition with in your budget ,is my recommendation.
I had a laugh at this. 1/10th your yearly earnings buys you nothing but stress and headaches. If you have to drive that car any meaningful distance you will break down, miss appointments, etc. A car with that price tag is certainly beyond its warranty date and you are buying a mystery 100k + miles. Even for 7-10k that’s certainly the poorest investment of the poor. Many a used car salesman has a lemon for 7-10k. At least with a new car you know every mile on it because you’ve driven them!
Better advice for the financial samurais would be to sick to the urban sprawl and skip the car altogether. For everyone else who travels many miles a day back and forth to work the dependability of a warranty and a reliable ride cannot be underestimated. It’s worth more than 1/10th your yearly earnings.
There are other options, too. Carpool with coworkers or quit your long distance job for a closer job.
It’s not the end of the world if you have a long commute. Bottom line is a car is too valuable to price at 1/10th your yearly earnings. If you don’t need a car you’re probably making up the difference in your rent (urban life usually is more expensive). For example my home loan in the sticks is $400 dollars /month. This is the benefit the car loan brings me. I would have to add both my home loan and the car loan together to match the price of these urban rentals my so-called financial samurai friends rent. The difference is I wind up owning both and they own nothing. Go figure.
By the way I think you can still save 30% of your yearly earnings and afford a car and a place to live. Maybe a more practical approach to buying a car would be to not spend more than 1/10th your earnings annually on a car loan over 5 years.
I don’t follow this rule. Whether it should be applied depends on the situation. If you live in an area with poor public transportation, a vehicle is required. I do agree that you should focus on a Toyota or Honda. They run forever.
I also tend to hold my cars for 15-20 years. I have one car right now (bought new) that has 325K miles on it. I am giving it away to another family member. My other cars are 10 years and 2 years of age. If I lost the 2 year old, I would replace it with a used Toyota. Gotten comfortable with that brand.
To: all younger people reading these posts… Life is NOT a dress rehearsal, live, love and enjoy your income buy what you want when you can. For realities sake those people saying they make 250k-300k are NOT buying 25k – 30k cars. No matter what they tell you. Don’t let anyone tell you your place or what you can or can not do. Do your own thinking. Find and make your own place at your own pace.
The most recent Census Bureau data showed that median household income — what people in the exact middle of the American spectrum earn — is $53,657.
Those families who make $250,000 a year, on the other hand, belong to an elite group: Americans who earn enough to be in the highest 5 percent of the income distribution. That top stratum captures anyone who makes $206,568 or more.
Let’s keep it real a rising tide lifts all boats~
Okay I’m not sure I agree with all of your figures. But I LOVE the idea of the self-flagellation. In any case:
My current car is leased and I pay 1/10th of my take-home (after 401k, HSA, etc.) on it. It’s pretty “affordable”, but I won’t lie I think 1/10th on a lease payment is too much and I wish I hadn’t done it, but I’m sticking with it until the lease is up. It was an impulse buy and I’m too old to be doing that. Not a hugely injurious one at the end of the day, but a childish one for sure.
Anyway, my previous car I had leased a brand new Altima and the lease payment cost 1/15th of my take-home (yes that was all-in–I put no money down) and honestly it was a great price to pay. For that payment I got a car that was brand new, meaning 100% reliable and under warranty, totally stress-free, economical on gas, and it didn’t suck to drive; had satellite radio, reasonably powerful, etc. Don’t forget also, when you get any car you’re losing money as it depreciates, and a lease payment has that already built in.
Sure, i could have bought a used altima and kept it for ten years, but at some point money is meant to be spent, and driving an old junker may end up saving me money long term (not a ton, really), but it also sucks, and given my income (pretty decent) it’s just not really worth the hassle or the pain. And I can save money elsewhere; I spend little on clothes or eating out, for example.
When I run numbers, the difference between buying a new car vs an old amounts to something like $100-150/month at the most after calculating depreciation, repair costs, gas costs (newer cars tend to be better on gas), etc.
Wouldn’t financing it over 5 years lower the percentage of your income spent on the car? Instead of 95%, wouldn’t be more like 10-20% per year?
I think you are missing the point of this article Jake. You don’t get to spend 10% per year on a car. You buy a car worth 10% of your annual income. Say your are on $50K, then you buy a $5K car; not a $20K car that you pay $5K on each year.
And if you want to change car in the 2nd year; then you sell the now $4K car and get another $5K car.
I think you missed the point of how cars are paid for, and if you say that you pay for it with 95% of your salary in one year, that would be incorrect as cars are financed and paid for over a period of time at typically pretty low rates
you would need to add up the income you made over those 5 years and then divide the car into that, simple math bud
Ah, I see what you are doing; yes very simple math.
Now tell us, how you are going to pay for your retirement with no money? Using the simple math perhaps?
Bud,
The author tried to compare apples to giraffes, and I just pointed out his mistake. Mistakes happen, but since you asked:
I will pay for retirement by using the other 90% of my income, that i have saved over the 5 years (the other 10% went to paying off my new car, remember).
Then, i will drive my new car until it no longer runs while putting all of my income (other than my house payments and basic food/budgeted expenses) into long term undervalued stocks with low P/E ratios and growth potential, and most importantly not ever taking that money out of the market – even after market declines, and making sure to match the maximum that my employer contributes into my roth IRA (as that is free money I would be a fool to pass up).
More or less using the simple power of compounding returns on investments is how i plan on retiring.
Assumptions:
1) income starts at $50k and increases by 3% per year
2) used cars lose 20% of current value every year
Scenario one: buy a used car for exactly 10% of your income, drive for a year, sell and repeat for 10 total years.
In total, I spent $57319 on cars, got back $40636 when selling the first nine and I’m now driving a car worth $5219. I can sell that last car, and be car-less, and for ten years the total is -$11464
Scenario 2: buy a used car for more than 10% with the intention of driving it for 10 years. If I buy a $12843 car and it loses 20% per year I get it being worth $1379 after 10 years. If I sell it, and again now car-less, my total spent is the exact same -$11464
Lets call these the extremes, the first one by definition was exactly 10%, the second was 26% of income. How about some mid-points [should have used 12 years with more divisors :)]
Scenario 3: buy a car for 5 years, then buy another for five years, selling at end with same ~$11500 cost; 15.8% of income.
Scenario 4: buy a five cars, every other year, selling at end with same ~$11500 cost; 11.3% of income.
Using those four data points I get a less catchy, “number of expected cars per 10 years to the -0.4 power… and uhh, divide that by four percent of income” rule.
Eric, I believe you’re missing a few pieces of the equation, mainly opportunity cost and compound interest. First, selling and buying another vehicle every year will destroy wealth quickly because you’ve compounded your 20% loss by buying at X, selling at X-20% and the buying at X+3%.
Given your initial assumptions, that’s a $5k vehicle. If you sell that vehicle and buy a vehicle worth 10% of your current income(3% raise) every year. At the end of 3 years, you’ll have a $4243.60 vehicle to show for it.
Alternatively, the $5k vehicle should easily last 3 years and you could otherwise invest that 20% loss and 3% raise each year and earn 8% on it. At the end of 3 years: Your vehicle is worth $2560 but you have investments worth $3339.70. Your net result is $5899.70.
That’s a $1656.10 difference in your net worth in only 3 years.
Wish I read this sooner. Already traded in my 04 Corolla with 140k miles for a new Corolla. Nice car, especially with the standard safety features (pre collision warning braking, etc) but now got a 4 year loan to pay off. My reasoning is because of the things I would have to fix. Check engine light (bad cat or sensors), front suspension, power window motors, a/c, water pump, power steering leak, new brake master cylinder, and it was eating oil. Interior lighting wasn’t working either. I loved this car but felt it was time to move on. Love your website!
I applaud Sam for writing such a great article, but I am afraid that it tries to “chew” on a topic that is just too broad and diverse to be addressed by one universal “rule”. A car is arguably one of the most common “big” assets we buy, yet it can be used in a million different ways; there are just too many variables: how much do you drive, where do you live, what does a car mean to you, what do you use it for – the list is endless. I would say that this is a great advice for anybody who needs a daily driver that will see plenty of mileage. For everybody else a “one size fits all” advice doesn’t help much, which is why the topic is still generating so much controversy years after its release. I live in Tokyo, where even people with 200K+ incomes don’t buy cars as they are unnecessary, yet I bought a used sports car that, at the time of the purchase, set me back 50% of my annual income. It’s a 15 years old collectors item that has tripled in price over the past 10 years. The car costed me 70,000USD, I paid in cash. I roughly save 45% of my annual net income and it took me a bit over a year to get the money back. I drive once a month and I have met countless amount of people and friends thanks to my car; I have found new hobbies and even inexpensive ways to kill time as many weekends I just meet with friends over coffee at car meets and the whole Sunday costs me 5 bucks. I even booked more business at work as one of my clients is an amateur racing driver. It pushes me to do better at work, keeps me positive and motivated and is a great relaxing hobby: I could literally go on for hours listing the amount of benefits and relationships that I built over the past two years thanks to my car and, all in all, in the bigger equation of life, these where the best spent 70,000$ of my life.
Nowadays, 10% of above-average salary won’t buy you a even third-hand car. Might as well not buy a car at all!
Our family has always owned used cars, which were actually hand me downs from more well to do family members who were trading up. Over the years that has saved us quite a bit, but we also had to invest in substantial repair costs, and suffer the occasional break down. Rural living requires having a reliable means of transportation, and older cars require expensive repairs. Now we are older and don’t want to risk breaking down in the middle of the winter. For that reason, when we needed a new car at year’s end, we purchased last year’s model, new Honda Accord w 0% financing, and we plan to keep it well maintained. I’d have to be young and living in a city to be able to follow your 1/10 advice at this point.
Is leasing just a bad idea or where would it fit in this rule?
Leasing is the most expensive way to operate a vehicle, perhaps only second to renting weekly from Hertz or Enterprise. A traditional car loan on a new vehicle would be financially better than a lease, unless you tend to sell your new car every 2 years. But if you’re selling your new car every two years and are not financially independent (perhaps 1+ Million in assets?), you’re shooting yourself in your own foot right before you try to run a marathon. Sure, you might finish the marathon, but you’re intentionally making it harder on yourself.
Also, I personally don’t advocate a car loan of any kind. I own 3 vehicles, the sum of their purchase prices were 8% of my gross income. Which is also a major step up, because for 3 years I drove a vehicle that cost me only$1k while I was making just over $100k/year. Those people claiming this 10% rule can’t be done are making excuses instead of admitting they are saying “can’t” when they mean “won’t”.
If everyone follows this article, the entire auto industry would be done. How many jobs do you think that is? Let’s face it, 99% of people do not make over $200K a year. The people that makes less obviously have to buy a used vehicle, which at one point these vehicles were new. Let’s see here, you will have 99% of people waiting for the 1% rich people to dump their new vehicles.
If the 99% is true, then it is also true that 99% of people spend way too much on a car, and are not going to end up with an optimal financial future.
I have read several articles on this website and feel they are very helpful and accurate. This article is completely false. Spending 1/10 of your income on a vehicle is impractical. Please understand that I do not encourage people to spend 30-40k on vehicles, but reliability is key. If you spend $4k on a car, the maintenance and repairs will kill you alone. Cars do not last. Most vehicles even good Japanese cars last 150k-250k miles. Cars that are selling for that price are selling at the price for reason. They are on their last legs. You will essentially be throwing that out. I encourage new buyers or individuals on a budget to look at vehicles that are lightly used. The best bang for your buck are the cars that are 2-3 years old and under 50k miles. Usually at that point with most Toyota’s, Honda’s, and Nissan’s, you can find them for about half their original value. You can get a civic, corolla, or sentra for about 10k. You put 20-30% down and take $150 payments for 48 months on a simple interest loan. You will have a car that will last longer, be safer, and is reliable. Shop the vehicle value and speak to your local bank about rates prior to going into a dealership and you will protect yourself and make a sound financial decision
My income has been $100k plus since1997. The most I have spent on a car is $9,000. It is a 2006 Buick Bought in 2009 and still going strong. I am now shopping for a newer one in the $20,000 range.Even though my income is a little higher now,I can go to the $20k level as it only 2%of net worth. I don’t feel like I have missed any driving experience.
Tom I commend you on your fiscal restraint. And I think you made the correct decision, rather than being sucked into the keep up with the Jones’ mentality.
But having said that, you have been driving an old Buick for 8-years, so I don’t really think you are qualified to comment on “driving experience”.
(Reminds me of a friend who was hitching a ride. An old Yugo pulled over to give him a ride. He went over to the car and thanked the driver for pulling over, but rejected the offer noting that he was in a bit of a rush!)
It just comes down to freedom, doesn’t it? What if you lost your job? What if your expertise became suddenly obsolete? Think of those brilliant people who perfected the manufacture of the CRT, where are they now?
If you are in debt, you have decided to live for the moment, and to put off the day when you could survive if the merde hit the fan. When you borrow money to buy something that depreciates in value, you are sabotaging your financial position with a one-two punch.
Maybe 1/10 is a little simplistic, because the real thing is the total cost of the car, including maintenance and operation costs. But it is a great eye-opener, a way to get folks thinking about what they really need, and what they are willing to sacrifice to get it.
This site is great.
The issue of 1/10 is what if you need the car for transportation?
There a lot of individuals that have to drive a car just because other modes are not worth it. Take three hour round trip a day, no other transportation is available etc..
In general financial rules are hit and miss. Just spend less then you make, stay out of debt, get out of the debt as quickly as possible.
If you want to spend half you income on a nice car go for it. Just realize the burden (opportunity cost), and don’t go into debt. Save up and then buy the nice car.
Rolling in a $1 per pound Cadillac with 80K on it now for 5% of income and it is probably the nicest car I ever owned. Gas isn’t cheap though. It can be done, but you need to know what to look for and if you can’t maintain it I wouldn’t advise going this cheap because the little repairs can kill you.
Oh and I had my 19 year old brother follow the pre 2007 Corolla advice, which is still over 10% of his income because he works part time for minimum wage while going to trade school. At 105K, it is dead, 5K of use in his hands. 98-02 Corollas can burn oil at a tremendous rate once they hit a certain age apparently. No check engine light, good compression, ran great for those 5K miles. Wish I would have just got him a nicer car right about now.
I know friends with Civics that burn oil like crazy also. Not all Japanese cars are as bulletproof as people make them out to be.
This is, quite possibly, the dumbest post I’ve ever seen and written by someone without a very solid grasp on finances (which is why you talk about it online and are not particularly wealthy yourself).
You don’t seem to realize the benefits of owning a higher-priced vehicle that go beyond, for instance LESS maintenance costs, less downtime resulting in opportunity costs, and the innate benefits like the “appearance” of wealth.
I make over $100,000. I’d never catch myself buying a $10,000 car because I want that car to last so that I’m not buying another one in two to three years.
You should look at approximately 30% of your annual income, give or take. We have an SUV that we paid $32k for. It is not an impact on my savings and I have no debt.
Thanks for your comment and sharing your wisdom. I’m just trying to build my nut to survive in this difficult world.
Congratulations for making over $100,000. A lot of us are not as fortunate and are just trying to do our best to make more to be financially free.
You may enjoy these posts as well:
The Rise Of Stealth Wealth: How To Stay Invisible From Society’s Rage
Abolish Welfare Mentality: A Janitor Makes $271,000 A Year, Why Can’t You?
The Average Net Worth For The Above Average Person
“I’d never catch myself buying a $10,000 car because I want that car to last so that I’m not buying another one in two to three years.”
I just don’t understand comments like this.
My current car cost $9,999 and had 24,000 miles on it. It was 7 years old. I’ve already driven it for way longer than 3 years. I expect to drive it for at least 10 years.
FYI, the average age of cars on the road in the USA is 11.4 years. 11.4 years! That means that a lot of cars are way older than 11.4 years!
Clearly, cars last a lot longer than many people seem to believe. If that weren’t true the highways would have nothing but broken down cars on the side of the road each and every mile.
Here’s a great article on how to cure oneself of “Tiny Details Exaggeration Syndrome”, which is the tendency to think that small problems are way more important than they really are.
mrmoneymustache.com/2012/12/26/cure-yourself-of-tiny-details-exaggeration-syndrome/
Incidentally, that $9,999 car was sold by someone to CarMax for less than that. If I had bought that car from the person who drove it instead of CarMax, I could have gotten an even better price.
This is a great article! I think it can be extended to retirement distributions as income. Many of us will be or are tapping into traditional 401ks and IRAs. Essentially that is taxable income. So is social security. If you are only tapping Roths, social security is not taxed. In any case you essentially are paying yourself taxed or not, so it is equivalent to a salary. It might be tempting to buy an expensive luxury car if on your retirement day, say January 2017 your net worth of your retirement funds and other assets outside of real estate amounts to $2,000,000. I have just shy of that amount now, and in various asset classes, and figure with average annual gains I could be getting $150,000 per year, and that does not include social security. So one tenth of $150,000 is $15,000 and I would be fine with a Scion. I currently earn around $130,000 and am driving a 2003 Toyota. My car is used to get between point a and point b. I am in Southern California, which is a car crazy place, by I make a point of moving to where my job is so that I won’t have to drive much.
Hi Sam. I am part of a radio program on the internet. The program is in spanish and I would like to share with spanish spoken people your recommendations about buying a car. I am asking you for permmission to share this wonderful experience. Thanks a lot.
Absolutely! Share away! Everything is free on my site for people to consume. Thanks
Tank you very much!!! I Apretiate that.
Yes. You are ALL spending too much on personal transportation. I’m sorry, but it’s true. Break down the cost of your car by the amount of time you use it. Then take a hard look at whether or not you should be using it, ie could you just walk or ride a bike down the street to the drug store or to get lunch (you should be bringing lunch anyway). Once you look at the cost of the car, the depreciation, the interest, the gas, the maintenance, the insurance, the parking, you are spending MANY dollars. Do you need to? Would those dollars be better spent elsewhere? Probably.
But in all honesty, most people are either been so poorly instructed how to use money or are so stubborn to believe they for whatever reason NEED that $40,000 status symbol, and will never that get the point of this article. Which is, as I stated, YOU ARE SPENDING TOO MUCH MONEY ON YOUR PERSONAL TRANSPORTATION.
Maybe the 1/10th rule is a bit draconian, but it’s an easy rule of thumb. And weirdly, I follow it. Mostly. I drive a car that’s about 1/8th of my gross. I could have gone cheaper, but I spend most of my commute sitting in traffic and I wanted some additional comfort that simply wasn’t an available in an econobox. I also paid for it in cash. No regrets.
While I see the merit in the 1/10th rule for those making the big bucks, I question its logic for middle class folks like myself. I make around 40k and by that rule I would be limited to a $4000 car. I’ve had my share of cheap cars and have always ended up bleeding money on them with repair costs. When it’s all said and done, after adding up mechanic bills, I would have saved myself a lot of money, frustration, and time by just buying an affordable, new, warranty-protected car.
I agree
I make just under $200k/year and drive a 16 year old Grand Cherokee I bought up for $3200 and immediately put $800 into it to fix some things on it. I’ve had it for 11 months now and besides needing to replace a $20 power steering hose since then, it has not given me any problems. I’ve put around 14k miles on it in that time too. Previously (when I was making $80k/year) I had purchased a $1000, 20 year old Eagle Talon that lasted me 3 years/60k miles and only had to replace a water pump and tires during that time. I also have a ’96 Ram 1500 I bought for $1200 and put new tires, some radiator stop leak and a new fuel pump. It has been a extremely reliable over the last 3 years and I lend it out to friends constantly when their newer cars break down or if they simply need to do a trip to home depot. If you add up total purchase price and initial fixing costs of all 3 vehicles I currently own, I apparently have a 1/20th rule for myself. If you only look at the most expensive vehicle I own, it would be 1/50th rule.
Insisting all older cars are maintenance nightmares and money pits is simply untrue. Sure, some are a nightmare; my friend, who makes a bit over $100k/year had a $500 Accord. 2 1/2 months after buying it, it set itself on fire while sitting outside a friend’s house. She had a good laugh, hopefully learned that $500 might have been too cheap, and replaced it with a Saturn for $1500 as her daily driver. She has a $500k home and horse property, 3 horses and a $8k truck that gets used to tow her horse trailer.
You might have it backwards about what those with high income actually do with their money. You’re taking the advice from people who’s houses and cars are owned by the bank and ignoring the advice of those who own their homes and cars outright and have the ability to retire whenever they want.
In 1986, I was making about 28K in an Engineering job. I let my first wife talk me into buying a brand new Honda Accord for 12K. That car payment was relentless. She and I divorced shortly after the car was paid off in five years (coincidence).
From that point on, I bought well-researched used cars. I spent about $3-5k on each and drove each for 4-5 years. I think I averaged having one $1K repair a year throughout that 20-25 year period. My income was of course growing all through that period, eventually surpassing 100K. Having to fix an old car (either yourself, or paying others) requires a certain amount of emotional resilience, but I feel like I saved a ton of money overall and still drove cars that interested me. Most were older Mercedes Benzes that I purchased in the 150K mile range and drove to 300K miles.
After those “lean years”, I did finally reward myself, buying a $33K new car. I did that after my house was owned free and clear, and my retirement savings were on track for my targeted early retirement at 55.
I had not heard of a “1/10th rule”, I just stumbled into it on my own. Maybe *you* can’t stomach it. It does provoke thought on whether you’re spending way too much of your income on a car, and thinking about money is a good thing.
One point to add to the discussion: When you’re looking at used vehicles for purchase, check to see if you can hire a mechanic that has experience with the make of car you’re looking at. I just did one on a 10 year old Volkswagen GTI that had low miles (65k). The inspection was $90. He found all sorts of issues with the car and I ended up not purchasing the car. I’ve been looking to purchase a car for several months now and this old GTI checked all the boxes I was looking for. The price was great with respect to the value I placed on the vehicle. That was, until I spoke with the mechanic and he told me about all the issues ($$$) of this particular car. I use the total cost of ownership calculator and similar tools on the web to get a sense about a particular make, model, and year for a car. Each car, even within a specific category, will be different. The $90 was totally worth it even though I didn’t purchase the car.
If you want an expensive car – go for it. Treat yourself and enjoy the fruits of your labors. But be smart about it. If you get a new $50,000+ vehicle, take care of it. Don’t smoke, eat, or drink in it. Wax it every few months, and do all scheduled maintenance on the vehicle (especially oil changes). If something gets worn or breaks, have it repaired as soon as possible. Drive it with care. (You don’t have to baby it – but don’t abuse it either.)
I bought a new Toyota 4Runner Sport with every option for $36,000 way back in 2004. Because I take good care of it, it has remained very reliable. I still drive it every day, it still looks and runs like new. I paid it off in less than four years, and since then I have been saving and investing every month for the past 12 years. I could go to a car dealer today and pay cash for just about any car I want – but there’s no reason to do that because my old car is still in great shape. (I was recently offered more than $10K for it, but I wouldn’t sell because I couldn’t replace it for that price.)
Perhaps in a few years if/when I start having mechanical issues, I might buy a replacement. The next one will also be brand new and will probably cost somewhere between $45K-$60K.
I’m afraid this article is flawed on many different levels and does not make any sense for those that are
a) Hire earners (medicine, tech, whatever) or
b) Single and hire earners or
c) Married w/o kids and hire earners or
c) Already in a debt-free position (except for mortgage) and hire earners.
Catching on to a trend here?
As an example, if someone is making $500k a year gross and has no debt other than their home, spending $100 – $150k/year on a fancy sports car is not a big deal and won’t financially ruin them.
A realistic example is a married couple with 2 kids making $500k – $600k/year. No debt other than a modest house and they are responsibly paying for college and retirement accounts. Yes, it is very possible and comfortable to buy a $100k car and live their life a little bit.
I would suggest a re-hash of this article to think through various scenarios in more depth.
I guarantee you, that FAR less than 1% of owners who purchased a $100k car make $1MM or more and they are doing just fine.
I demand a re-think please !
I think you are missing a couple of things here.
Firstly the author has a companion 5% rule that allows one to purchase a car whose value is 5% of net assets. (The author should probably amend the article to mention that.)
So for the higher earners, if they are careful with their money, they could easily spend more 10% of their income. Once a doctor earning $500K has over $1M in assets, they can look to the 5% rule to get a better car. But if one is a doctor earning $500K and doesn’t have such assets, that may point to the fact one is handling money poorly, or has lots of debt or other financial obligation, and so they should stick to the 10% rule.
Secondly, the purpose of this article is to show one how to stop being a wage slave, and to work towards being independently wealthy. Therefore spending in line with transportation needs rather than desires is more likely to achieve that.
The article does have flaws in that the title is “click baity”. It also gets on board with the race to the bottom in that it is a very simplistic analysis. The more stupid we treat people the more stupid they will become. A better analysis would probably take on board ongoing costs involved in running and maintaining a car e.g. if I earn $100K, surely it is a better choice to purchase a new Nissan Versa rather than a 20-year old Hummer with over 100K miles.
But the article is what it is: a simple rule of thumb aimed at helping one save money.
(And for $50K one can certainly buy a nice BMW or Merc.)
Interesting rule. I just bought my midlife crisis car, a Chevy SS (slightly used). I was feeling guilty a little for spending so much money (I had wanted to spend half), but to my surprise and delight, I still passed the 1/10 rule! So now that I’ve found this article I can enjoy the car and still feel frugal at the same time. Ah, this is going to be the best midlife crisis ever! :)
This was an interesting article to read! Thank you for teaching us about the 1/10th rule!
Gross Income for 2015: $234,000
Purchased a Subaru Forester in 2015 for $22,900
I guess I’m on track ;)
Come on, you only live once. My Dad alway wanted to have a Bentley or a Jaguar. He now ends up in an Opel Adam. Yes, quite sensible but sad at the same time. If you can afford it and want it, go ahead and live!
Great article, but now I’m torn between guilt and motivation! I’m in the boat of needing a new minivan (5th kiddo on the way and all) and a current van with lots of problems and no shocks and struts to speak of. If we did the 1/10th rule that will only let us spend about $8000, maybe $9000 if you include a tax refund as income… I didn’t see any minivans on that list! So I have been looking for awhile and would really like somethig that can seat 8 (or 7 very comfortably) with 70,000 miles or less (I want this one to last for awhile), but I’m seeing a whole lot of nothing in that price range, I’m hoping I can spend $17,000-19,000k as I do have that stocked away for it. Does anyone have suggestions on lowering that amount realistically? I am open to suggestions but just figured I had to spend at least what I saved and maybe a little more…
An $8,000 used Honda Odyssey would be reliable, and you could easily put a couple hundred thousand miles on it without anything major going wrong. I’ve seen them approaching 300,000 miles.
The 10% rule, as it’s being described here is seriously flawed.
It’s flawed because it assumes all cars have the same operating, maintenance and repair cost… which is not reality.
For example… in the past, I bought a 2007 Ford Focus for around $5000. Over a 2 year period, a car like that might incure about $2000 in maintenance, repair and upgrade costs.
In contrast, a guy I know bought an early 2000 BMW 3 series for about the same money. Over a 2 year period, he spent about $10,000 fixing shit on it… and then the engine blew.
He would have been cheaper for him to lease or buy a new Toyota Yaris.
When you buy a car, not only do you look at the purchase/lease cost, you also call your insurance to find out the insurance rate, you look at the fuel economy ratings and estimate how much you’ll spend on fuel and also factor in other costs like registration tax, parking and other fees. There can be some very large variations and sometimes spending more can result in LOWER overall costs.
Here is a Consumer Reports Article that discusses the differences in operating/owership costs and how greatly they can differ:
https://www.consumerreports.org/cro/2012/12/what-that-car-really-costs-to-own/index.htm
It also doesn’t account for making lifestyle choices that reduce costs… like moving closer to work so the car would only be for weekend use… which cuts fuel and wear/tear costs.
Finally someone with sense, but I’m sure the author will come up with something. Probably something along the lines of how the people on this site make him more rich so the rule works for he and his doctor friends.
This world would be much better with rationally thinking people. How about changing the title and the intended users of this “rule everyone should follow”. Or, you can make the rule adaptive by phase of life cycle. Otherwise, it seems the website is being filled with BS so you can continue your passive income.
But the average person is a blind follower so I should just end it there.
I agree with Peter Stern about car buying. Keep in mind this is the Financial Samurai’s blog. FS can choose the topics. It is an open forum and readers can make their comments. I do not think the readers of this blog are blind followers. You can choose not to read or comment.
I certainly hope the readers aren’t blind followers, however, I think we know the real answer.
You are right though. I lashed out for no real reason. I’ve only read this one post so I should have limited my comments to this one posting.
Hi there, I’m new here, thanks for having me!
So, I’m used car-shopping now. I make $41k a year, and am trying to decide what amount is sensible to spend on a reliable used car. For me, reliability is a top priority since I don’t know a lot about mechanics, and have too much bad experience dropping money into constant car repairs in the past, for a vehicle with hardly any value in the end.
I recently got a gift of cash from my parents towards the car purchase, and with money I already have and the check from my insurance company, I can afford to pay for the car upfront cash, and still put over $8k more cash into savings. I’m looking at used some used Toyota Yaris, Honda Fit and Prius. Any advice on how much it really is necessary to spend to get reliability? I mean, I looked at a used 2009 Prius with 135k miles for $7,500, and even if I put aside $2k for a new hybrid battery fund in the future, it seems cheap, but the mileage makes me nervous. I would get a savings of over $900/year in gas over what my old 2008 VW hatchback got, though. Is that a better choice than a 2015 Yaris for $11k? I know older Honda Fit’s are also great buys, but the 3/5 starts on the driver’s side crash tests make me nervous, as I drive a lot of freeways. (Also, I’m only looking at hatchbacks, a I need one for transporting furniture for my side business of refinishing thrift store finds. Ps, I like your mention of how a side-hustle can be financially helpful). Thanks!
Or, like me, I just pay upfront in cash. I mean if u have to finance anything you cannot afford it. I don’t need a credit history because I never needed to finance. Pay your taxes, keep JUST a checking and savings account and you are good to go. Ask yourself: Do u need or do u want? I was drafted in 1968 and since then I have seen it all. Avoid smoking cigs, do exercise and eat reasonably well for your bodyweight. Just a little tip from my 65+ years on this world.
I think you’re spot on but I’d go even further.
Once you reach the monthly income needed, you could simply rent a nice vehicle at a low percentage of your revenue. By doing this you could literally drive a BRAND NEW sports car lease with the newest models for 10+ years for 100k (Mercedes tier vehicles for this example).
To me that makes the most sense. What are your thoughts on renting vehicles like this?
If someone hasn’t mentioned it, cars will depreciate in value over time (unless you own a coveted collectible). Why spend so much money on something that will lose value? Save that cash, invest it in something that will create wealth instead or sock it away for those rainy days.
I take home about 10k a year. Bought a sh*tbox for 1,500, 15% of my yearly income, closer to 22% with tax and the paperwork to get it on the road, plus abouf 16% of my yearly take home in insurance (if the car would’ve made it through a whole year) because I’m 19, I’m a high risk driver even though my record is spotless. It lasted 10 months before it required more then what I paid for it in repairs to pass inspection. I did not have it repaired because everything else on it is tired and doesn’t have much left to it. It is very likely that if I waited until I could afford something roughly 35% of my yearly take-home it would have lasted me much longer before needing such repairs. I live in an area with mountains, no busses, and everything is >10 miles away, mind you. If I went buy the 10% rule, I would have gotten something that would have cost me probably more than what I paid for it to get it inspection passing to begin with. So I guess it’s a would where you have to make $12+ an hour or get 2 jobs just to afford any kind of car at all. Let alone rent, electric, water, food, etc.
Looks like you are in the lower income bracket. You can take advantage of IRS’s Saver’s Credit. Check it out https://turbotax.intuit.com/tax-tools/tax-tips/Taxes-101/What-Is-The-Savers-Credit-/INF15617.html
Comment is irrelevant especially since the savers credit won’t benefit this guy. The main reason is that he only makes 10K which means that his tax liability is $0. Savers credit is non refundable.
I am going to go to college for 8 years spend 200 grand on student loans so one day I can buy a new honda civic… Said no doctor ever. Have fun paying repair bills on a car that you bought for 3-6 grand. Lets do some math. 10 percent rule. lets see. Annual salary 150,000 a year gives you a 15,000 dollar car. If you make 50,000 more a year you can spend 5,000 more on a car… even though over a 5 year span someone making 200,000 will earn 250,000 dollars more than the person making 150,000 dollars… Idk where the author got this 10% rule from.
How much are the repairs going to cost if you spend 5 grand on car? Not just the repair costs. How about rental car costs. Car breaks down, mechanic shop has to order parts takes 10 days to fix. Used cars with low miles that are cheap are cheap for a reason. Its not just the miles its the age of the car. All the rubber seals,gaskets corrosion from just being old is going to make it unreliable. Spending 5 grand on a car mine as well buy some scratch off lottery tickets or play black jack at the casino. Its a gamble.
Another scenario. I own a house 4 bedrooms. Only enough parking for 3 cars. But i want to rent out all the rooms for 500 dollar each while living there. I can park my car in my backyard but in the winter a 2wd car would get stuck. Solution buy a awd car. I go out and buy a brand new impreza and pay 350 a month for the car payment. But I only make 50,000 grand a year with my job. Which puts me in the 5,000 dollar car range according to this article. Renting the rooms out increases my income to 68000 a year. So that means I can buy a car for 6800 dollars… So by buying a awd car that will allow me to rent out one addition room which earns me 30,000 dollars over 5 years pretty much paying for the car but that doesnt matter because I am over the 10% rule. This 10% number is absurd. I just bought a transit connect new for my business. Paid 26k for it and got 0% interest financing on it for 6 years. Now if my income goes from 50,000 to 100,000 as a result of the purchase according to this articlel I spent to much money on the van. I should have spent 10k. Couple problems with this. Number 1. Older vans do not get any where near the mpg as the new ones. Second problem is if it breaks down I am paying for repairs and losing customers(income) because i was a cheap ass. Whats your rule of thumb for a house? live in a cardboard box unless your pulling in 6 figures? What about food budget? 50 bucks a month? Buy rice,beans,lard, ramen noodles and peanut butter?
My doctor friends are all making over $500,000. Not sure where you are where doctors make only $30-$60k. The doctors in America can afford $50,000+ cars and have very steady earnings.
I would like to dispel the myth that doctors make over $500,000. The average physician in primary care makes less than $200K. A resident in training probably makes $30-$60k. If you look at the average compensation in all specialities by geographic area the average MD is below $300K. The surgical subspecialists such as Orthopedic or Cardiovascular surgeons MIGHT be making close to the $500k amount. I would suggest that you read MEDSCAPE 2015 Physician Compensation Report.
Most doctors will not even tell their colleagues how much money they are making. I think your buddies are truly the exception. They also maybe generating additional income from investments. Based on salary alone, using the 1/10th car buying rule most doctors can afford a car $20-$30K.
While the 1/10th rule in this article is completely flawed (especially for doctors), I can assure you that there are doctors out there that are pulling $500k+ for their specialty and not just in under-served areas, in major city centers. :)
Can you elaborate on some of the flaws and why? Thx
I posted a comment earlier today actually, it’s the latest one posted to your blog.
I feel that it is perhaps appropriate for certain income brackets (the lower ones primarily) but as other readers have pointed out, the older and cheaper a car you buy, the higher your expenses are ultimately going to net out over the course of your ownership. So yes, your cash flow on a monthly basis won’t be impacted by a high (or any) car payment but you will most likely have some surprise expenses hit you from time to time. The likely hood increases as time and mileage go on.
As I said in my earlier comment, VERY few people who purchase a $100k car are earning $1MM/year. On the flip side, there are a lot of idiots who are probably only earning $100-$150k who buy a $100k car.
That said, your article really doesn’t account for those people who are high earners (medicine, tech, etc) and have their financial house in order. Several of your other articles do speak to high earners but not this one.
IF you have college savings for your kids and retirement savings in check and are debt free and fortunate enough to be making big bucks (e.g. $500k/year or more), then there really is no reason why you can’t purchase a toy car that is $100k – $150k in price. You state that you should ideally be earning $1MM+ a year … that’s just ridiculous, I’m sorry to say.
Like I said, your advice has merit but only for very specific households.
I would suggest (and greatly enjoy) and fresh look at this article from you with an eye towards different income thresholds and scenarios.
Deep down, you’re a car guy but you’re subsiding the beast within and you know it. :)
I consider myself a frugal person, but this advice is out of touch with the real world. This advice is for the top 5% income earners at best. Imagine setting a general savings rule of 30%. How many people do you think will be able to do that?
There is a reason that lenders use debt-to-income ratios and have for years. Debt-to-income is logical. For most people just aim for a reasonable debt to income, say 30% or less. Smart people know that leveraging debt is necessary for building wealth, even debt for cars.
Can you expound on your belief that leveraging debt for cars is a wise financial move? Thanks.
Check out: Net Worth Targets By Age, Income, And Work Experience
I didn’t care to go any further because leverage wasn’t directly related to the article.
But, if the household at the median income followed the 1/10th rule 1.) they’d end up spending more money than buying an affordable vehicle with a low interest loan because of maintenance and 2.) they’d be tying up cash into this vehicle which would possibly be as much as 1/10th or 1/20th on an annual basis meaning your first hit would be as high as 1/5th of income!
On the topic of cars, that’s where leveraging has its advantages. I’m able to get low interest loan on a reasonable priced newer (used, mechanically sound) car that allows me to keep my expenses low and spread out cash payments so that I am able to invest more and not run into cash flow issues. You can’t invest what you don’t have.
I apologize if you wanted me to speak more generally on financial leverage. I assumed you already know what it is. My point was
Why not pay cash for the car?
I understand what leverage is. But why would you want to get into debt to buy a depreciating asset? That results in an accelerated decline in your net worth.
Isn’t being financially independent and free worth it?
Why would you sink Cash into an asset that’s already depreciated with a short useful life plus the cash to truly own that almost fully depreciated car. You now have less money to invest with and grow your wealth.
I understand you want to defend your article. Again your plan only works for high income or high net worth individuals. If that’s who the article is for then admit that.
It’s true. This site is focused on those who want to achieve financial freedom sooner, rather than later. It really doesn’t matter to me how you decide to spend your money. Everything is rational, we justify our decisions, and we all do what makes us happy.
Can you tell us about yourself? What is your age, income, net worth and type of car you’re driving. I’m always interested in learning the background of my readers so I can better understand where they are coming from. I don’t want to guess.
Here’s more about the typical FS reader if you’re curious: https://www.financialsamurai.com/who-is-the-typical-financial-samurai-reader/
A lot of people are afraid of cars with over 100k miles. But most cars from the 90’s to today will run like a champion to 300,000 miles if you maintain them well. At that point the engine is done and I get rid of mine. From 100-200k there are typically no repairs needed other than brakes, batteries and tires like any new car. As in not one break down. After 200k you need to have a garage and learn to do minor repairs like alternators, starters and water pumps. Probably 2 of those type of repairs will occur in a year if you drive 20,000 miles a year.
I had a couple of new cars and I have found that it is just as exciting when you buy used ones. A 100k car seems pretty fancy when your old one is ready to be hauled off.
Rad, great comment, and I couldn’t agree with you more. It’s not the 1980s or earlier folks. Cars are MUCH more reliable nowadays. Getting them to 150,000+ is easy. My last car was a 2000 Land Rover Discover II and I drove it fine until 142,000 or so. I finally let it go in 2014 b/c I didn’t want to spend $500 – $1,000 for it to pass a smog test here in CA.
How do we feel about bicycles that cost more than 1/10th of gross annual income?
Fascinating post. Last year I spent $22,000 cash for a new midsize sedan and my annual gross income is 75K. BUT, this is only my fourth car and they’ve all last at least 10 years (my last one 12 years.) Be honest, do you still think I paid too much if I keep it 10-12 years?
I don’t mind it that many people buy expensive cars. I remember a high school economics teacher who used to say, “For the consumers buying new cars, we should give them medals.” So I agree with that teacher. Don’t discourage consumers from buying new BMWs and Mercedes even if it does stretch their budget. Give them medals.
(…but you needed to understand the sarcasm of the teacher as he would go onto to say: hey, somebody needs to drive the US economy forward so lets take advantage of their sacrifice; and, yes, give them medals for injecting their money into the economy)
Admittedly, I have not honored the 10% rule either but I do find it an interesting challenge.
Is this a joke ? 1/10th of your annual income ? Seriously? I make 130k and bought a 60K car a 2 years ago. I already paid it off and still saved a load of money over that time. Also, the car is still worth near 50K. This 1/10th rule is ridiculous. This is probably one of the most ignorant articles I’ve ever seen on the internet.
You only make $130,000, but spent around $85,000 of a gross income on a car? Are you kidding or serious? I can’t tell.
Maybe you should check out:
The Average Net Worth For The Above Average Person
A Car Is The Ultimate Status Symbol For Insecure People
85,000? Where do you make up these numbers?
Yes link more of your bias articles as sources. Because that’s solid.
I’m far from insecure. I buy things because I want them and could ln’the care less what you or anyone else thinks of me (and I really don’t).
Your one article says average net worth for someone my age (26) is 9,000. I have nearly 15 times that in the bank, and that doesn’t count all the equity I have in assets or retirement. My credit score is 762 and I have 0 debt (litterly).
I think I’m doing just fine with what I’m doing. Your advice might be valid for completely irresponsible people but is far from the only “correct” solution.
How much in gross income do you need to make to pay for a $60,000 car? Do you not pay any taxes?
Why be average? Why not be above average? I guess it is understandable that at age 26, the desire for a car is great. It’s hard to understand the importance of good financial habits earlier on. Instead, it’s natural to think we know it all.
It doesn’t matter to me or to anybody what you do with your money. We all have different priorities. When I was 26, I bought a 2/2 condo in San Francisco bc I value property and growing my wealth more.
Unfournately I have no tax deductions so I pay alot of tax. I net 94k.
I took out a loan for 47k on that car and paid it off in 2.5 years, half of the full term. With interest rates so low, you can afford to get into newer cars with full warranties that keeps maintenance low which helps alot and gives you extremely reliable transportation which for some people is really important. You can’t make money if you can’t get to work.
Car’s are a hobby of mine so of course Im gonna spend more on it. But I also bought a car that doesn’t depreciate much (Nissan GTR). I also bought it used so someone else already took alot of the depreciation for me.
I value growing my wealth more too. And I believe I’m doing it. I’m buying a new construction home here in florida that should be done in about 5 months. 5/3.5 3 car garage (no surprise there) 3200 sq/ft. I’m putting 20% down. The built in equity alone means I’m winning.
At the end of the day, growing wealth is great, but how much do you really need? As long as you’ve saving a proper amount for retirement and are responsible with what you have, you’ll be successful. I want to enjoy my life and not look back and wish I would have done something different. After all, when you die, you can’t take any of that wealth with you.
I apologize if I came off as harsh or rude before but I just don’t believe in all of this as the “proper” way for everyone.
No worries. I get called names and stuff all the time. No big deal.
I, too, bought a very expensive car in my 20s. It was a MB G500 for $72,000 pre-tax. It was fun for a year, but after a while, the enthusiasm for the car faded, but my payments stayed the same. I bit the bullet, sold it for a loss and bought my condo instead.
Now that I’m almost 40, the desire for a mid-life crisis car has returned (but still following my 1/10th rule). I’m a car enthusiast too.
Here is the key which many people don’t realize until they are much older: Your enthusiasm for work WILL fade after about 10 years. The newness will wear off and you will question what else is there in life. If you don’t properly save and invest your money before the enthusiasm fades, you will be STUCK working a job you don’t like and become unhappy. You will have wished you had more wealth so you can have more OPTIONS to do things you really want to do.
The ultimate measure of success is happiness. And even better, SUSTAINED happiness. I’m sharing my experience. Folks are free to take it in or not.
Thanks for the Article, but I would like to point out that a $4200 vehicle costs A LOT more in maintenance than a new vehicle, even though the new vehicle costs more to buy. I know from personal experience that a vehicle is going to be a depreciating asset, and sometimes a liability, no matter whether you buy used or new (unless you get lucky and buy a cheap, reliable vehicle like I did with an old farm truck). But anyways, going with your example of the 1/10th rule, once you take out predicted maintenance costs (roughly half of that $4200 per year) you are left with a meager $2100 per year for the loan payment, which means on a 5 year loan you can’t buy a vehicle worth more than about $10,500. Unfortunately, $10500 doesn’t buy much in a vehicle, especially in the new/lightly-used market. A Ford Fiesta new costs about $15000, and they are about as cheap a vehicle as you can get, and are no more reliable than any other car on the road. I guess what I’m trying to say is that the 1/10th rule worked years ago when the income/living expenses ratio was better, but cars have gotten more expensive and the average paycheck (adjusted for inflation, of course) hasn’t grown much in the last couple of decades.
I guess the good news is that many people don’t need vehicles that can last forever. What with the rebirth of public transit and the new job opportunities that are popping up in cities. But if you live in the heartland, a car is the center of your life. Without a vehicle, you’re stuck, so perhaps it is wise to say that the 1/10th rule if fine if the vehicle is not priority #1, but if you absolutely NEED a car, preferably one that will live a long life, it pays to pay a higher price for a better vehicle.
I agree that the 1/10th rule is too simplistic; but I disagree that standard maintenance on a used vehicle is going to be $2,100 per year. Unless you are the unluckiest car buyer in the world, I’d find it hard to think of $2.1K in maintenance that would occur every year; or maybe you have the most expensive mechanic.
After you change out the engine, transmission and tires, I’d hope it would run relatively trouble free for a few years.
We bought a 2007 Suzuki SX4 in 2007 with about 7K miles on it for about $13.5K; and it’s worth about $3K now. So $1.2K depreciation per year seems reasonable on most salaries. And it is still running fairly good; although it only has about 50K miles on it.
I do see some similar vehicles in the sub $15K region; and there are even some very good deals on Jeep Cherokees (I think). And going that route may be a better option than the 1/10th route to avoid the chance of a 2nd-hand lemon.
Great site. A newbie question, as it is probably more complicated of an answer than a quick two sentences but I would like a general piece of advice I can think about.
I am a 29 y/o living in the high priced Bay Area. I currently make $175ish and have a net worth of ~$450K ($200k equity in duplex, $200K in equity portfolio, $60K in cash). I love general aviation and would really like to own my airplane. Been hard to wrap my head around if/how much I should spend but would like a rule of thumb for spending on hobbies. Thanks!
Financial Samurai-san,
Could you please advise on if it’s a good idea to purchase a vehicle through Uber for the strict purpose of driving for Uber while every and all earnings from driving for Uber goes into the vehicle (payment$, insurance & maintenance).
I already have a day job and single so no financial or family obligations but to myself. Relocating from the city where i bicycled, walked, trained and bussed to the suburbs (cheaper & much closer to job) where everything is an eternity apart made me concluded that a car that would pay for itself would be most ideal with the added perks of enjoying distant suburban/nature attractions.
Domo arigato gozaimasu.
Really stupid advice. No new car can be bought for most people’s income on this ratio. If everyone followed your advice all the car manufactures would go out of business and the world would go into deep recession.
Wrong, the advice is somewhat sound, but the title is stupid. And your argument is fallacious. Individuals should not make decisions based upon how it would negatively affect an industry. Decisions are made on how they affect the one paying the bill.
I do agree that if everyone followed the rule, many current car manufacturers would be in trouble. And used car prices would go through the roof, which would be an odd irony. But people and manufacturers would adjust, and we’d probably end up with Tata type alternatives, and maybe the soon to be released Elio would become very popular. Plus Uber and Zipcar type operations might become even more popular.
Most people are driving way more vehicle than they really need.
Nope. They’d just start making cheaper cars.
Adjusting for inflation, the average cost of a new car has outpaced income by something like 3:1. The manufacturers CAN make cheaper cars. They just won’t because the profit margin for the most popular models, which in this day are luxury pickups and crossovers, represents way to much profit. Until people accept they can and should spend less, the industry will be more than happy to oblige our gluttony.
“The manufacturers CAN make cheaper cars.”
They can and do.
Median new car price in the USA is around $33,560 for 2016.
Yet perfectly good brand new cars are available in the $14,000 price range.
We had to rent a car when we were out of town for my mom’s funeral. I rented an economy car. We were so impressed I looked up what the car cost. It was less than $14,000 new.
That $20,000 difference (more if you count the interest savings) is 1/2 the purchase price of a small rental property in my market. The savings on two cars (including interest) will only be a couple of thousand dollars short of buying and fixing up a rental property. That rental property, by the way, will pay both car payments.
Think about that.
We can drive two median cars or we can drive two perfectly good cars and own a home that pays us to drive our two cars.
If you want to get wealthy, you have to stop focusing on how to appear wealthy and instead focus on how to transform expenses into revenue streams.
I am a huge fan of being sensible with cars. I average 8-10 years ownership per car. After a long time of lower car % ownership I am going to 18% on a great income. Still going to have for 8+years and I am buying used. Great advice.
A car should be looked at as a product with a lifespan. Lets say its 12 years, 12k miles a year for an entire lifespan. You can buy 6 yr old Accord with 84k miles for about half or more of a new model. So do you want an entire car or half of a car or a quarter of a car? I say buy brand new, haggle and get the subverted interest rates from the mfgr. You can start with a brand new car with the best mpg power tech ect. You have to keep it for a long time in order for this to make sense. If you replace it too soon your wasting money. This is better than paying for and driving the dirty old car on its last legs over and over.
I really enjoy this site but this particular article is a head-scratcher. I agree with you, dareo – the timespan of the purchase is an important missing variable. Am I allowed to spend 10% of my income on a car purchase every year or I am supposed to spend this 10% on a car every 15 years (that’s my average car purchase time period). I do not think I can find a $5K used car that will last another 15 years (may be a bicycle).
Perhaps, we should think about this as the maximum percentage of annual gross income you should spend on car expense a year. The car expense should include the cost of the car (car itself, sales tax, initial registration, and most importantly, opportunity cost of this “investment”) amortized, say, over 12 years. Then you add in yearly registration fee, maintenance, gas, and insurance. Setting the max at 10%, I suspect most of us cannot even afford a Honda civic.
Honda Civic = $25,000 (incl. tax and registration)
Assume 3% compounding over 12 years, $25,000 = $36,000.
$36,000 amortized over 12 years = 3000.
Registration = $150
Insurance = $900
Gas = $800
Maintenance = $250
Total = $5100
I believe the median annual income for individuals in the US is less than $51K.
(the average number is even less)
One thing I learn from this whole exercise is that a car is a very expensive item in one’s budget.
But in our society, no car = no mobility.
When can I sell the first car and use the proceeds to buy a newer cheap car?
How does one account for depreciation and residual value using the 1/10th rule?
Certainly, I’m not buying a new 1/10 income car every year. And on the other end of the spectrum, I certainly am not going to drive the 1/10th income car until the annual maintenance+insurance+gas+lost wages from missing work is so costly as to consume 1/10th of my annual salary. Where is the middle ground in your opinion?
I think the “revenue” from selling your old car should be considered a slight return on depreciation and should NOT be factored into the value of whatever you replace it with. The idea behind this 1/10th rule is VALUE, not COST. What you should do is save that “revenue” to cover maintenance and repairs. Drop it into a savings account where you can get to it if need be, but otherwise don’t touch it.
When should you sell? When it’s no longer reliable or viable. Meaning, if you can’t count on it to get you to your job and you have no alternative transportation, and repairing it would cost more than replacing it, then I think you’re “authorized” to get a new car.
Yeah… I made 12k a year when I financed my new 08 Hyundai Accent for 9700$. Paid it off within a year. But according to this list, I should’ve be making 50-75k. To be part of the higher class, to buy a low end car. Absolute fail.
Your math doesn’t add up. If we figure you paid 10% in taxes that would leave you with $1,100 that year to pay all of your living expenses. I’m not sure where you live, but out here by Chicago you couldn’t even rent an apartment in the hood for $1000 per year.
Great advice! I recently purchased a newer, one year old – fully loaded van for $17k. Household income is $180k. We’re paying it off quickly as this is the first ‘new’ car I’ve had in over 15 years and having a payment makes me nervous.
With a family of 5 in brutal Idaho winters, I feel safer in a newer car.
What a lot of these comments don’t seem to notice is that he says that anything below 50 percent of your income is decent. Consider if we didn’t have credit cards, because it is relatively recent; how many of you would have enough money to pay cash for the cars you have. I think that this rule is a decent way of making sure people don’t get buried underneath the spending power they now have.
Love this concept, especially the idea of keeping the car until it’s 1/10th your income if you already have the sunk cost. That is a new idea to me and a great one!
I agree with this rule at the average income range, but I’m not sure that a 1/10 scale makes sense for those making upwards of 125k. What is your proposed budget for other expenses, what else should you spend your money on?
I’m in my mid 20s and my wife and I (no kids now, maybe 1 in 4 years) have been very fortunate to make it to 180k/yr (I am in IT consulting and she is a resident physician and both work roughly 70hrs/week). I have always preached living below your means to make your future better, but there has to be a limit to how much you should save. If you start in your 20s and max out your retirement accounts for 2 people (47k/year) you end up with about 6.5M after 35 years at a fairly realistic 7%. How much more wealth could I possibly need?
My monthly budget is something like:
15000 gross income
– 4000 to retirement
– 4000 to Taxes
=7000 take home
– 850 to non retirement investment account
– 1600 to mortgage, taxes, insurance (300k house despite bank saying i could afford 800k)
– 300 to utilities
– 2500 to eating out, food, entertainment, vacations, any random things that come up
= 1750 which I basically call fun money that includes my car payments
I spend about 1300 a month (about 8% of gross monthly income) on cars amounting to a total purchase price of 95,000 (2010 Mazda 3 – paid off next month; 2014 Jeep Cherokee, and 2009 Porsche Boxster I bought used last year). I certainly don’t make the 1M required in the article, but I feel like I’ve bee very smart with my money. What else could I possibly need to spend my money on, if I’m on track for lofty retirement goals and I regularly contribute to my investment slush fund.
wow, now that is penny pinching. My wife and I make almost 200k a year. I’m not driving a Civic. What’s the point of saving a bunch of money if I’m going to be a cheap ass my whole life? Based on this, nobody but the insanely rich can buy a nice car. I’m already going to be a multi millionaire even with a $1,000 car payment. The point of earning money is not to hoard it until I die.
Mike, I think you are missing the author’s revision. I believe the author found he couldn’t get a nice car with a diminished income after he ‘retired’, and so now the rule is one can spend the higher of 10% of one’s income or 5% of one’s net worth.
So in your case you’d keep to a cheap car until your net worth goes over $400K. Then you can start increasing the car price; and when you are worth $1M you can get a nice new Civic for yourself and one for the missus!
It’s seems the majority on here are saying wait till your 65+ retired and worth a few million before you buy a nice new car to drive to and from the doctors office! Sounds like quite the life! Live within your means but ultimately its your money and if rippen around in a new car tickles your fancy by all means go for it. And if kicking the bucket with a few million in the bank is how you wanna go then by all means do it. Your tombstone will either read “Here’s lies so and so who died from a heart attack doing donuts driving a Hellcat in a McDonald’s parking lot” or “Here lies so and so who died while sitting in their $1,000,000 plus house with lots of money in the bank with a great looking portfolio who was always finacially responsible and drives a 1995 Honda Civic”. Another quick point no it’s not smart to purchase so POS car for 2k only to continue to dump money into it, buy something reliable and newer, maintain it like you do your personal hygiene and it will take care of you for years.
I agree that we should smell the roses as we go along. I think that saving money for retirement is a good idea but everyone does not live to retire. Money is to provide some security and enjoy. If there is any joy in riding in a new car — buy a new car.
Why not just make more? I wanted to own a sweet new Honda Fit for $20,000, so I decided to make more than $200,000.
Check out the post: Are You Too Proud To Be Rich?
Not everyone can just make more. At any rate the goal in life is to enjoy yourself, be happy, and die penny less.
As long as your saving enough to retire when you want to retire spend however much you want in whatever categories you want!
And that’s the scary part. If not everybody can make more, then why should everybody be able to easily spend more? The AH-HA moment of this entire comment thread!
Related: How To Retire Early And Never Have to Work Again
Well, you don’t spend more in total. You should spend more or less in whichever areas bring you the most happiness, no? I’m sure there’s things that you enjoy a lot and that’s where you should spend your money.
I mean, I’m sure some people spend what I would think is entirely too much on refrigerators, clothing, electronics, etc. Other people spend too much money going on vacations, other people save too much, etc etc.
Especially if you could kick the bucket tomorrow or maybe something happens to you physically and now you can’t do what you enjoy (again live within your means and be somewhat responsible) and the reason you held off on something you wanted that in all reality was within reach but you were almost being to conservative to a fault and now you don’t get that chance. And I’m sorry but I think retirement in someways is a detriment to society. Who says you have to stop working? I’ve seen what retirement looks like and it doesn’t look very enjoyable to me. Even if you have hobbies and some things to keep you busy, humans are built to work and thrive when they work hard ect ect, look at how many billionaires and millionaires are still workings when they don’t need to. I think the idea of “retirement” has been idolized for so long as part of the “American Dream” when in reality there is nothing wrong with working all your life. Again have a balance of work and play and enjoy life! And if you enjoying life is stopping work at 40 and drinking the finest champagne then go for it!
What’s wrong with the Civic? I think they are pretty nice. Maybe I’m just easily impressed ;)
The problem with really cheap old cars ($4K and under) is the repair costs cannot be estimated.
If you make $40,000 and buy a $4000 car, you will also be paying rent, mortgage, food, Obama care, utilities, insurance, clothing, gas, etc. After all those, what is left for the car repair? Seriously, let’s say your old car died and you only got $900 for the junker. You make $40K, so your take home is about $2800 per month. After expenses, are you able to save enough money to buy a $4,000 car? Imagine at $200 a month, would take 2 years. How are you going to get to work during those 2 years? This is a big issue. Same problem with buying a house, you never can get the 20% down payment, so you rent for the rest of life.
On the other hand, you could buy a very respected low mileage (under 15K miles) car 1-2 years old at a 1/3rd discount and expect to drive for 5 years without much expenses, except for tires and brakes after 2-4 years. Then you drive this car for 12-15 years, and the annual cost is about the same as the old used car, which probably will have to be junked and replaced every 5 years conservatively. You have nice, clean reliable transportation, albeit costs about $1000 per year more than the junker, but you have peace of mind.
So we are stuck between a $150-300 per month loan payment vs. unknown repair costs for a car with $150K miles, which I estimate to average about $1500 per year, which means the old car with 150k miles is cheaper to operate, be it less reliable, until a major repair comes up, and the whole formula is off whack. Expect to continue to buy old musty smelly cars, constantly have to be repaired, and the nightmare of a major repair you cant afford just around the corner.
So the key is therefore to purchase a car with low repair costs and excellent repair records, no matter which car or price. In the long run, these two items are the most important for you.
Great financial rule #24 – Always pay cash for your car.
In theory, I think that the 10 % rule can apply only on car purchases if you are doing short distance driving. If you are doing long distance highway driving, a newer reliable car is a better idea. I have always bought new cars and drove them at least 200,000 miles. I have saved some money because my husband did some repairs and not going to the dealer for major repairs. I also paid for AAA membership which would tow 200 miles. If the car breaks down, it is easily towed. Car rental for long distance driving is also an option. I have found that a one week car rental can cost as much as a one month car note. If your old cheap car stops working on the highway in 10 above zero temperature, I guarantee you will never buy a cheap car again.
I have seen similar comments from others about buying a new car and keeping it for 200K miles. If the goal is to spend as little as possible on a vehicle, why not buy a used car that has 70K miles on it, and drive it for 130K miles? Over time, rather than buying two new cars, one would buy three older cars. I imagine the savings would be significant.
The comparison with car rental prices is interesting. The only thing to note is that $500 to a rental company is $500 gone. But $500 on a loan produces some equity.
The correct answer is it depends.
Certain makes and models hold their resale value better than others.
You really need to estimate the expected life of the vehicle. Then factor in any required maintenance (timing belts, suspension components, tires, etc.). At 75,000 miles the vehicle likely needs new shocks and some other bits. With a new vehicle you still have to replace this stuff, but you get a lot of miles out of the vehicle before replacement.
Anyways, after you come up with the total cost of the vehicle you can come up with a cents per mile figure. At this point you can actually compare the costs of two vehicles with different mileages.
Also remember, mileage isn’t the only cause of vehicle wear. A car that’s low miles but is relatively old could be in need of just as many repairs as a car of the same age with double the mileage! Certain components wear out with time rather than mileage (anything made of rubber).
In some cases a car with 45,000 miles on the clock will cost more per mile than the same car brand new. In other cases the exact opposite is true. It just really depends on what the used market is. Subarus and Hondas are two examples of cars that usually cost less per mile new than used. American makes are almost always better bought used.
never buy a car in the 70-90k mileage area. if you do, you need to negotiate a huge discount, because this is the mileage area where major repairs are going to pop up at any moment. it is better to buy a car with 150k for 20% what you paid for the 70k, and by 150k, most of the expensive things are already replaced.
my recommendation is either buy a 1-2 year old very good repair record used car (must be under 15,000 miles), and drive it into the ground.
or, as the author suggests, a $4,000 car with 150,000 miles on it, and also drive this into the ground. Anything between 15k and 150k are going to cost more.
But it’s not that simple, it really depends on how much the particular car depreciates. The mileage you should buy a car at REALLY depends.
That’s why simply saying spend 1/10th doesn’t work. There’s a huge difference between a 100,000 mile + car that cost 1/10th and a 10,000 mile car that cost 1/10th.
This rule should really be based on how much to budget for transportation expenses on a monthly basis.
I don’t understand where 10% comes from or how it is a good number. If you only make 40k a year you are only supposed to spend 4k on a car? If you can find a good one then great, but good luck. A cheap old car from the 1990s is more likely to fall apart in a few years than not. Everyone keeps presenting anecdotal evidence that their specific car was 20 years old and they drove it for a million miles and it never had a problem. Well that is definitely the exception, not the rule. I have an older car, I bought it for 4k and I’ve driven it for four years and now I certainly need a new one. Things wear out, it doesn’t matter how you maintain your car. Your suspension, brakes, engine components, all pumps and motors wear out with age and miles. I’ve maintained my car perfectly well and I’m lucky I’ve had no engine trouble, but I’ve had to replace my brakes, calipers, struts, exhaust, starter, and more. That stuff is not cheap at all, and I’ve done all the work myself. If I took it to a shop it would have probably been more than what I paid for it to fix it.
It’s definitely good to be frugal with a car. Don’t buy something fancy, just buy something that drives. However, sometimes you do get what you pay for.
Looking at Autotrader there are 199 cars costing between $3K and $5K within 200 miles of my zip code, all built after 2005. Of those 32 have mileage less than 100K.
If you bought your car for 4k and drove it 4 years(48 months) it costed you $83.33 to own the car. Even if you paid another $1,500 a year for repairs for 4 years which is 6K your total cost would be 10k or $208.33. I think you had a bargain if the car is still running. The car also still has some trade-in value even if you sell it to the junk man.
If the repairs are going to be $1.5K per year, wouldn’t one just be better off getting a new or newish $10K car which wouldn’t have any repairs? It would have a much higher resale value after 4-years.
There is always a debate. Just flip a coin and buy what ever comes and don’t regret it(you can also do best of three while flipping the coin). In the end I am going to buy what makes me happy. #YOLO#YouCantBuyHappiness.
I make just about $500,000 a year. If I buy a $50,000 car every year, where do I put the old ones?
Author meant to say that 1/10th in GENERAL audience, not to take it literally for EVERYBODY.
Say if your take home is $60k, you well deserve a nice Camry LE, that’s well 35%. That’s it, do not push it for more.
This is how you put yourself in to future trouble.
If your take home is $3000 a month, that doesn’t mean you can easily cover $600/month for a car. Working for a private company, even as a permanent status, taking many loans is risky. When the company goes down, so do you.
Depending on your employment situation, say government employees are less likely to get laid off. They have better chance to take a financial risk, especially buying a car, or long term loan because the income/retirement is assured.
Two decades ago, a friend back in high school, working at the gas station for minimum wage, part time, bought a Brand new Civic for $14000. After decent amount of down, from his parents, he can afford $200/month. In his case, he paid almost 100% on a car.
The case above is not the same as, a coworker, takes home $70k. A 535i is also 100%. $1000/month may be manageable. Look for the long term. To me, it’s $12000 a year. You get a very nice car with it. In this case, the money she paid $10000 down, can be a car and done deal.
Saving money never been so easy. If you save 50% of your income, do it. Even if 80%.
Buy a house with that money you save in 5-10 years, after that rent it and buy another one and live in it. Your living expense will pay itself. Go home and relax.
Going back to the Chart, ask yourself, DO YOU WANT TO WORK FOREVER?
Do you want to work forever < -- EXACTLY right. When I was in my 20s, I was very enthusiastic about working. How could I not be after going to school for so long? 10 years later, not so much. If you have massive debt and depreciating assets, you will never be able to escape. Here is my passive income for financial freedom update for 2016. It took sacrifice, but nothing good comes free, especially trying to get to $200,000 a year. Hint: It doesn’t involve spending more than 1/10th of my income on a car. It involves trying to build assets and grow my income as much as possible so my money can work FOR me, not the other way around.
All you’re really saying is do you want to do the same job forever? The obvious answer there is no. Nobody does.
Sitting around doing nothing in retirement is toxic. Similarly sitting around in a dead end job you’ve grown to despise is also toxic.
The best life to live is one that entertains you and challenges you until you stop breathing. For most of us that means finding an occupation that you enjoy. It also means keeping your skillsets up-to-date and branching out whenever you start to get bored.
Retirement savings are great if you are in a high-risk fleeting occupation such as sports. If you can do the job at 70 then I honestly see no reason why retirement is important. Work until you croak and enjoy yourself the entire time. I say this as someone who has worked for 25 years already.
GOV employee here, most of us take home around $70k after tax
those whine about how broke they are, spend between $35 to $60k on their car, some of them have more than one for himself/herself.
lack of education? indeed, i am not talking about not having at least a Bachelor degree, but common sense.
their mentality goes, when I retired, I still have the same income, so spending it all now it’s okay.
it isn’t, unless you have short term mortgage which will be paid off before retiring.
retirement is not 100% grantee, many reasons could void your retirement, if so, then what are you going to do? you have no money, no retirement, no savings.
In the article and comments there is very little attention paid to safety features. Having front collision avoidance and lane change warning are expensive and are worth paying the extra money for. How much is that saved cash really worth when you spend 6 months in a rehab facility/home or live without half your cranium for the rest of your life, or graduate off the mortal coil permanently? Current safety features and new, functional airbags are worth money and buying a 10 year old car will not get you those. If you live where driving a car is completely mandatory, e.g., anywhere in Texas, then riding a bike or a horse are not options, and you are forced to buy a car to live. Paying more for it to have current safety features is a significant investment in future quality of life and makes no sense to not factor into the price and value of a car. Financial independence is a lovely dream but loses some of it’s shimmer if it means it got you smashed up.
Airbags, anti lock breaks, anti-swerve features have been around for well over 10 years.
In the old days, cars used to be built even tougher due to the amount of steel they used versus bodies today.
Speed is the #1 killer. Slow down.
When you bought Rhino even you valued *current* safety standards that did not exist in older cars. You wrote, “I was happy to research that Honda skipped the 2014 model and went straight to 2015 because they wanted to comply with all crash test metrics. The 2009-2013 models didn’t pass Insurance Institute for Highway Safety’s front overlap crash test. Based on the latest IIHS test, the 2015 Fit overcame the failure and received the IIHS TOP SAFETY PICK award. Awesome!”. (https://www.financialsamurai.com/deciding-on-leasing-or-purchasing-a-new-car/)
Good highlight. My old car was 14 years old when I finally switched and had 6 warning dashboard lights on. It was time to switch as I couldn’t pass smog. It was time for me to change as I took the love of my car too far, especially based on my income.
the author of this a idiot, not a damn person that makes 200,000 a year is going to pay for a 20,000 car. everyone that knows me know that im cheap and conservative but 10% is way to over conservative and unnecessary. i say it should be 50% there is alot people who make 60,000 and and have a 35,000 car make make their payments perfectly fine with no struggle. this article is insulting. im guessing he’s mad he cant buy a nice car, so he tells people that makes alot to buy a crap car.
You say this because you make over $200,000 and can’t get yourself to pay only $20,000? Or, are you saying this out of speculation? What’s wrong with a Honda Fit, Toyota Corolla, etc?
I’ve made way over $200,000 for over a decade and drove an awesome Land Rover Discover II 2000 for 9 years that I bought for $8,000.
Check out: How Much Should My Net Worth Or Savings Be By Age. If you’re on track, then good. If you’re not, then just accept the fact you’ll be working for the rest of your life. No need to call people idiots.
The rule is 1/10 of your salary on car expenses per year. Not 1/10 your salary on the entire principle of the car. That’s absolutely ludicrous. The 1/10 rule is a great rule to follow when you follow it correctly
No – he’s right. The figures here listed are egregious.
You can always make the argument that a cheaper car is better; it’s a depreciating asset. Financially speaking, we should ALL be driving $5,000 clunkers. Please don’t be one of those people who state ‘but I need an SUV for my wife and kids’. You don’t NEED one, you WANT one, the same way an enthusiast WANTS a performance vehicle.
At the end of the day, as with anything – there’s something to be said for desire factor. If you are in the ‘don’t care’ category (as are most of the people whom are posting here), then by all means – buy a used econobox and put an air freshener in it.
But stating people who make $100,000 a year should drive a $10,000 car, or are making a ‘bad’ decision, is the type of financial advice which is simply out of touch with the market.
What’s next, stomping on grapes to save on wine?
If you want a more expensive car than $10,000, why not just try to make more money? No wealthy person I know in the top 1% spends more than 1/10th their income on a car. Perhaps this is why they are in the top 1%?
See: The Top 1% Net Worth Amounts By Age
I know this is your website and all, but telling people to simply make more money is incredibly off putting. For most people it’s simply not that easy. You can’t just wake up one morning and decide your going to make more money. Some people can do it, but most can’t.
On a serious note and you may have an article about this, but I’m curious.
What kind of budget do you run for yourself, as in I’d like to see a break down off what you do with 100% of your income. You don’t need to include dollar values, but rather I’m interested in percentages. What percent do you save for retirement, what percent do you spend on housing, what percent do you spend on food, what percent on vacation, what percent on recreation, etc.
If you already have an article on this, point me to the link, if you don’t have an article on this I think it would make a very interesting reading. Certainly seeing the entire picture would be very helpful rather than you saying you only spend 10% of your income on a car.
I get bummed out if I have to work more to try and make more or get more as well. So I understand. Everybody wants the easy way. Everybody would rather justify their spending than actually control their spending. What I’ve noticed is that a lot of people DON’T BELIEVE there is a way to make more, so they don’t try. Here are some articles to help:
Income Profiles Of Financially Free People
Easy Ways To Boost Your Savings And Control Your Spending
Spoiled Or Clueless? Try Working A Minimum Wage Job
Blogging For A Living? How Much can You Really Make
Why You Need To Start Your Website Today
How To Make $200,000 A Year And Not Feel Rich
Let me know your thoughts after you’ve read these articles.
Thanks,
Sam
Well, I’m pretty young yet. Only 25 and have not got to the point in my career where I’m anywhere near topping out my earnings. So I haven’t and don’t plan on trading valuable free time to be able to make extra money.
What I’m really more interested in, is what you think an ideal monthly budget would be. I’d like to see 100% of gross or net pay budgeted by percentages. A quick google search already gives plenty of examples, but I’m curious to hear your take.
Let me know your thoughts on my posts I sent you.
One way to learn at 25 is to just do whatever you think is best and learn from any mistakes and get better. There’s no better way to really learn than trial and error, compared to listening to someone who’s already gone through what you’ll experience.
It’s all about enjoying the journey. My ideal is for you to max out your 401k and then save at least 20% after 401k and after tax earnings. The rest, you can do whatever you want with it. You can also check out How Much Should I Have Saved By Age too.
Sam,
There is where we are out of touch. I do know individuals who are in the top 1% of income earners who spend more than 10% of their annual income on automotive, and I know many ~100k income who have spent more than 10k on their vehicle, and are on solid financial footing.
I agree with the principle of what you are saying, but a new Corolla starts at around 18k, and to tell yourself you need to make $180,000 to buy a new Corolla, is not an effective way to motivate yourself to make more money.
Ravi
It is for me. And I guess everybody has a different way to motivate themselves.
There are GREAT Corollas that are 6-8 years old for under $10,000. I drove a $8,800 Land Rover Discovery II, know for having a bad maintenance rep for 10 years until 2014 and didn’t have any crazy problems.
I think you are missing something here.
The reason why the 1% spend proportionately less on their vehicles is due to the law of diminishing returns. Once you reach the luxury price point of 30-50k you simply don’t get much more for additional dollars spent, so the rich tend to either stop at this point or go a little higher to the 5 or 8 series BMW range. Their percentage of income/assets spent is lower b/c of this “soft cap” on the price spent. This is the same reasoning why you don’t see many 1% people with gold plated iphones…
I think your 1/10th of income rule is ridiculous. The reality is that households earning 100-200k are being very reasonable buying a 30k automobile.
I think the thing you are missing is that the author has a back-up position: you can spend the greater of 10% of income or 5% of net assets. The result of this is that wealthier people can afford expensive cars even if their income would not justify such expenditures.
It is clearly a better rule than his 10% rule. It directly rewards those who don’t flitter away money frivolously. For someone earning $200K, who invests wisely, and doesn’t waste money on a car, once their net worth goes over $400K they would apply the 5% rule. And when they have a million in net worth they can spend $50K on a car.
Obviously for anyone whose net worth is double their income, the 5% rule is better. And buying a cheaper car early on will help that in two ways: less spending and more investing.
My parents are frugal jerks who would stomp on their neighbor’s fruits to make juice, and they wouldn’t even limit their car spending to 10%.
It’s just dumb to buy a cheap car < $10K. Those cars tend to be either 1) old clunkers, 2) crappy cars, or 3) tiny cars. A decent, multi-purpose sedan that will last you 20+ years starts at $20K. And if you need a minivan or large trunk for transportation, those start at $30K.
Used cars also often have plenty of problems you won't be aware of until after you've owned it for months. You'll end up spending a lot more replacing parts and/or the car itself if you spend too little. There's a limit to how cheap you can go.
I usually the articles here, even the crazy-savings ones. However, this one is just out of touch with reality. According to this article, if I made $150K a year and saved $5000K, I shouldn't waste money on a tiny Fiat.
It's more realistic to change the requirements to 10% of your wealth instead of 10% of your income.
Actually the author has another article where he advises us to spend either 10% of income or 5% of wealth.
The one thing I note in your comment is that you say that a $20K car will last 20-years. Well if that is the case why does one have to buy it new. Why not buy it when it is 5-years old and only $10K; or 10-years old and only $5K? It would still have many good years left in it.
See this article: https://www.financialsamurai.com/net-worth-rule-for-car-buying-guideline/
Well, if you made $150k/year in your job and had saved/invested $5000K (aka $5M), even if that $5M was only making a 5% APR, your income would actually be $150k+$250k = $400k. So by all means, go by a brand new $40k car or truck. Personally, I shy towards real estate, which gives closer to an 8% return when only calculating rent and ignoring appreciation, so that would be closer to $550k/year income, or a $55k new car/truck.
Pete: per the author’s 5% of assets rule, with $5M in assets one could spend $250K on a car.
Bud, yes based on the net worth rule. But the point was that even based on income, someone with $5M in assets *should* not have only an earned income of $150k, but should really have far more income coming from investments.
Very untrue you can buy 3year old Volkswagens and and Honda accords for under 10k that are still decent cars. I personally have a 2008 GMC Acadia that I got under 10k that is a large suv that has been reliable for years
“It’s just dumb to buy a cheap car $10,000.
I bought a low mileage 2002 used sedan (24,000 miles) in 2009 for $9,999. It’s still running strong 7 years and 90,000 miles later.
I liked that car so much that I bought it twice! Yep, bought the same car twice, it’s that good.
It was totaled by hail damage about 4 years ago. Nothing functionally wrong with it but it had a lot of dents. The insurance company totaled it, paid me for the loss, and then sold it back to me for pennies on the dollar. I made about $5,000 on that deal. (And another $5,000 on a similar car my wife drives, also bought for $9,999 a couple of years earlier. She drove that one until last spring.)
I figure I’ll be driving it at least another 5 years, at least 4 years into my early retirement.
Sure. We can agree to disagree on calculation you have chosen.
I’m an early 30’s professional with a love of cars, and what we can totally agree, is that using our ‘wants’ to motivate us to increase earning potential is a powerful tool.
Feel free to share other articles with me which you think will help.
Keep up the great work!
Ravi
You are right. My 2015 tax return will say $1,255,000 in income and I drive a perfectly fine 15 year old Toyota worth about $4k. I currently am deciding not to spend even $20k on a new to me car because I can use that money to help build another business. That use is more fun and better financially. So you are right on – even earning well over $200k I won’t spend $20k on a car.
What is the purpose of money? I think to give an individual life style options and to help others. I also think it is wonderful that you are happy with your $4k Toyota. Possibly you are spending your money on other expensive non-business related items or charitable donations.
I have been in an older car in a Midwest winter with the temperature at zero degrees. My well maintained car did not start. I am willing to spend more than 1/10 of my income on a car to buy a reliable car.
In 2000 I got my first job out of college and then proceeded to spend about 35% on my first new car. Shame on me. I thought I was being frugal buying a new honda accord v6. They got me for something like 7% interest at the time. I refinanced it later to lower the payments and eventually I owned it. The car was wonderful and I put a ton of miles on it, but the WHOLE ORDEAL COST ALOT OF MONEY.
It is a misnomer to only say used cars require maintenance. I religiously took my car into the dealer for tune-ups at regular intervals for the first 3 or so years! Each visit cost around $100-150 bucks (if memory serves me). Give or take a bit on my numbers here — my point is that new cars require maintenance too if you want to get your full value out of them!
My current car I picked up for <10% of my income. No loan. 4 years in it is still going strong … one of the better car decisions I ever made. NO CAR PAYMENT, NO LOAN.
Freedom from debt is hard to express until one experiences it. Most of us take paying a monthly chunk of our check towards a car for granted, but why? We don't have to. The car I have is safe, dependable, and it suits me and my family just fine.
I’ve read many of the of the posts here and skimmed all the others. I don’t get it ???
1. Where did 10% come from ? Its just a completely arbitrary quantity based on no known financial model ever published. Its meaningless.
2. Over what time period are you going to own the car? One year, 10 years, forever ? Without a time basis, the 10% is once again meaningless.
3. Factoring in trafic tickets and excessive insurance charges for being a high risk driver only makes sense if you get trafic tickets and pay excessive insurance rates.
4. Cherry picking the bottom of the stock market and saying you would have made 300% compound growth is grossly biased! Its more likely that you bought stocks long before the most recent market bottom and you may have just got back to even or possibly even lost a substantial portion of your average investments.
There is no simple or useful “one size fits all” solution for everyone. Practical budgeting is a must for anyone who wants financial security and spending over your ability is always a mistake. Car ownership is as much a necessity for many people as is food. For others its a useless expense. You simply can not put these two classes of people into the same group, toss out “10%”, and make it sound reasonable.
Until you factor in TIME OF OWNERSHIP, no arbitrary percent of income has any significance. If you buy a different car annually, 10% is way too high! You are throwing your money away! On the other hand if you keep that same car for 10 years or longer, at 10% you are probably living well below your means! Accumulating cash wealth with enjoying its benefits is a sad life indeed.
Seriously, I bought a shinny NEW and fully loaded GMC Jimmy for about 42% of my income at the time. I’m still driving it 17 years later! Yes, by choice not necessity! Averaged over time and factoring in about a 50% higher income now puts this purchase at about 2% annually. My average cost for a luxury SUV (at the time anyway) has been less than most people spend on their phone bill.
I’m just now considering a new car and stumbled upon this site. With a practical buy and hold philosophy, I’m looking at the BMW-X4 or Lexus-NX. Both of these cost well above the silly 10% rule being discussed here but would look much nicer in front if my $500,000 home. Which by the way was fully paid off years ago even with my excessively over-reaching 42% GMC purchase 17 years ago.
My point is simple: common sense and patience in your budgetting will help you develop financial security faster than meaningless spending “rules” that probably don’t apply to your exact situation.
There is no one size fit all car buying guide. But I’ve found through my experience of buying / selling over 10 cars and making minimum wage to multiple six figures a year is that the 1/10th rule works great for those who want to achieve financial freedom sooner, rather than later and be bitter at their jobs.
If you want the X4 or NX, why not work on some side hustles to try and make $400,000 – $500,000? Use your wants as motivation to make more!
Read:
Spoiled or Clueless? Try Working Minimum Wage Jobs At Least Twice In Your Adult Life
The Average Net Worth For The Above Average Person
I’m glad there are other people who also feel the same way as i read through this article. For a while i thought i was the only one thinking how ludicrous this sounded to me. I just got my first career Job as Software Engineer and making…well let just say it’s far exceedingly well above the national average. I currently have a 2010 Mazda Mazda3; Prior to this, i owned a 2002 Toyota Camry which i bought in high school and paid off. I drove the camry through the better part of college; The Camry after aging quite a bit, if it was not for my parents would have been damn near impossible to maintain working for $12/hour through highschool and most of college. I find it somewhat absurd that it would be suggested that someone spend only 10% of their income on a car if they make 40-50K/year. This is dangerous advice. My camry cost in maintenance after reaching old age, about 12years old, became EXTREMELY expensive. I calculate spending somewhere around $1000 to $1500 every 8-10 months at the dealership because of just major maintenance in old age. And just to clarify, no i do not drive recklessly or were bad at maintaining the car. I took the car to the dealer every 3-4months and spent $70-$100 and that was just regular maintenance. So to say the least, buying a car at 10% of their income is a BAD investment. This is true for a few reasons if you buy a car at 10% of your gross income assuming its the national average of 42K, you can buy a car that is with about $4.2k. That’s great, but here are the problems…generally unless that car is a motorcycle the car will be at least 10 years old which means maintenance is already an issue. Considering that i was spending $1000-$1500 on my camry every 8-10 months you would be in a lot of trouble just on maintenance. You also pay more money in your insurance policy for having an older car (In general). This seems counterintuitive to me…why would i buy a bucket that will cost me money just to keep it running??? Is that not just as bad as buying a car over your means? Secondly, older cars with this “less” technology that can cost more on maintenance as the author claims in the article is as someone else mentioned…heavily biased. The argument could be made that older cars can also be stolen more easily because they don’t have the technology that newer cars have. This is all speculation though there isn’t really any concrete evidence being presented that would make this useful. Finally, if i can buy a car at 17 that cost $16K pay it off while working a part time job making $12/hour in highschool some working full time in a career job making 40K-100K+ per year can afford a $20K-$30K car. It’s absurd to say that this is not the case. Otherwise you are probably living in substandard conditions. Being smart with money, yes; im all for it, but being cheap to save a few bucks and living in subpar conditions seems way too much this 1/10th rule is definitely living in subpar conditions.
Rex,
The biggest unknown is how your 10 year older self will feel after working all those years. I can promise you that enthusiasm and energy fades for work the older you get. You start dreaming of escaping the rat race.
The key is to save and invest now so that when you really want to get the hell out, you have the financial means to do so. Financial freedom is all about having optionality, if you spend a Ton of money out on your car then you lose that optionality.
Better method is to just make more. What is wrong with making more money if you want a nicer car? Have you seen my post entitled, income profiles of financially free people?
https://www.financialsamurai.com/income-profiles-of-financially-free-people/
I would say not everyone can just make more though. That being said, while i have a car payment now , I’m starting to think I won’t have one when this one is up. I might start subscribing to the cash purchase only car shopping method.
The problem with car payments is this: your enthusiasm for your car will start off high and slowly go down, but the car payments stay the same. A car buyer’s goal is to keep that enthusiasm line HIGHER than their car payment line, otherwise, they’ll feel like they are wasting money, which they are, and start feeling the car is like an anchor on their financial life.
Everyone can make more. This is 2016 where the internet reigns supreme.
There’s the gig economy, like driving for Uber, where my friend made $1,000 in two days due to a sign up promotion then quit.
There’s starting your own website, like this one, where the demand curve is unlimited. This website allowed me to leave my finance job of 11 years to be free. It’s been 4 years now and I thank my lucky starts I spend the time to write posts and respond to comments every day.
Then there’s the number of hours you are willing to work a day or a week. There are actually people in this world who COMPLAIN why they can’t get ahead financially, while only working one job for 40 hours a week or less. Can you believe it? Why not work 60 hours a week, and make 50% more through a side job or side hustle?
The Income Profiles Of Financially Free People are all real people who are willing to do more. Saving money on a car, clothing, food, is the EASY first thing to do. The harder, but much more rewarding thing to do is make more money.
I agree this 10% philosophy is ridiculously low. It is not like you have to pay off the car in a year. If most adhered to this, they could not afford a more reliable low miles, low age car. Then they would buy cars that ate up more in repairs and have them for less periods of time before catastrophic issues would come up. There is something to be said of buying a car that ensures issues are covered under warranty for a while.
Rather than focusing on a dollar amount that is too small (someone making $100,000 a year certainly can buy a car north of $10,000 without any problem), the bigger thing is avoiding overpaying for things that are unnecessary (like a specific brand name or extraneous features). I have an ex that HAD to have the $50,000+ Lincoln MKX… I got a Kia Sportage at well under half price. Yeah, I lack in the bells and whistles… but I generally do not miss or need the majority of them. I do not need heated or cooled seats, nav systems, backup cameras, folding size mirrors, etc.
The way I see it, if you have a lifestyle that needs transportation to commute or enjoy life, then you are going to be buying some decent cars. Of course, buying more used cars is one good option to save money. But even new vehicle purchases can be ok if done reasonably and at least then you always know the real vehicle history.
Sam – w an 11k loan on a VW beetle 2010 30000miles — 60 mo loan 48 months remaining 6% interest do you recommend:selling at a loss – or using 0% credit card for partial repayment ? And pay down the rate
I have no other debt escort $1000 visa and some medical bills I pay whom I can— goal is to buy a home after divorce …. Car payment only $279 but they make it sound like a big deal when I apply for mortgage – so they want it paid in full — I don’t want to take $ out of savings – however family member will pay it. At that poi,tmi feel it’s better to put that gift $ toward downpayment on home
Please — need a plan — love Yor blog
Correction : typo pay down the remainder
If you can’t buy a house with a $279 car loan something else is likely wrong. I just recently purchased a $200,000 home with 20% down. 30 year fixed at 4%. I have a car note that’s $417/month and my fiancé has one that’s about $390/month.
$300/month shouldn’t make or break a mortgage is what I’m getting at. Especially if it’s in an asset.
the numbers are low, which means you are playing safe, but what is your Net Income? it could change the whole game.
I have been trying for over a year, since before last September, to buy a vehicle that will work for our needs, a family of 5, with 2 extra seats, for the kids friends, I’m often expected to assist with transporting. We make less than the median income, but I can’t find anything used, in good condition, with less miles than the fifteen year old van I’m driving. I would be so glad to keep on driving it, but we are typically spending more than $300month, sometimes much more even double to keep it going, and the engine block has a crack,the transmission is also needing to be replaced. I keep on checking “Craig’s List”, and local news sales, but even 5k, more than this rule allows won’t net me a vehicle that I’m not scared to waste my money on. ive also actively shared our search with friends & family. I feel that the leasing market has destroyed the quality used vehicle market. I do have the 5kcash if anyone has any other resources or ideas for me to find a mini van that will function for our family. please excuse the mistskes, my old phone isn’t doing well either.
Hi Sam,
I’m a reader of your site from Malaysia. Stumbled upon this article when looking for guidelines on how much to spend on a car. Ended up buying a used one according to the 1/10th rule.
Recently wrote an article about the experience and linked back to you too.
Just wanted to say thanks, and all the best ahead for your upcoming product!
Best,
Aaron
Hi Aaron!
Good to hear from you and thanks for linking back. I was just in KL and Pulau Redang this past May/June! Wonderful food. Hadn’t been back in over 10 yers.
Cheers
Damn… how did I miss your reply? Just got back here and saw you replied.
Hope you enjoyed your trip last year, and do come by again. Have you been to Pulau Perhentian yet? Not as widely known as Redang, but less commercialized.
Do let me know if you’re ever in KL. Drinks on me!
No prob. Was deciding between Redang and Perhentian and chose the former as I wasn’t the driver :)
OK, next time!
I’ll be waiting!
I just have to ask here, im new to the financial mastery side of Life. I turned 25 two months ago, I have a job, ive been studying currency trading for quite some time now and aspire to become a stockbroker. I come from a working class family. Currently I make $16 an hour for a position that I know is worth much more (mortgage industry) but took it to get my foot in the door. Anyways, being from the working class, surrounded by people also in the working class, my “$16 an hour” is an “ooo ahhh” amongst my friends. I’ve been wanting to surround myself with people who A) Already make good money to teach me the art of making and spending money, or B) Someone who is as ambitious as I am to push eachother to make good money.
Im just reading your comments, and how you guys throw around “i make $100k, $250k $300k a year” like it’s nothing, almost as if you’re disappointed in making that! lol My point is, I cant even fathom making that kind of income. What do you guys do? how did you get started? what tips do you have? Do you guys have degrees? are you self starters? are you guys on salary or business owners, if salary, how the hell did you land such a high paying job and what kind of responsibilities do you have?
My youngest brother and I, (he’s 18) are the only ones in my entire family with ‘starry eyes’, we dream big, we work hard, we want it, and we want it bad.
I however, have been going through financial issues with a stupid BMW lemon that I bought a year ago ($4,000 bought.. I’ve spent $4,000 worth of parts into it within this 1 year) .. cant sell it because it wont pass smog, and now im stuck with a late registration because it just wont pass, still afraid its going to shut down on me at a red light at any given moment despite repairs.. yea.. . Anyways, as soon as I get that out of the way, im going to finance a vehicle (about $10,-$12,000) simply because I’ve spent the money on an “about 10% of your income car” and repairs have killed me since day 1, i’d rather put up with financing, maybe even purchase extended warranty, because I tell you.. I know for a fact, there’s nothing like that peace of mind, that your car wont leave you stranded anywhere.
I’m glad to be on this website, and I hope to reach the tax brackets of all of you before I reach 30!
Buying a BMW for $4000 is not something anyone but a decent mechanic or experienced, motivated DIYer should be doing. Not a lemon–you just made a poor decision.
These people are likely all educated or highly skilled. Of my friends who make 6 figures, one is a dentist, the other a pharmacist, and the last a lawyer. All require doctorates and i believe they are all making about 150k. Get educated or pick up a skill!
Actually while all those positions do require quite a bit of education, none require a doctorate.
A JD means juris doctorate (lawyer)
A DMD is doctorate of dentistry
A pharmacist has a doctorate in, well, pharmacy.
The Google is really helpful to,see that all of these careers require doctorates.
None of these are real PhD-type doctorates.
A doctorate in law is an LL.D. A JD is the US equivalent of an LL.B. i.e. a Bachelor of Laws. It certainly doesn’t qualify one to go around saying one is Dr. Smith the attorney.
For medical professionals who do get to be called Dr. Smith, it is not correct to say they have a doctorate in the sense of a higher degree in dentistry or medicine or whatever i.e. it is not a PhD type higher degree.
And yes, The Google is really helpful if you know something about what you are looking for.
BTW you can reply to things on the internet without being a smart alec (per Wikipedia: sarcastic, wisecracking, or humorous manner … delivered in an offensive, obnoxious, or cocky way).
I have an MD, a medical doctorate. I had 9 years of formal education after my undergraduate degree. You are saying I don’t have a real doctorate because it isn’t a PhD? I’m not sure what underlying insecurity you are trying to protect here, but yes lawyers doctors and dentists have terminal doctoral degrees. Maybe you couldn’t get into one of those programs so you went the PhD route and now feel like you are better than others because you do research or something? The things you are saying are incorrect.
M.D. does not stand for Medical Doctorate; it stands for Doctor of Medicine. You may be a doctor, but you don’t have a doctorate i.e. in the sense that a doctorate is a PhD. When people are talking about doctorates, they are talking about PhDs.
But as a medical professional you are obviously perfectly correct in referring to yourself as Dr. X. The only other group who can correctly do that, are those with a Ph.D.
A J.D. was a made up degree to make lawyers seem like they are on par with medical doctors, and an attempt to be recognized as doctors. Historically a law degree was an LL.B. i.e. a Bachelor of Laws. There is no difference between a US J.D. and an English/Irish/Australian/South African/New Zealand/Indian/Pakistani/etc LL.B.
I would laugh if I heard an attorney, who didn’t have a Ph.D., was referring to themself as Dr. Smith, J.D. The proper title for an attorney is John Smith, Esq.
Also it seems odd to say that the attorney “Dr.” Smith, J.D. after completing a higher degree would be going from a doctorate to a Masters of Laws (LL.M.).
BTW it is not necessary to be insulting when having a disagreement. You may have years of education in medicine; but perhaps a class on how to interact in a positive and sincere fashion wouldn’t have gone amiss.
I know four people who make six figures a year. One is a coal miner who runs a long wall machine. He has a high school diploma. Another is a small business owner. He has a high school diploma. Another owns some hotels and a factory space that he rents out to a manufacturing company. He didn’t finish high school. The last one is me. I did about 2 weeks of university. I’ve averaged just over 100,000 a year for the last three years from my own website. I basically got lucky.
I also know a doctor who is just recently out of 6 years of school and more months of residency. She makes 72,000 a year but lives in New York so spends about half of her income on rent.
Diplomas aren’t everything.
Diplomas aren’t everything, but they sure help.
You know four people who make six figures a year.
All of my colleagues do.
I’m a doctor.
Most people are paid what they are worth. Usually.
Some jobs are underpaid for the value they add to the world like social work imho.
What is your educational background? $16 an hr is not bad if you don’t have a college degree.
Engineering is a very rigorous 4 yr degree and I know some young engineers only making $27-30 an hr. Others make $50 an hr right out of college. Opportunity cost of not making money is 4 yrs for a college degree plus about $40,000 in tuition loans. Living costs would be present regardless so I don’t mention them.
Medicine (I’m a doc) pays from $100-200 an hr. Most docs make about $100 an hr. Sounds great right? Not really. 4 yrs college gettinf very very good grades, rocking the mcat, 4 yrs medical school which is *very* demanding. Then 3-7 yrs residency working 60-100 hrs a week.
Then you’re taxed a ton as an attending physician. The professional careers pay well but have heavy opportunity cost, loss of your youth, and loans.
Anybody *can* become a doctor with at least average smarts and a LOT of studying. Everybody (save for some friends that have super rich parents giving them 500,000) takes loans to study medicine.
Hit me up if you have questions about making money. I’m self-employed, in the trades, make pretty good money. My adjusted gross income hovers around $70k (69, 72, 68 the last few years), but I only work about half the year. I make as much as some of the doctors and lawyers whose homes I work on, without the overhead of graduate school. It’s pretty satisfying watching their egos deflate as they see me make the same money they do without the formal education. A self-employed tradesman doesn’t have the same status in society as a doctor or lawyer, but he can make the same money.
In earn $185k/yr after 41 years of work in high tech. I’ve worked since I was 14 with no gaps in employment since 17 when I joined the USAF. I am now right at 59 1/2 and can see the light at the end of the tunnel with a decent 7 figure nest egg. Still employed but not for long – I hope. It’s a tough decision due to health care costs, and I’m healthy, so is my wife of 34yrs.
I started working at 12yrs old getting paid under the table – sort of speak – due to my young age. I provided dumb labor as it was all I had to offer at that age.
The USAF (6yrs) gave me a good foundation for the rest of my adult life and I was able to leverage the training I received into an entry level high tech computer job making $11.5k a year. My salary quickly grew to match my skill level over the years. The years were constant learning and working long hours, sometimes non-stop over 24hrs or more. It was and is a results oriented kind of work. In other words, if you have the skills to do the job, prove it with results – everyday.
My advice to anyone starting out is to get in the work force as soon as possible.
Never quit.
Change jobs once you have some skills and a resume that your industry needs. It’s a good way to bump up your salary instead of relying exclusively on annual increases. I belive it’s the best way to get paid what you’re worth.
Never quit.
The Military is a viable option if you join correctly. The USAF is by far the better option for really good technical training, safer too. Study for the entrance exam as it will determine the career field you will be placed into. Score high enough and you can choose your career field and the type of training you will receive. Save your money while you’re in, I did not, you don’t need much since food, clothing (uniform), and shelter is provided.
I’m in IT, one of those “$200k” people you speak of. I am definitely not disappointed in that number, so hope it doesn’t come off that way. But, perhaps what you pick up on with a lot of people in the >$100k crowd is that ambition (that you also have) to always be striving to better ourselves and those around us.
On the topic of getting to that kind of earnings… I took an entry level job at a company doing tech support after college in 2004, earning $33k/year. After about a year and a half I got promoted over to development and had to move to Santa Barbara for that department… they gave me a $2k raise… both incomes would be considered poverty level in those places. As I changed companies after gaining experience, I met more people and networked more.
Those who work hard want to work with other people of that caliber. I try to hire those I know work hard and they do the same. I try to get “Joe” and “Bob” to join me at my new company because they are hard working and enjoyable to be around. I tell my boss they are worth the money and talk highly of them and they get a raise by coming over to the new company. Maybe 3 or 5 years later they are doing the same for me. Sometimes it’s 10 years later after we’ve each gone to a few different companies.
The old saying of: “It’s who you know” is true, but if you’re not a good worker, it also work against you. If I am interviewing someone and I see they were at a company a friend of mine worked at, I will ask my friend about them. An previous boss or company may be required not say much more than whether they would rehire you, but your old coworkers don’t have that requirement. You will never know I talked to them though. If they tell me how they always had to do extra work because of you, that you were lazy, that you have an attitude, etc and I trust them because I know their caliber of work…you might not even be called in to interview. It’s the other saying of: “Your reputation precedes you”.
So, get your foot in the door, work hard, be ambitious but humble, help others through your career, and stay in touch with old coworkers you liked working with.
Carlitos –
There are a number of great responses to your question, but I’d like to add a couple pieces of perspective.
Everything is relative. I grew up in nowhere, Midwest thinking if I ever made $100K+ I’d be the luckiest SOB. Now, I live in a coastal city, and my peer group is all <30 y/o and all earn $200K+. I relate to how your family responds to your current earning and ambition. It's been a mind shift as newcomers joined my peer group from age 10 (hometown) to 20 (college) to 25 (early career).
The single, most important piece of advice I'd give you is something that is already on your radar: surround yourself with ambitious (I'd add kind-hearted) friends and mentors who will push and teach you. I feel most optimistic about my career when I look around and I'm not the smartest person in the room (happens a lot :)). Secondly, I've learned how I learn new things, so I know I'm well positioned to continue to learn and benefit from others' experience as long as I listen, ask ?s, and apply effort. Additionally, choosing a partner who has similar values goes a long way. Mine is a frugal midwesterner too, and she keeps me grounded when I suggest a luxury-type purchase. "That's inconsistent with your values" or "What would your grandpa think of that?" comments have helped me reset my thinking and maintain level living costs as my income grows.
I will echo others in that education (Bachelor's degree from public school for me) has unlocked a ton of opportunities that my family members simply never had. That doesn't mean you can't make it without that, but I do believe it requires extra hustle and creativity. I'm not in much of a position to advise on specifics to side hustle (but I think there are posts on that topic) as I followed a boring/predictable path much like Sam's early career.
Best of luck to you and your brother!
Sam,
First of all, great website.
30y/o, I earn 120-130K and have 100k saved. I live in Japan and I need 4500$ to go through a month. This includes everything. I save 1/3 of my income.
I love cars, I mean I am REALLY passionate about them: your article and most of the comments make perfect sense to me as most of you look at cars as a mean to go from A to B. I have the same approach for clothes (10 bucks v-necks and Chuck Taylor’s) and many other things.
In short, I have very little expenses, cook all my meals, don’t go out for dinners or drinks and just go on a couple holidays a year, but I love cars and I am planning to buy…a 65000$ one, in cash.
It’s a used Nissan GT R from 2000, these cars are actually getting even more expensive as the time goes by, but I’m not planning to sell it as I’ve been chasing it since I was 20 years old and I can’t actually believe that I am in a position to buy one.
It will add great value to my life and it’s the only passion I have, but I’m not happy to see 2/3 of my savings go as it will take sometime to get them back.
What’s your advice for somebody in my position?
Thanks in advance and keep up the great work!
I am in the same boat as you.
I am looking to spend 50 of my 100 on a 1M, limited production vecichle only around 800 ever made.
I am scared too but I do not want car payments and I intend on keeping this car forever.
I think you should go for it.
You are good with your money, you will save it up again in a couple of years.
And just think all the joy your car will bring you.
I am a gear head too, I feel your pain.
Good Luck!
Melissa,
Thanks!
I wake up every morning wishing I had the fever for motorbikes instead, that would be much cheaper!
I have been following Sam for a while and I know that he is a bit of a car but too, but I think I am on a different level. I mean, spend my weekends tracking down old Motorsport magazines and DVDs for 3 bucks on the web. I go trackside to watch live racing and I just spent the weekend with very little sleep as I was following the live streaming of the 24 Hours of SPA. I bought a scale model of that car in 2003 and I have been looking at it ever since.
The car is not new, is not fancy and, for most people, not even pretty. I’m paying the money not for possessing it, but for the experiences that I am planning to have with it. Still, it’s a big, though world and I’d like to hear Sam’s thoughts.
On a financial standpoint, the car is definitely appreciating as they are getting more and more rare. Here in Japan is an icon and I’m 100% sure that, should the worst happen, I will be able to sell it. My salary is also going up and I work in sales with the possibility to earn large commission chunks. My plan is to save an additional 15-20K and pull the trigger.
But if you buy this very expensive car, you will also need expensive insurance, and even that will not truly repair the car if something damages it. Buy a cheap ugly truck and trailer, that you can park anywhere, and later, if you buy the fancy car, trailer it to events, and charge sponsors gobs of money to showcase it and sell their wares with it, or charge people massive amounts of money to drive it gently on closed courses at well publicized events. After you have made enough off it to cover your original purchase of it, drive it like you stole it and don’t give 2 shats about what anyone thinks of your blasphemy. If you get tired of it somehow or wreck it, still sell it for some insane price due to all the publicity.
I have a friend just like you, a total car nut. Spending 2/3 of your savings is a big decision though. Only you know if the opportunity cost is worth it.
If it’s your passion, your dream car, and if that car will appreciate in value, I think this may be an exception to the 1/10 rule. I believe what Sam frown upon is the idea of “keeping up with the jones” or driving a nice car for your own ego.
So nobody is going to ask this guy how his advice is even possible to follow let alone smart?
The cheapest new cars are around $13,000. So how much would you have to be making to buy the bargain basement new car? (Hint: think, $130,000). Good luck finding people on that salary that will buy a car that probably doesn’t have air conditioning standard and that might have to roll the windows down to cool down (hehehe “roll”, fun times huh). And these people tend buy much more expensive cars than $13,000. Don’t believe me? Who the heck is keeping BMW, Mercedes, Audi, etc in business? You don’t buy those cars for under $4,200 unless it’s on victory lap.
Next, if the medium income as you say is $42,000 that means half the working class can only buy up to a $4,200. But that’s not even the worst part. What percent of people actually make enough to buy a new car within 10% of their income??? 11% dude. 11. ELEVEN! 89% have to buy used cars.
BUT WAIT THERE’S MORE!!! How are used cars made???? New car drivers make them!!! How on Earth is 11 percent of employed people going to buy enough cars and then drive them enough them enough miles/years to artificially create the supply to go with the EIGHTY NINE PERCENT of the employed’s demand???
$4,200 cars exist soley BECAUSE the majority of people DON’T follow your, ummm, are we still calling it advice? What would the country be like if they even COULD follow your… uh…. words? The used car market wouldn’t exist! We would be back to square one: Only the rich could afford those “people movers” which means very few cars needed, no competition from just a couple car manufactures. Let’s say these people were nice enough to want to single handedly change things (LOL, this is rich…. get it? hahah)? That means for every rich new car buyer, (s)he would have to buy 9 cars each (11:89 ratio roughly), put lots of kms on ALL of them and then be willing to sell them to desperate middle class people (and people making “only” $100k to $129k) who need to get around, for a fair price. The public transit system can’t immediately accomodate that many people. I don’t even think the New York system could handle 89% of working new yorkers that’s the best the USA has to offer.
Sucks to be anyone in a city with no real public transit making under $25000 in your world. Gotta find a horse I guess, YYEEEEEHHHAAAAAAWWWW!!!
How about you give a % for house price now? 30% maybe? So median worker buys a $12,600 house? Too much huh. We are after all trying to get rich or die trying. Excessive frost bite from being homeless up north in January will surely do that from the parking spot we were able to buy.
Let’s go ALL OUT. 100% on housing!!! (in my most evil laugh and pinky to the lip.) Who needs food and transport anyways. Find me that $42,000 home. Does it come with pet roaches?
Recheck the math. Have a good one.
Wow, that was definitely a huge rant.
You seem to be trolling, but just in case, here’s how you do it.
Buy a used $4200 car instead of the $25k car. Instead of having a $20k loan with $358.93/month payments (based on 5 years @ 2.95% interest… you know most people don’t get that low of a rate right?). If you drive that $4200 car for 5 years and instead invest that $358.93/month into an S&P index fund… which has averaged 11.8% year over year for the last 72+ years… but we’ll base our calculations on just 8% to be fare so people don’t freak out about 12% interest. You’ll have $26,350.48 in that account.
Lets say your $4200 car explodes… as in, it literally blows up into a giant fireball and you didn’t even have insurance. You manage to get NPR to come pick it up for free, just so you don’t have to pay someone to remove it and you get your $5 tax deduction for burnt scrap metal…
Now, assume you’re a loser and in 5 years you’ve never gotten a raise, so you’re still making $42k, but your $26k is making 8% also, so you’re actually making $42k+2,100 = $45,100. If you just restrain yourself one more time… and buy a $4,500 car and keep investing that $358.93/month… your investment account has $26k-4,500 (were else did the money come from to buy that car right?) = $21,850…. plus your $358.93/month… in another 5 years… is worth $58,455.
Now, lets say you’re like F’ this! it’s been 10 years I’m buying a new car with cash for $30k out of that $58k. Because that other $4500 car got vaporized by little green men and you still didn’t have insurance on it, so you get $0 from it. Lets assume you started later too.. so you started all this when you were 30, so now you’re 40 and have a $30k car paid in cash. You leave that other $28k in the account and keep adding that $358.93/month… when you’re 65…
You’ll have $523k… again, still invested, so still earning 8%… and you’re still a loser, so you’re still making $42k… but you’re actually making $42k + $41,840… and you won’t be a burden on society when you retire because you actually have money. Oh yeah, and you’ve been able to buy new cars for a while now too.
If you look beyond right now and can grasp what happens over time when you actually invest money, you’ll see it clearly. But if you manage to justify making the decision to remain broke on the basis of “If people don’t buy new cars there will be no used cars”, then I doubt you’re going to comprehend what compounding interest does in my example above. Because in reality, there’s plenty of used cars in existence in this country and if people actually followed basic financial wealth building principles like this, there will be plenty of us buying new cars and selling used cars.
By the way: I have two vehicles, total value of both combined is under $5k. My house was less than 100% of my yearly income. I bought a house well within my means so I could invest more, no cockroaches either! 7 years later it’s 2x the value, I haven’t been a loser and managed to get raises, so the mortgage is now only 8% of my take home pay, which means more gets invested each month.
Whether you say you can or say you can’t do it, you’re right. But, it’s doable if you choose to. So I suggest you ‘recheck the math’. Because the math isn’t wrong, you’re inability to restrain your spending is.
So Pete, tell me where can I find a car that costs 4200$ on purchase and nothing on maintenance to keep it mobile and reliable?
Seriously, I want one!
I may be inclined to go overboard on reliability, just because I don’t want to look for a new job after I don’t show up when my car dies 500 miles away from home (i.e. weekend trip). And I’m not interested in paying 800$ for towing.
Repairs are not free, and 500$ can be easily twice a year, particularly on an older car … for some trivial matter (intermittent short killing the battery, power steering leaking, cooler leaking).
I couldn’t agree more. I’ve unknowingly always followed this rule because I refuse to finance a depreciating asset, but it has caused heartache over the years. The major flaw of this article is ignoring the reality that fully depreciated cars are not free to operate. Here on Earth, they require more maintenance than when new, and yes I’m talking about more than tires/oil changes/brakes.
If it was 10%*(Gross Income) purchase price, and lets say no more than 5%*(Gross Income) in maintenance, wouldn’t you be in the same spot financially after 5 years if you bought a newer/nicer model for 25%*(Gross Income) and half the maintenance cost. For every success story of buying a beater and driving it for years with minimal maintenance, I’m sure there are 10x as many money pits that aren’t worth the time, money or grief people put into them every month.
And just so I have my facts straight, I would like to know where $42K/year median per capita income was derived from? That may be average, but not median. Google says $52K/year/household and $27K/year/person. Now our $4200 example is really more like 15%, or 50% more car. As a car guy in general, I’m telling you buying a $6750 car (25% of Google’s per capita income) is WORLDs ahead of buying and maintaining $2700 money “saver”. Oh and let’s not forget all the people who may be reading this (eh hem half) that cannot pull down $27K/year who may be interested in improving their financial situation as well
I understand the objective of this article, but please let’s all be adults about the true mathematics/economics of driving a beater.
Ah, but I have taken into account the cost of ongoing maintenance with my 1/10th rule.
In the 1980s and earlier, cars broke down all the time. Today, cars are so much more reliable. So even if you get a 10 year old car from 2005, the ongoing maintenance expense is much better than a 10 year old car from 1985 or 1995.
I drove a “beater” worth $2,500 – $10,000 from 2004 – 2014 (it was a 2000 Land Rover Discovery, famous for its problems). I didn’t have anything out of the ordinary in terms of maintenance expenses, and this car is at the top of perceived problems. Now think about a 2004 Honda Civic or Corolla driver. The maintenance expenses are not as much as people think.
The lemons get blown out of proportion.
Well, I actually own two of them and drive 30k miles/year. One I bought for $4k and average about $200 in maintenance on it and spend about $400 on tires every 3 years, so ~$130/year more.. total right around $330/year in maintenance. The other one I bought for $1200, put $600 tires on it when I bought it and had to replaced the fuel pump for $120. I’ve had that for over 2 years now and have put about 15k miles on it. Besides changing the oil and that pump, nothing else has been needed.
You’re forgetting that they are ‘disposable’ cars for the most part, so you don’t fix every little thing that breaks. The one I had prior I bought for $1k and it cost about $300/year in maintenance/tires. I drove it for over 60k miles in 3 years before the engine finally just seized up. I know $1k is a bit extreme, but under $4200 is completely doable. I’ve personally have done it 3 times, 4 if you include the $850 motorcycle I used to commute on for 2 years (which I actually sold for $1k after those two years)
You can make excuses but in reality, a $4k car is reliable if you buy things based on mechanical condition as opposed to what “looks good”. The $1k cars left me on the side of the road about once every 2 years waiting for my $75/year AAA membership to get used, but my $4k vehicles haven’t done that yet. But you’re entire assumption is based on new cars not breaking down, which, if you stalk a repair shop for even a day, you’ll learn that they actually do as well. Besides, if you’re actually saving/investing that money you didn’t spend on the car, you can easily rent a car for the one week every 2 years for what you would have been paying monthly.
Realize also that I also do 30k miles/year, which is double the average. So my 2-3 years is most people’s 4-6 year span in terms of maintenance, cost and wear and tear on cars.
Are horses less than $4,200? Think of all the maintenance. Giddyup!
At 1.9% interest the board on my horse would get me a 30,000 car with a 60 month loan. That’s not including any of the other expenses.
I’d say you could roll around in a pretty nice off lease BMW for what a horse would cost.
Btw, I’m pretty cheap with the horse. Could spend a lot more.
My husband and I bought our 1995 Ford Explorer for $1800 three years ago (less than 2% of our yearly income). When we put our kayak on top, it more than doubles the worth of the car! The “Proud Vietnam Veteran” bumper sticker that we haven’t bothered to take off really adds to our street cred.
Sam,
How would you apply this rule to a married couple driving two vehicles? 5% of combined gross income per car? Or 10% per car? Or, since 20% total seems high, yet couples generally enjoy more efficient living expenses overall, perhaps call it 15% of combined gross income total for both cars?
My wife and I drive two vehicles currently worth about 7-8% of our CGI combined. We are 26 and our gross is around 175k. We own both free and clear and I don’t intend to change that ever. No more car payments for me.
I bet we will make it another 5-6 years before my wife’s needs replacement, and mine will hopefully last 10-12 years. The thought of how much money I will save/invest in that time makes me salivate! If I were purchasing a car for one of us tomorrow for some reason, I would probably aim for about 8% of our CGI in cash.
Hi Michael,
Since a marriage equals one unit, it’s simply 10% of a couple’s total combined income.
Check out: The Average Net Worth For The Above Average Married Couple!
Man… what do you do?! My wife and I make about 110k combined. I’m 25 and she’s 24, there’s no way we could hit 175k in two years!! I’m a bit jealous. Although it could be a geographical difference.
I am an engineer and she works in marketing for an international corporation. We live in the expensive Northeast. The interesting thing about personal finance is that your income level is only part of the story. With a relatively high rate of saving and no expensive debt, you can fairly quickly eclipse people who earn much more than you, but overspend like crazy. According to Personal Capital, our NW is $283.5k as of today. If you had told me that 4 years ago when I was dead broke after a trip to Europe, I would have laughed at you.
Save your money if that is what you want to do. I work hard, I play hard. I also invested a lot. not in the stock market, but in oil and gas. Now I am able to invest in real estate. I am 32 years old make almost 7 figures a year and have millions in the bank. If you want it? go get it!!!!! I was given nothing in my life by anyone, but an opportunity to work hard. I started off making 10.00 an hour 14 years ago working for the man.
Is it smart to have 4 soon to be five cars when you are making 400k a yr with 2 million net worth. 2015 jeep 40k. 2014 truck 25k van 10k car 14k another car 10k =100k
Doesn’t seem very efficient or green. But I guess it all depends on your debt levels and need for cars. Do you have 3-4 concurrent drivers?
Yes going to be four drivers and the truck is necessary for buisness
Sam, where do you live? I am in Northeast Ohio. This will become pertinent in a minute.
I drive a 2000 Celica GTS that I bought new. I drive very carefully and do not abuse the car, and have only 100,000 miles on it. This year it has taken $1800 in repairs so far (It is only June). Last year it took $2500. Note I have an independent mechanic who is excellent and charges 50-60% of dealer costs.
Most of the repairs are not items that have worn out due to use but rust is the problem. I just broke a strut: It rusted through. The resonator pipe: Rusted through. Brakes including calipers get major corrosion after only one winter, so I just replaced rotors that were at 60% but were destroyed by rust. The parking brake cables ($340 or so for that repair) corroded completely apart. This is an item which takes very little stress over its life. I replaced sway bars and I cannot be sure, but our pot holes from the winter act like Freddie Krueger on car suspensions.
This vehicle is worth < $4000 on the open market but these last five years' worth of repairs would have put a MAJOR chunk down on the median $24k car that you warn sternly against.
I suspect the repair curve will plummet for a few years now, but I do not really know, it could continue! To mitigate risk I could take your advice and buy a $6,000 or $7,000 vehicle and sell my current vehicle, only to replace a large number of items very soon for the same reasons.
Lamenting the repairs to my mechanic he responded: "I bet you did not do much to this car for a long time, right?" "Yes for 7 or 8 years I did absolutely nothing, and little for 10 years." "Well, I am doing similar repairs to yours on Fords and Chevys that have only 30,000 miles on them. Our weather is a big cause of this." So the Toyota is still king, but remains a patsy to salt and snow.
If you are in the Sunbelt, you may have different problems like the dashboard drying out and not looking so great, and faded seats, but not tens of components just falling apart before their time. (?)
I am thinking of an SUV to replace this vehicle. The industry leading depreciation of say a new or certified Honda CRV or Toyota Tacoma is looking darn good about now. If my calculations are correct (?) I see about $1600 per year average depreciation for these leading vehicles over a ten year span. It is anyone's guess; will my car average above or below that for its second decade? I am tired of guessing and a well-defined $1600 figure is more attractive than the rust lottery.
My mechanic recommended a BMW X3 at $8,000 that he has been servicing. He likes the German vehicles because they are all stainless steel underneath, including the fasteners. That sounds great however the owner is a divorcee who is selling because the X3 is nickel and diming her to death.
I am not looking for a reason to get a shiny new vehicle. My wife and I are debt free. We eat out <5 times per year and do not have cable TV. We live more simply than any other educated professionals that we know. Gurus like you are correct, it has become addictive to save money and have emergency money, and not live paycheck to paycheck to feed a material lifestyle.
Thus, if I could be one of those people who bought a $3,000 car and drove it for 3 years with $200 in repairs, I would be the first to line up. I cannot find the line for the free lunch though. Where is it?
What is your income though? $8,000 for a car seems reasonable with a $80,000 income.
I live in San Francisco, the cheapest international city in the world right now IMO.
I totally hear you on being the Rust Belt or living near the corrosive ocean and having to spend more money maintaining a car. Something to consider when buying a vehicle… where you live, where the vehicle has lived before you buy!
For everyone getting worked up about the 1/10th rule, just relax. Not hard to tell which posters have already wasted the money, but there’s still hope for the rest of you.
It’s not a hard and fast rule, the basic advice is don’t buy a new or expensive car that you can’t afford. No matter how much you try to convince yourself, you don’t need it.
Forget those on $500k per year, they can buy a Ferrari if they want one, it doesn’t really apply.
For people with a regular income, just try and keep the purchase price under $10k (ideally closer to $5k), very manageable figures. Also think about the price of repairs and parts, second hand transmissions, diffs, struts, engines etc. You’d be amazed at how cheaply a wrecking mechanic will source and fit these things for more common vehicles, normally with 3-6 month warranties, enough time to put it through it’s paces and “test” it ;).
The reliability argument. Non-factor. If it’s post 2000 and not huge on miles, and from a reliable manufacturer, it will work out cheaper on maintenance than a new or more expensive car 95% of the time, and if you choose wisely, all major repairs are relatively cheap anyway (see above).
Think about it, a $30k car vs a $5k car… That’s 6 x $5k cars you could buy for 1 x $30k car. Even with the worst luck ever, choosing famously unreliable cars from shitty manufacturers, and never doing any basic maintenance, you could blow up 4 x $5k cars in 10 years, abandon them on the side of the road and completely replace them, and still be $10k better off than driving a $30k for 10 years.
Regardless, if you buy a $5k car that’s known to be a reliable make and model, that’s not too old and doesn’t have massive mileage, then you have a reliable car.
Choose one that has a timing chain rather than a belt, maybe replace the cooling hoses as preventative maintenance, change the fluids, perhaps new spark plugs are in order if you really want to splurge, and have a mechanic give it a once over. A few hundred dollars and you can rest easy. After that, just change the oil and filter somewhat regularly and all that other normal stuff.
It’ll be just as reliable as your new car will be in 3 or 4 years time (which is almost no different to when new), and you’ve saved an absolute fortune and don’t feel like a sucker.
Great article, spot on.
Wow, so many people here shuddering at the thought of driving a car worth less than 10k, choosing to spend 30 or 40% of their income on a car! That’s not including the interest.
You guys realise we’re not talking about dealer 2nd hand cars, right? We’re talking about private sales. There’s so many bargains out there.
These people not only have a poor understanding of money, but also automobiles. Or they’ve already made this huge mistake and refuse to accept it.
Christ, I’ve got a 2005 ford work car outside that drives beautifully after over 360,000 km (220,000+ miles). Paid about $7500 dollars for it 7 years ago. Modern, powerful, reliable, fuel efficient vehicle bought for 1/4 of it’s original price just 3 and a half years after it was made. Never missed a beat until 350,00km when the automatic transmission (which had never been serviced) started to slip a little bit, got it swapped out for a low mileage trans for $900. Away we go. When the engine does finally die (these ford straight 6’s can get up to 600,000km) I will swap that out for about $1200, unless its like 2025 and I decide to scrap it.
My insurance payments? $140 a year for 3rd party property, that’s it. Only a mad person would pay for comprehensive insurance on a car that can be fixed or completely replaced so cheaply.
Mine is an extreme example, but anyone can do this with almost any vehicle they want.
You’re all wasting your money and making others rich.
But, each to their own.
How much coverage do you get for $12 a month?
That wouldn’t come close to being enough insurance to protect me/my assets in case of an accident.
It’s 3rd party property coverage.
It traditionally covers the cost of any damage done to others property in an accident. My particular policy also covers my vehicle for up to $5k if I get hit by an uninsured driver and am not at fault. Fire and theft coverage was a few dollars more per month but I didn’t bother with it.
The point was that when you drive a cheap car, then you don’t need to pay for full coverage. I only pay for 3rd party coverage in case I rear end a Ferrari or something ridiculous.
I understand the financial sense in the article but at the same time one must be able to enjoy the things in life which they work hard for. I am very frugal but sometimes I sit back and feel like I work hard enough to buy anything I can afford. At age 19, I was earning $22K a year and treated myself to a brand new Toyota Corolla for $20 000. One will disagree and bash me but three years later, the car is paid off, I have a decent amount of money stashed away and I have NO financial problems.
If one spends the majority of money and saves little or nothing then I understand why they can’t go buying fancy cars. I also have placed some of my money in the stock market but I wish to not take big risks.
I’m 22 and earn $60K a year and is yet to complete my Bachelor’s degree and I am in need of an AWD car since I had a bad winter with my current car. I know I can buy a used SUV for $10K to 15K but I choose to buy an Infiniti Q50 AWD for $28 000.
Again, I prepare for years of rainy days and have no credit card debts. I contribute 6% pre taxed to retirement savings, 25% to special savings and balance to rainy day account.
I just pray that I don’t die and leave all this money so I enjoy it while I am alive.
The demographic at biggest risk of blowing their money on cars is Male between the age of 18-25.
Cars are intoxicating for males, during school and right after getting their first real paycheck. 10 years from now, I’d like you to revisit this article and ask yourself whether you would have rather invested the $28,000 instead.
I probably will look back and say damn I was young back then. I have been receiving $3500 month commission paycheck and $1200 biweekly pay checks and I don’t k ow what to expect when I get a rea paycheck.
When I get a real paycheck, I can imagine the car I’ll be driving and house I’ll be living in .
I do not disagree with the article but one article cannot define everyone’s situation or way they should spend on cars.
If one is spending money on cars, with little or no income and no savings then God be with them and save them.
When you’re earning money and saving money, it’s time you treat yourself and be happy before the money is all gone and you never got a chance to live off it.
Remember as mentioned earlier, I save close to 50% of my annual income and some goes back into paying for school.
lol i can tell when people are lying “arrows putting up” lmao
this article is ridiculous.
I’ve been a poverty level earner (__<24,000) for my entire lifespan.
I've also had a 1988 honda crx Si since I was 20 years old.
I've averaged less than 300/year on maintenance. Gas is cheap. And I even have a class 3 tow hitch, which has empowered me greatly to live a decent lifestyle despite my low income!
P.S. I bought the car with ~250,000 miles. It's now ~360K.
I'd like to slap the author with a bit of reality when they argue that I shouldn't even OWN a car. How absurd.
How long do you keep the car for? Chopping and changing every few years within the 10% rule may be more expensive than buying at more than 10% but holding for decades…
Without looking at all the replys, I would like to suggest that there are times when this rule should not be followed…
My car (bought used, paid cash for) broke down last year in January. I had to decide real fast if I wanted to spend the money and labor (I do my own auto work) to fix it, or if it was time to get something that wouldn’t break down for a while. While I was sitting on the side of the road waiting for a tow, I was scouring the internet, and found that I could lease a Nissan Leaf for $169 a month (with $3k down). This was interesting because I was currently spending an average of about $300 a month on gasoline in my current car… which would equate to my lease payment being half as much as I was previously paying for gas.
I did some more searching, and eventually ended up picking out the Chevy Spark EV. I put a minimal down payment, and got a lease of $288 a month. Now, my car payment is less than I was paying for gas, and I average about a buck and a half a day on electricity when I charge at home, and less when I charge at the many free charging stations around town. So lets say that $288+$45 ~ $333 minus public charging = a little more than I was paying for gas.
This doesn’t even factor in the cost of oil changes, which most people have to do every 3 months/3000 miles (if you listen to the lube shop) or 6 months/6000 miles (if you actually read your owners manual and don’t drive in the dust and dirt all the time). There are no oil changes for the Spark EV, or any EV for that matter… so while it cost more than a comparably equipped gasoline powered car, my costs are actually about the same as they were before I had a car payment, and now I have a car that has FAR less moving parts to worry about breaking down. There’s no transmission (and no transmission fluid to change), no belts to change (especially no timing belt…), no spark plugs to change, no air filter to clean or replace, and did I mention; I get to drive around in a quiet, comfortable, and brand new car?
People claiming they can’t get a fun car for their budget aren’t being honest just have a very narrow view on how to have fun driving. If you’re looking for a cheap sports car the answer is always Miata. You can get a running project car for around $1000 in my area or buy a solid one for $3000. You could afford have one of the best driver’s cars on a $30,000 salary. Make more money get something newer. 350z start around $6000, C5 corvette around $10,000… The list goes on. Not many legitimate excuses for overspending on transportation.
Oh yeah, the Miata is an awesome car! I’d love to own one, unfortunately even at $3,000 that’s too much for a second vehicle for me. I drive 30,000 miles/yr for business in my 2014 Focus ST. Sure I could have got a higher performance, higher mileage car for less money, but the reliability factor just wouldn’t be there.
Anything that doesn’t have to get me to clients I tend to spend less money on. For example I have three motorcycles (2009 Yamaha FZ6, 2008 Yamaha R6, 2009 Honda CRF230l) that I have acquired over the last few years, each one has been less than 1/10th my income and was paid for in cash.
Sure I could cut a lot of money out of my vehicle budget, but the thing that I always come back to is rather simple.
I’m not sure what I would do with the extra money, I honestly can’t think of a better way to spend my money. I could save 30% of my income for retirement rather than 15%, but I’m not sure that would actually bring me happiness.
Money doesn’t buy happiness, but adrenaline sure does.
It’s definitely good that you’re saving 15% for retirement. Nothing wrong with with being an adrenaline junkie ether… I just think it limits you future wealth by too much when you buy a brand new vehicle like that. The Focus ST is a pretty cool car but like you said the performance bargains found on the used market make it almost a no brainer buying used. As far a reliability goes cars like the Miata and Corvette are known for being bulletproof and lasting hundreds of thousands of miles. It’s not like you can’t have fun while being cheap as well. Instead of buying a 20k Polaris RZR like some of my coworkers I have a 2001 Honda 400EX and a 2002 CRF 450R for when I have fun in the dirt. On the street I ride 2007 Ninja 650R. All those toys were had for less than $4000.
True, the Corvette and Miata just wouldn’t work out for me, but there’s other options. I suppose I could have picked up a used Mazdaspeed3 or GTI instead of the Focus. I think next time around I’ll go that route, but for now I’m going to drive the Focus another 200,000 miles hopefully.
Next time I get a car it’ll be used for sure, but probably will still be about 20% of my income. A nice three year old MS3 with 45,000 miles on it really wouldn’t be so bad.
The thing that I always come back to though is that I put 2.5x times more miles on my car than the average driver every year. So I don’t necessarily like higher mileage vehicles.
For instance with my Focus I paid 23,000 OTD, with the 15,000 MS3 I would pay about 16-17,000 OTD. If you assume the Speed3 had 45,000 miles on it and both cars made it to 200,000 miles the price difference ends up being about 1 cent per mile. If you multiply 200,000 by 1 cent I would actually only save about $2,000 (by going with the MS3) over the course of 200,000 miles by going used, rather than the $6,000-7,000 initial price difference.
I guess what I’m getting at is that it’s important to take into consideration mileage with a used vehicle when you consider it’s total cost.
Toys are definitely an area where it’s easy to cut costs though, as there is about a million low mileage cheap motorcycles out there. I’m sure the Ninja 650 is a blast, that bike is very similar to my FZ6. Cheap to buy, cheap to maintain, and every bit as fun as a $20,000 motorcycle on the street. I ran into issues once I started doing track days with my FZ6 though, hence why I bought ended up with an R6 also.
Sorry if I’m rambling a lot.
WHY YOU SHOULD SPEND MORE THAN 10% OF GROSS ON A CAR
1) Maintenance costs:
Simple, don’t get parking tickets or traffic tickets. Insurance on a new vehicle is more, but still not that bad. Maintenance is certainly cheaper on a more expensive car (to a degree).
2) Opportunity cost.
Oh… watching assets grow, fun! Not really, now driving a car one really enjoys, that’s fun! Anyways, what’s the point of having money if your not going to spend it?
3) Stress. Paying more than 1/10th of your income for a car doesn’t make one stressed, it simply means one purchased the WRONG car.
4) Makes you want more. On the contrary, have you seen how Jay Leno dresses?
5) Makes you feel stupid. Not really, nothing beats taking a hard corner at nearly 1g and accelerating out full throttle with not the slightest concern that your vehicle is going to explode.
Attention author of the blog and all readers of the blog. You both are taking the 1/10 ratio wrong!! You can spend 10% of your annual salary on a car and have a brand new or even a pre-owned luxury car.
Take the average annual income of $50,000. 10% of that is $5,000, divided into 12 months and that’s a $500 monthly car note. Do less of an amount, if you don’t want anything that extravagant.
You’ll repeat steps 1 & 2 next year. Get it?! Why does it work, you ask? Because you are only spending 10% of your annual salary, key word annual!!!
Author please do a fact check on advises, before blogging incorrectly.
Readers use your minds once in a while. Go ahead and get that 10% annual car note. :)
This doesn’t seem like solid advice. Not sure if you’re trolling or what but 10% annually is too much. I would be in a 2015 Corvette Z06(I love corvettes) if I was unwise enough to spend 10% of my annual income on a car note… Let me guess, I need to spend 40% of my income on house payments as well?
I have read this article a number of times to digest. The first time I was appalled. After revisiting it again, I decided to trade in my Infiniti with a $480 payment for a used Civic (4k miles) for a $250 payment. Between consulting and my main job I make about $210k per year. Even though it was not a stretch on finances I relish in not having to pay for $80-$100 oil changes and $60 fillups with premium gas. Not to mention there is a certain satisfaction of driving up in your $13k car and making a decent living. I am 28, owned 10 vehicles in my lifetime, love cars, love trucks, and anything that goes fast. I get my fix when I travel and get a rental car. I’ll pay the additional $20 for the Challenger. It is fun but then I think about how it would cost $400 a month more in a car payment, $200 more per month in gas, and $100 more per month in maintenance and insurance. I ask myself, is this something that is worth $700 more per month or would I rather take my wife on two vacations to Sandals that year. Yep, i’ll drive the Civic.
Nice job! Save and invest the extra money over the years and you’ll be surprised at how much more wealth you’ll be able to accumulate.
The joy of getting to point B, but much cheaper is great. Less stress involved with a cheaper car too.
It’s all a matter of whether you want to look rich or be rich. There’s a lot of people driving around in nice cars which for the most of them, as they say in Texas “big hat no cattle”. If you can suppress many of those consumer purchases when you are young you can live a slowly increasing lifestyle when you get older. So while you may not get to “enjoy” what you’ve worked for you will later in life. It’s all about building up assets as soon as you can so that those assets will take care of you later in life.
I appreciate your thoughts as always, my man.
This post comes at a good time. We were in a car accident that cause $8k of damage to our $13k-ish valued 2007 Honda Pilot EX-L with 107k miles on it. (Couldn’t convince them to just total it. Yes, we will be seeking reimbursement for the diminished value of the vehicle, too).
With that much damage, I’m concerned about it’s integrity as a family vehicle — and I’m especially concerned about it “croaking” from some hidden damage 6 months down the road when I still have a lot of loan left on it.
So I actually found myself looking at Certified Pre-Owned Replacements. I love the fact that we will have lower repairs (the previous car averaged almost $200/month in maintenance) and that if something serious goes wrong, we will have a powertrain warranty.
But the ones I like will put us at the 27.5% mark. So. Whaa.
Anyhow, the one thing I wanted to mention is that the Cash For Clunkers program has really, really hurt the little guy. Until 2 years ago I only bought in the $1k-ish range. Prior to the 2009 program, you could get a lot of car for $1k. After they snatched up all those cars, the used car market has become really pricey, and I think we will continue to see those effects for another 2-3 years.
It’s a side effect that has really hurt, and one that is often overlooked.
You can also look up your local tax incentives to
see which option pays more in the long run. You can expect to get paid for your vehicle
in some cases on the spot during pickup or, in some cases, no later than 14 days via check.
Another question to ask is whether you need to deliver the junk car or if
they will pick it up.
Even though a new car say 26K and you are earning 60K, by the time you are done paying it you would have paid 35K in 5-6 years. If you drive 30K a year by the time its 3 years you will need to pay for your own repairs before then.
What I did when I was earning 60K was I bought a 5K car cash and earmarked about 2K for repairs for one year. I spend 1K of tha in one year. The car was 10 years old but I kept it for another 6 and spent on tires and repairs about 3K for that period. And I drove it for about 60K miles in 6 years with nothing major
Its better than buying that new car and costing me 6K in payments every year plus 800 more in insurance.
When I buy a used car I make sure it has the timing belt changed and clutch if it is manual. If not I use that as a bargaining chip.
A car is a tool and it is ridiculous that it would cost you so much per year. If you are paying 800 in payment a month and your take home is about 4K then something is very wrong
While some of your points are valid and I respect the concept behind your rule, it is a bit extreme even for most penny-pinching or otherwise conservative folks. Sure, your car’s price alone may be a significant % when compared directly to your gross salary. But a 35k dollar car on a 35k dollar net profit on salary after taxes is not a true 100% utilization of income. Unless you’re buying the car up front and in full with cash, which of course is stupid, you won’t necessarily be overburdening yourself. Financing or leasing are common and while they yield no equity or return of any monetary kind, these options may yield great personal enjoyment through the intangible. Happiness derived from car ownership is a valid justification for spending more than 10%, especially if the payments are affordable and made over a 3-5 year period of time. While the opportunity cost of leasing a car is obviously the returns from investing instead, this can’t be used as evidence supporting your theory by itself. Next, if you make 25k and buy a 2500 dollar car as a result of your theory, your maintenance cost will likely be substantial. Cheap, high-mileage used cars need parts and service and are likely not under warranty. Additionally, you can’t include parking ticket or traffic ticket costs as a likely expense if it isn’t guaranteed or consistent, even. I haven’t had a fine in 5 years. This isn’t a guaranteed expense and shouldn’t be used in support or opposition of a vehicle purchase. Only take into account the known or statistically significant variables.
I must note that while your articles are mostly excellent and validated by fact and experience, this article and theory was poorly supported in my opinion. Point 1 on maintenance was dubious as an expensive car may require none and/or have maintenance covered by the warranty. Point 2 on opportunity cost is totally valid and on point. Number 3, less stress? A cheaper car is less stressful? I think you’re reaching on that. It’s an opinion and subjective by nature, but it isn’t even well supported. 4, makes you want other nice things? What evidence can you cite? Maybe someone just wants a nice car but is content with a cheap watch or basic clothing. Having a nice car and living lavishly are not mutually exclusive. But worst of all, point 5. Makes you feel stupid? Why would I feel stupid about a decision I made that required a great deal of thought and budgeting before the paperwork was signed. Not everyone values investing or returns or cash flow streams or savings plans as singularly as another might and one may value the expensive car for its pleasurable qualities more singularly than you, since you are content with a Honda. Opinions and tastes vary, but these differences are not indicative of intelligence. Only preference. To call someone stupid for passing on a POSSIBLE investment return in order to enjoy a vehicle which is a just as much a purchase out of necessity as it is out of intangible personal benefit. A smile on my face is important to me, maybe even more so than a non-guaranteed return on a small investment. If that investment ends up losing, the better choice is clearly the one improving my life and happiness.
I love your work and admire what you’ve accomplished, but I can’t agree with your 1/10th theory and I think your points of support could use a bit more substance and objectivity rather than just personal opinion or anecdotal speculations.
Bravo and well said. A bit too opinionated/subjective of a theory, and in some instances straight-up unrealistic. How many people out there who earn $100K have purchased their vehicles for $10K or less? Hmmmm… let’s just say it’s probably 1/10th of 1/10th of 1/10th of the population. Being fiscally responsible is one thing (and a good thing), but 1/10th of one year’s salary is fairy-tale-like in nature. If this is how people actually lived almost everyone would be taking transit. Spending 10% or less of one’s income per year is probably more realistic.
I’m near six figures and I’m driving a car less than 1/10th my income. I did recently spend $500 to replace brake and rotors but besides that much less stress than my “enjoyable” performance car that was 1/10th of my take home pay. There’s a huge difference between worrying about someone hitting my car then and now. I estimate that it would of cost me $1500 to replace the Brembo rotors and pads on my performance car.
Within the next 3 months I’ll be car-less and no longer a home owner after I move locations; even less stress. Don’t get me wrong I plan on buying a fun car again but not until I can pay cash for it without thinking about it along with only using it as a weekend warrior.
I make in the $100k range, and have never bought a new car. Never. The last used car I bought was well below the $10K range.
I make >$130k and drive an 12 year old Civic I bought for $4k and now have 200k miles on it and I have a 15 year old Ram 1500 I picked up for $1200 with 175k miles for those trips to Home Depot and such things that only a truck will do. So, I have two vehicles which solves the “reliability” issue everyone complains about and I’m still under 5% of my annual income. I drive 30k miles/year (>2x national average) and budget $100/month for vehicle maintenance (which includes tires) and never go through it all.
There are two generally accepted “Rules of Thumb” for what your mortgage payment should be: <=25% of your take home pay or that the purchase price should be 3-5x your gross income (depending on down payment, 5%-20% down). Either way when you calculate it, you're looking at roughly 25-30% of your take home pay being considered a good idea. This way you can still invest, save for retirement, and have a good overall quality of life. But, when you pause and think about it, that's for something that over the long term appreciates in value, but yet people want to spend anywhere from 25-100% of their annual income on a single vehicle… and a lot of households go buy two of them and double down on their losses. (Yes, I know there's a difference of once per 5 years buying that car vs paying it every year for your house, but try paying that extra 25% towards your mortgage instead of a car and you just took a 30 year mortgage down to 10 years).
The point of the article and most like this: the more you spend on things that go down in value, the more you're sacrificing either the long term and/or the things you can enjoy now. If you haven't read The Millionaire Next Door, then you really should stop by your library and pick it up.
People with real wealth are not spending a large percentage of their yearly income on vehicles. Once you start the investment ball rolling, it grows fast and you don't have to drive cheap cars for long before you have increased your income, whereby increasing the value of the cars you can drive. Not to mention having increased your overall quality of life as well in the process. The majority of people simply "want it now" because "they can afford the payments".
Our grandparents had the right philosophy: pay yourself first, live below your means, and pay for things with cash. There are reasons it takes two incomes now to live a lower quality of life than our grandparents had. Inflation is one reason, but buying things on credit before you can afford them isn't financially smart… if it was, we wouldn't be talking about how student loans, national debt, and credit cards are crippling the future of our children.
You make some good points, but the thing that a lot of people over look is that it isn’t necessarily how much you spend solely on your car, rather it’s how much you spend on “consumables”.
Someone who buys a car that costs 25% of the annual income sure did spend a lot on that vehicle. However, if she doesn’t really buy much else in the way of consumables she could be better off than her neighbor who has a car that cost 5% of their income but goes on extravagant vacations every year.
The key is figure out how much money you want to invest each year and then figure out how much you have to spend on the consumables that make you happy.
For some people cars bring happiness, for others its vacations, fancy food, nice clothes, etc. I guess my point is it’s important to be financially responsible, but not everyone has the same passions. If you don’t like cars and only need it for basic transportation by all means abide by the 1/10th rule and spend your money else where. However, I don’t see the harm in cutting down on the food budget or clothing budget or vacation budget to spend more on vehicles if that’s what makes one happy.
Well said and spot on.
“Unless you’re buying the car up front and in full with cash, which of course is stupid”
Why is that?
Interest rates on auto loans are very low, you would make more money investing the extra cash and making payments.
If you take out a 60 month car note at 2% you will pay $361 in interest the first year. If instead you invest that money at 7% you would have earned $1446 in interest.
So if you took out that loan and invested your $20,000 your net interest income would be $1,085.
The interest earnings of $1,085 is earnings you couldn’t get if you had paid $20,000 cash for the car up front.
If your overly conservative this a great approach. Maybe for people who lack ambition in life?
Why would I want to drive around in a busted 15 yr old Lexus or drive a generic box on wheels? In life you are supposed to enjoy the things you work hard for. If your only making $40-50k per year your not going to get rich or be rich.
To say your going to risk $10-20k on stocks is also a risk and some would say a bigger risk than buying a reasonable car. I think when people fail it’s when they make $40-50k and they want to buy something beyond their means. Nobody that make $200-300k is going to drive a $20-30k vehicle very rare and I think if they are making enough they are smart enough to continue to earn at the level or earn more (because they are already doing it).
The best way is to buy a car 2-4 yrs old with low miles you get a deep discount and the car is still new. It’s also not smart to put 20% down into something that depreciates. Put little to no money down and BUDGET your money accordingly before you make a purchase.
Be realistic but don’t be a penny pincher all the time you will get no where in life. Some would if your a hard work, smart and ambitious having a few “more expensive” items will make you work harder and hustle…..
Don’t forget. When you make $45,000 a year, and purchase a $4500. car, you will definitely be putting a lot of money into the car when things go wrong with the working parts. And for $4500 purchase, DO expect break downs.
Janet,
How do you figure you’ll be expecting breakdowns? Inspect the car before you buy it and keep up on the maintenance. I’ve never been stranded.
I bought a ’99 Pontiac Grand Prix for that price in 2008. I still have it 80k miles later with 179k total. Sure things need fixed and maintained, but unless you have an ego to maintain, it’s saved me thousands upon thousands of dollars.
I agree with you Janet. I just have never bought a used car. I have no one to impress. A new car is one of my life luxuries. I just have always bought a new car that was not expensive. I bought a 2002 Chevy Cavalier and drove for 240,000 miles before I sold it in 2015 for $600. I now have a 2012 Ford Escape purchased new. This is the most expensive car the I have ever owned. It represents about 30% of my annual salary. I have a towing package on the vehicle which allows me to transport my things. I now have paid it off. I will probably keep it for a minimum of 12 years. I think however if you really want to save money you should buy a used vehicle.
your life story had almost nothing to do with this
Who are you Greg to determine that. Your input had nothing to do with it
“It’s also not smart to put 20% down into something that depreciates.”
Disagree. In my opinion, the fact that it depreciates has absolutely nothing to do with your down payment. The down payment is about borrowing less and paying less interest. The fact that it depreciates is MORE reason to pay as much as you can out of pocket. Otherwise, you are losing financially on both the vehicle’s value and in interest.
To take your line of thinking to the extreme, it’s like saying that even if you have the money, you should never pay cash for something that depreciates, that a car should always be financed.
Is there something I am missing here?
Well, typically you can get an auto loan with an interest rate 1.9% or less. It’s fairly easy to earn more interest than that on the market.
With that in mind, the less money put down the better, as long as you do something smart with your left over savings.
Personally, I put down just enough to never be upside down. If I have a financed vehicle I try to make the loan so that I could drive down to CarMax at anytime and dump my vehicle on them. This way if I run into financial troubles I won’t be stuck with a car payment.
I see what you’re saying, but an interest rate of 1.9% or better is usually a special financing offer, and only available on new cars. By using the 10% rule, you would have to be earning somewhere above $150k to find a new car that falls in line with both criteria.
Bankrate.com says that the current interest rate on new cars is closer to 4.5%, and that a 36-month used car loan is coming in above 5%.
Yeah… I have 1.9 on both of my cars through my credit union.
I don’t really abide by the 1/10th rule myself. It doesn’t accomplish anything for me. My car cost about 30% of my annual income, but if you were to add my motorcycle collection on top of the cost of my car my “transportation” expenses go well beyond 50% of my annual income.
I make a pretty decent living, put away 15% of every check for retirement, spend maybe $300/yr on clothes, I don’t go out to eat, don’t have cable, my vacations consist of camping or track days, etc, etc.
I guess what I’m getting at is there are many ways to live frugally, it’s just important to pick the areas that you don’t care about so much and cut costs there.
Me, I really enjoy machines, so that’s where most of my money goes. I could care less about fancy dinners, clothes, and other status symbols.
Luckily for us, in the United States we have such a vast system of National Parks that are easily accessible by car. Makes vacations dirt cheap, a one week vacation to Yellowstone for my girlfriend and I could be done for about $300. Not bad if you ask me.
I love exploring our country and having a awesome car or motorcycle just makes the whole experience that much better.
how did we go from talking about insurance to talking about how u dont care about fancy dinners.. wow nobody cares, nobody cares about how u live your sounds to be boring life. people just want to know what to spend on a car.
Greg,
You must not be too bright of an individual. Benji’s point was that he spends more than the 1/10th rule because he enjoys owning and operating cars and motorcycles ( it is something that is important to him)
He is able to do this BECAUSE he lives a frugal life in other areas such as not enjoying fancy dinners etc.
Just take a second to think about what the words mean before you respond to something. It is a good strategy.
I make 200-210k/yr and I ride a freaking bicycle dude. I love the newest car designs, I really do. But I also see the stupidity of spending so much money on a new car, especially when I like walking and bicycling so much. I dunno, when I see money go into my accounts I always feel like I would have more fun investing it and becoming rich than buying stuff. Don’t get me wrong, I get tempted thinking “I could buy that!” but then I think I would rather invest it. One day I’ll have a brand new car, but when I do buy it I want to buy it because I’m rich and I can buy that luxury car in cash without it even making a dent in my net worth, or even making me blink.
When I buy stuff now like groceries or my bike I recently bought, I didn’t even flinch. It’s a great feeling. I never want to feel the “ouch” of buying something like a luxury vehicle even though I can afford it on paper, even according to financial samurai’s spreadsheet. I plan on buying a car soon though, but it’ll be (according to my calculation) 2.4% of my annual income. And I feel like it’s only marginally worse than the luxury car. I’ve spent time in luxury cars before and they feel nice. But becoming rich feels WAY better. :)
I am a bit confused by the rules here. If I spend a huge 50% of my income on a flashy new Landrover Discovery but then drive it into the ground 15 years from now, am I still spending less than 10% of my income on this? $50000/15 I would love to do this, but I fear the payments.
Personally I just bought a Hyundai Santa fe with 100,000 miles on the clock for about $4,000 in the UK. If it goes for a couple of years I will be happy. People reading this thread should google “bangernomics” the rules of which dictate buying unloved classics and helping them see out their final days in glory.
No, the author is suggesting that one should only buy a car worth 10% of one’s current annual income–i.e. not 10% per year.
So to go for the $50K Landrover, one should have an annual income of $500K.
I agree, buy within your means but don’t pinch pennies. My husband and I work hard, very hard but we’re young. I make decent money for my age and qualifications (22, no degree) and my husband is military, and their pay is down right embarrassing.
Based on this 1/10th rule, we would only be in the market for one car for about $8k or 2 cars for around $4k. I can say right now, that doesn’t work for me. If I was single, I could make that work, but not with a family.
After my son was born, my car we had purchased a couple years prior, just wasn’t hacking it as a family car like we thought it would. So, we traded in my husbands car and bought a 2010 Nissan Pathfinder for about $25k. It’s an amazing vehicle, runs greats, and best yet it’s big enough for a couple more car seats and has all the safety features. (why would I shell out money for an older vehicle without air bags?).
The car has the capability to grow with us, and I will not be needing to buy another anytime soon. We’re still looking to sell my car so we can save the payment towards a down payment on a new vehicle for my husband. I’m trying to get out of this car shuffle with no more than $45k in vehicle loans. While personally, I find that amount ridiculous, it is doable at our income level. We’re all set to have all debts paid off in less than a year aside from the vehicles, school loans, and the mortgage.
My school loans are reasonable, and I consider the vehicles necessary. However, the house will be a rental property this time next year and we will be on the market for a new Forever Home. My husband’s earning potential goes up about $70k/year once he leaves the service (He’s a Reactor Operator), so the goal is for me to stay home for a few years, and still pocket the $40k extra a year that results. My mortgage is set to be paid off by the time my son is grown and fair market rent is around $1,600-$2,000 for the property at the moment.
You can live and retire comfortably without acting like a pauper. And before I get any flack about not saving for retirement, we do. lol Our house is a large part of our retirement, but it is not the only thing. Our total investment in our retire plans (401k, Government Investment Account, Savings, Real Estate) comes in around $27k/year, so about 37% of our income give or take. I consider that not bad for two 20-somethings without degrees and a growing family to care for.
And kindly… you will never be financially independent.
“Nobody that make $200-300k is going to drive a $20-30k vehicle ”
I make $300k and drive 14 years old car which I paid $12k cash twelve years ago.
Will drive it as long as nothing major breaks, then I’ll buy a car that costs around $15k.
Good for you TT… that is Financial independence!
Make 200-250 and was thinking the same thing when I was looking to replace an older car. Bought cadillac sts 2002 with 50k miles for $5500 cash.
I guess I am crazy. I make 270k per year and buy all of my vehicles in cash used (Ford Expedition. 9k- it was great shape leather etc. And they don’t change them much) same for my Harley for 6.5k that sold for 27k new-they never change. Even a 33foot sailboat at 10 cents on the dollar compared to new
You can do it easy and no car payments is great. Older clean cars are everywhere and frankly, no one cares what you drive. Most people who are driving the 80k car or even the 40k car are living nearly check to check
I’m so glad I found this page today. One of my close friends’ gross incomes is about $60K (we live in a fairly sizeable suburban area in South Carolina), and he recently decided he’s going to trade in his reasonably-priced, reliable Toyota that he’s only had for a few years and fork over $50K on a used luxury vehicle because he likes cars. I’m all for doing what you want in life, but it almost makes my stomach churn to think about what a mistake this is for him, especially since he’s only 30, single, and could be using this opportunity to save and invest for his future. I’ve been trying to talk him out of it, but he won’t listen and is getting rather fed up with my advice. Maybe I can just send him the URL for this page…
I should also mention that he only plans to put about 10-15% down on it…yikes.
You should forward this article and save him from blowing up his finances. $50K car on only a $60K income is a big mistake.
I’m just a little confused on some of the follow up advice you gave in the comments.
One person said they made 80K a year, and when they said they had $70K in cars, you suggested “just try working to make 700K a year”
Like, what kind of advice is that? How is one to, in a reasonably short amount of time, multiply their income by 8.75 times, when they are already making nearly double the national average. Ask for a 8.75X pay raise????
You can be ambitious and hard working, but lets be realistic advice. It isn’t fair of you to suggest that such an idea is so simple, that they should have thought of it before?
Everyone in the country can’t make 500K salaries. We need people for every job. Is it fair or realistic to tell the janitors and garbage men of the world who have a genuine interest in driving a car worth more than $3,000 to attempt to increase their earnings tenfold?
I am an 18 year old freshman college student pursuing a degree in mechanical engineering so I can one day start my own car company. That being said, I can certainly understand drive and ambition, but I know how hard it can be to advance in life sometimes
My parents combined make about 70K a year (Approx. 35/35 split)
Back in 2003, my mother purchased a brand new Mercury Mountaineer for approx. 33K. By your calculations, she GROSSLY spent outside of her means. She still drives it to this day and the most expensive repair she’s EVER had to get on it was an alternator. My father and I perform regular maintenance on it to save a little bit of money.
To contrast, my father only buys used cars and has been through at least 7 since the year 2000. They ranged in years from 1993-2000. He bought them from people he knew and kept them running as long as he could. He only got rid of a car when the price to fix it exceeded its original purchase price. It has caused him much stress, headache, and plenty of money to go this route.
If you plan to own your own car company, then it’s possible you could earn over $700k to buy that $70k car you are already longing for at 18. Book mark this post, and revisit it in 10 years. Dream big, but also recognize the value of the dollar.
Read this post too: https://www.financialsamurai.com/bankers-techies-and-doctors-youll-never-get-rich-working-for-someone-else/
Hi Sam – I read your article on buying a home as “Lifestyle choice”. I treat home as a place to sleep, and car as a vehicle to take me from Point A to B. But what I did find contradictory in your choice of “home vs. car” is that its an individual’s choice. What you treat as a “room with a view” is what someone else treats as “road with an experience” :-) Just like home, car, 72″ TV in basement, they are all “materialistic” to which we all attach personal importance. But at the end, all the same.
Glad to know that you are financially intelligent, but still have passions beyond money.
Thanks. I’m lucky that one of my wants to improve Lifestyle also has the ability to also grow tremendous wealth.
I am surprised to see a 50% surge in prices of properties with panoramic ocean views in San Francisco in just one year. Perhaps the three examples are anomolies. https://www.financialsamurai.com/invest-in-real-estate-for-capital-appreciation-rental-income-or-lifestyle/
What is your housing and car situation? Love to get some perspective of where commenters are coming from.
I am 45, in US since 1995. Was raised in a far more luxurious lifestyle than I live in US today, given the cheap “services of multiple servants/driver/gardener” in India, for a high official father. British mindset, unlike US’ build your own, do your own.
Aint stupid, have an MBA as well, from US.
That is where I come from.
Tonight is the first time I respond on your site, only because you came across someone who thinks and expresses like a normal person, but not an author who is writing articles to make money.
As for my “car vs. home” situation, I dont treat home as a house. Am a family man, with kids. My son’s face is sun-rise view for me, and my daughter’s a sight for mountains :-)
My point was – Lifestyle for home, is same for a car, or someone passionate about a boat.
Thanks.
Hi,
Disagree with the frugality of the rule, however agree with the principle behind it.
What about a variation of the rule…instead of spending 1/10th of your gross income on the car (MSRP) dedicate 1/7th of your annual gross income to your ANNUAL car payments.
Say you earn 100K (most of us don´t want a Ford Focus or similar) you should not allocate more than 7K to the ownership of a car per year, this translates to monthly payments of $580, which if you have a good debt to income balance should not represent a burden, and at the same time allow you to buy a car you actually like and (although it may sound superfluous) that suits your job and lifestyle.
If you dont like cars just get a honda or a toyota,,,but if you do, having a nice car is among the things that money is for
Just my opinion….
I too was one hour away from buying a new car. I read your article and it made really good sense. My car is four years old and my warranty is about out plus I am very close to buying new tires. I have decided to keep my vehicle(Buick Enclave) but I will be purchasing an extended warranty, which a lot of folks think is a no no ,but I will feel better.
Glad you aren’t buying a new car Valerie! Your wallet will thank you for it, and I think you’ll be happier. 4 years old is not an old car.
I don’t agree with this rule. Why not enjoy your money and drive the car that makes you look forward to drive it? I feel safer and I know I am safer in a BMW but I never lease or buy them new. A one or two year fully loaded model would save you 15 to 20 percent off MSRP and would still have warranty and free maintenance. Life is short. Your undeserving relatives will fight for your high net worth that they never earned when your 6 feet under. This idea seems to suggest that we are immortal or will live to be a 100. I don’t know if I’ll be alive tomorrow so I don’t stress myself out of amassing a million $ net worth in the far future. I enjoy the here and now and not worry and put all my trust in the almighty. Financially, my family is well taken cared of if I checked out tomorrow.
Carlo, while this rule is not perfect, your arguments against it are terrible.
Safety argument: IIHS only has one BMW on its list of the safest cars in 2015 and that is the BMW 2-series. If safety is really an issue then you should be opting for a Volvo XC60, Mercedes M-class Toyota Highlander etc. Or just go and get a very heavy vehicle and drive it slowly.
Enjoy your money argument: the reason this is a poor argument is that you are not a 2-year old. As an adult one generally has obligations to one’s self, family and future. The goal of this article is to ensure those obligations are fulfilled. If this were a good argument wouldn’t we all refinance our homes and buy Ferraris and Bugattis.
Die tomorrow argument: and you could live to 100. You don’t know. While we as a nation may only be 36th in terms of longevity (beaten by Lebanon, Hong Kong, Taiwan etc), men have a life expectancy of over 77 and women over 82-years. Plus if you live past the babies who die early and the young male morons who get killed in the teens and twenties one’s life expectancy is well into the 80’s. And it is getting higher. To make a financial decision based on the notion that one could die tomorrow, rather than the fact that one is likely to live to one’s 80’s is foolhardy at best.
Perhaps one doesn’t want to leave a bunch of money to relatives to fight over; but that is surely preferable to having to beg those relatives for monetary support later in life, or living off food stamps just because one wanted to drive a BMW.
You must have missed this part “I enjoy the here and now and not worry and put all my trust in the almighty. Financially, my family is well taken cared of if I checked out tomorrow. “.
There’s nothing wrong with spending as much as you want on a car as log as your finances are in order.
If your can pay your mortgage and save for retirement and still buy a car 50% of your income I don’t see the problem.
Personally I own a cheap home, I don’t really see the purpose of having a large one. But I have quiet a bit of money in my vehicles.
I’m extremely happy with this scenario.
Also, though not by a large amount, automatic provides worse fuel efficiency.
The experts, who have many years of experience in this field, often suggest junk car owners to sell out their
vehicles to charitable institutions. Venturing
to a business that involves making custom cars.
Well…had little in life and have had lots. I drove a Honda Accord for 12 years until it was falling apart. Drove it hard, too. Traded for a 64K Z71 4WD Tahoe, paid cash. Net worth 5 million. I plan on driving it a long time. I’m a taller, 40ish girl with toys to pull. According to net worth chart, could’ve bought more expensive, but I like my all-American tough truck. And my boat looks good behind it!
Sam,
Love this article and drive a ’99 Corolla for work, cost $2K. However, I have tried to follow this for the family car and have bought a 05′ Malibu and ’02 Odyssey that ended up costing 3-5k in repairs over 3 yrs each and tons of stress on my wife and kids. Even decent used vans are freaking 10-15k now….any ideas? 28yrs old Make 50k, no debt except mortgage, net worth 100k. 4 kids, 1 stay at home mom. Know that I am crazy on that front, but love it! MMM frugal.
Jonny,
Sorry to hear about your repairs. Honda cars from late 1990s, early 2000s are quite bad (late 2000s are too new and too expensive so I never considered them) especially the V6 cars (Accord, Acura TL, MDX, Odyssey etc) have had nearly universal problems with transmission. I have tried various cars from Toyota, Honda, Nissan and Mitsubishi and eventually I have become a Toyota/Lexus buyer (5-12 year old cars). Toyota Sienna is much more reliable than Odyssey and its used car value is about the same as Odyssey. We sold our 04 Sienna XLE Limited (all bells and whistles, $9k-ish) 118k miles a few years ago to put money towards our house down payment and haven’t been able to find a similar value deal on Sienna since then. We currently have a 05 Chrysler Town and Country which has given some issues ($600ish total in repairs for check engine light) but nowhere near the issues you had. Having read reviews from Odyssey owners (on KBB site and on edmunds) I would never buy an Odyssey unless they fix them for 2016 model and I read good reviews in 2025 about them being reliable in the 100-150k mile age :)
Hi Friends,
Thank you for this website, this was so helpful, wanted to ask your opinions:
I made a big mistake of buying a new Mercedes GLK350 for $45k when I was single. Now I am married and save its becoming difficult as now my car has reached 50k miles. My question was is it better to trade in (current value of benz is $21k) and get a basic camry ($20k range) with less maintenance and better mileage for next 5 years? Or is it wise to keep this car until 90k miles and then opt for a trade in that time(at that time It will be about 13k plus I would have spent on extra gas for this suv+extended warrantly of 2k + maintenances)? We may need a second car in next 1 year.
Thank you very much
Sandy
Keep your car, drive it until 200,000 miles. Shouldn’t be getting rid of a car before 100,000 miles. Barely broken in at that point.
Or you could trade it for 10,000 Camry. It would be silly to trade your depreciated Mercedes for a non depreciated Camry at 20,000. In five years the bens will still be worth more than the Camry.
Sandy,
I think you should get rid of it as soon as you can because the more you keep the Mercedes the more you’ll lose in depreciation. You have already paid x years of depreciation ($24k) but the car is still worth something. In another 50k miles / 4 years the car will likely lose (say) another $11k.
If you are concerned about not burning money, don’t buy a brand new car because that will bring the steepest depreciation loss. The first year is the steepest and the next few years it would still lose a lot of value. Even if you buy a Japanese car like Camry or Accord for $21k or $29k you will easily lose $2k the minute you sign that purchase paperwork and another $2k in a year. Every year that brand new car would lose $3-4k. If you buy a 4-10 years old Japanese car for $5k (Camry) or $10k (Lexus LS for example) and you ensure that you don’t get a badly maintained or a lemon car, you will lose a very small amount in depreciation on that car. You could keep it for another 4-10 years and still get some of your money back. I have never spent more than $8k on a car, always bought in cash, started with $1400 1995 Toyota Tercel with 150k miles which I bought in 2007, kept a few months, never had spent a dime on repairs and then upgraded my way over the years. I have bought many cars at 140k+ miles and almost all cars had been above 100k+ miles and I never had to pay for any major maintenance (occasional wheel hub or bearing, axle or radiator which cost a couple of hundred, not even a thousand dollars). We bought a 1997 Avalon with 140k in 2008 and had to offer it to a cousin next year at 165k because he desperately needed one, otherwise we would have kept it. He’s currently at 190k+ and the car runs as smoothly (or even better with new tires).
Those who complain about “repair costs” for older cars are just using that as an excuse to buy new shiny cars. The monthly depreciation, monthly car payment, insurance and tax amount is usually around $1000 for a new car whereas any old clunker would not require $1000 in repairs every month. My current cars are 2002 Lexus LS (more luxurious and comfy than any new $29k car, bought $8k 137k miles 1.5 years ago, now 153k miles and worth probably $7k, spent $480 on a wheel hub, $50 on a rear view mirror button, other than that just oil change and wheel balancing + alignment) and a 2005 Chrysler Town and Country van Limited (bought $5.5k 97k miles about 1.5 years ago, now 111k miles and worth probably around the same 5-5.5k, spent $600ish on a various items to remove a check engine light, this is among the highest ever spent on maintenance, still driving fine, took several 250+ mile road trips with family).
I agree and disagree with this article… What are you saving all this money for again? Are they going to stuff it in your casket? Are you saving it for your spoiled grandkids so they can get a hand out where they don’t appreciate anything? I say it’s your money, do what you want. You have one life to live. You can’t go everyday penny pinching till the cows come home. Sure use coupons at the store, and don’t buy certain items till they come on sale sure. I already invest 18% of my pay towards retirement, plus a pension, and have been for 10 years. There is this thing called “Quality of life”… Meaning your entire life. I mean once you have a house and a promising retirement that builds interest, who gives a crap how much you spend on a car? For car people, this would never fly. My car is my hobby, it gives me the happiness and the quality of life that I enjoy. This is what non-car people don’t understand. It’s what makes you happy that matters, not the price tag that’s attached. As long as everything is paid and taken care of, who cares.
I consider myself a ‘car guy’, and I didn’t buy a new car until I had my house paid off and my retirement savings well along the way.
I think once you’ve embraced the ‘saver’ mindset, buying interesting cars on a budget is just another challenge. Me, I bought old big motor Mercedes sedans. I typically paid $5,000 or less for each one – they had ~150K miles on the clock. I’d drive them for another 150K and then sell them or part them out. Did this four times over 20 years. I enjoyed the hell out of those cars, and almost universally people thought that I’d spent way more than I had. I had some repair bills, but nowhere near the cost of ownership for a new car.
Today, maybe old VW GTIs or Mazda Miatas might fill that bill (I have not done the research). Car guys tend to have fun no matter the budget.
Terrible rule, based on no analysis whatsoever. Very condescending tone as well. This magical “rule” doesn’t even make sense.
The overall idea of spending less on a money-losing investment is sound, but if you are making $50K, the LAST thing you want to do is find a $5K (or less) car. Does the author have any idea what kind of car that will buy you? A high-mileage, high-maintenance gas hog!
Better advice: (1) Buy a late-model (no more than 2 years old) used car. (2) Buy a car that gets excellent MPG (30+). (3) Buy a car good enough to last you a MINIMUM of 10 years. (4) Perform ALL scheduled maintenance.
The biggest issue isn’t the worth of the car, it’s how often you BUY a car. Buying a car incurs payments, which is what hurts people the most. Gas guzzlers (mid-size SUVs and larger) simply create bigger payments and bigger maintenance costs (larger tires cost more!).
DON’T lease; that’s as bad as renting a house.
These days, a car capable of lasting 10+ years will cost you at least $10-12K – for a late-model subcompact. If you’re too large to fit in a subcompact, lose some weight by driving less and walking more….thereby saving even more.
This makes little sense. I make $45,000 a year and previously owned a 2003 Mercedes ML350 because it was a gift. The problem was, it ate up gas, required premium fuel and needed repairs constantly. When all was said and done, it was costing me about $650 a month to own it. So I traded it in for a brand-new Toyota Camry. My car payment is $275 a month, and I pay a third of what I did for gas now that I drive a car that uses regular and gets double the gas mileage. By owning a new car, I’m saving about $250 a month over what I was paying. That car payment doesn’t make me feel dumb. On the contrary, every time I make it, I feel brilliant.
You are comparing the cost of ownership of a 13 year old high-end luxury vehicle made by MB when quality was on the decline with a brand new flagship vehicle made my the the most reliable car brand on the planet? Based on your income you should probably be in a mid 2000’s Camry instead.
Why not pay yourself by putting money in your 401k first, and then spend what you have leftover on whatever you like? If you like cars, buy a nice car and don’t spend much on other things. If you like to travel, then travel and don’t get a nice car. Cars, clothes, vacations, etc…..none of them will bring you a big return on investment. Make sure you save for the future, but also make sure you live your life.
This is absolutely ridiculous. Unless you don’t enjoy cars at any measure, or would like to add the vehicle that you drive and use every-single-day to your long list of boring frugality, then do not follow this advice. Please!
Your article makes a lot of sense, some people who aren’t financially sound should definitely follow it. I understand the art of being frugal, but not when it comes to this. How boring can you possibly be, to earn so much money on a regular yearly basis, that you can’t even treat yourself to ONE expensive item that you’ll be using almost every day. No, let’s earn 50k every year, have a little cash saved up, and buy a $5,000 rust bucket from the kid down the street who’s still in high school. What a life. What’s the point of wanting to earn money if you’re not going to enjoy that money once in a while. A vehicle isn’t an investment, it’s one of those few exceptions where you can afford to take a loss.
Saving is good, its good to save. But this article shows just how much of a tight-stingy, “no one wants to be around” type of person you are. Life is unpredictable people, one day everyone dies. Build wealth and be smart but just remember you’re not guaranteed anything. Keep waiting until your 65 and watch your money grow, maybe if you’re lucky to get to 65 (and physically able) then you can finally enjoy it. Hopefully you’re not depressed, could have easily been driving a nice newer vehicle throughout your life, but instead you opted to drive an out-dated 10-year old economical piece of transport compared to everyone else.
Some people enjoy the boring lifestyle, they’ll never truly learn to live. Follow this article only if you’re in financial trouble, then once you’re out of financial trouble, celebrate by buying a nice car, drive it and enjoy it for 10+ years.
“…you opted to drive an out-dated 10-year old economical piece of transport compared to everyone else….Some people enjoy the boring lifestyle, they’ll never truly learn to live.”
If you spend your life comparing yourself to everyone else, you’ll never be happy. It’s easy to spot an unhappy person…those who call others “boring”, “tight-stingy”, and the kind that “no one wants to be around”. Does writing this post validate yourself?
It sounds like you are one of those people who needs to spend money on material goods to enjoy life. I know a lot of such people, several of whom lost their home around 2009. Congratulations, knock yourself out. But don’t come to these web sites complaining about the high cost of health care, insurance, and other necessities that make life, as you indicate, “unpredictable.”
Did it ever occur to you that some people might enjoy saving money so they can feel more financially secure? Or pass it on to children?
Unimpressed with the article. I’m 48, and have paid cash and financed. Bottom line, buy what you can afford. 1/10 rule is really foolish if your 3500 car ( especially if it’s a BMW or Lexus ) breaks down, like all machines do. Get a bike if you are really concerned about affordable transportation. A 4,000.00 dollar car is very often junk. I’m not riding in junk. I dont wear junk and I dont want to live in junk. Cut costs at the restaurant or on the electronic gadgets. Personal choice of where I want my money. I personally have no interest in riding sketchy only so I can blindly put my money in a 401k managed by a guy needing to upgrade his 2014 LS460 to a 2105 model by playing with my money. No thanks Wall street. At least I can ride in my money or buy real estate.
Awesome points. I have some accountant friends who religiously pay brand new luxury car payments from the moment that they landed jobs out of university. The worst mistake I can ever imagine.
BeSmartRich
I suppose it depends on what your into, I’m an accountant myself and drive a brand new car. I realize the immense savings to be had by purchasing used. The thing is, my salary is high enough that I can afford all of my other living expenses, saving a healthy amount for retirement, and purchase a brand new car.
Sure if I bought a used car I could have a larger pile of gold when it comes time for retirement, but at what point do you become like the character Smaug from the Hobbit? I mean money can only bring so much happiness, after which point it’s better to diversify into other areas that bring joy. My first priorities are my family and retirement, but after that I allow myself to splurge on my vehicle. I don’t care for fancy clothes, food, vacations, etc. Heck, when I travel I don’t even get a hotel 90% of the time, I usually just find somewhere to pitch a tent.
I guess what I’m getting at is sure, a new car is a “waste” of money, but what if purchasing myself a new car brings me more marginal utility than purchase another share of stock?
Killer rule Sam, I followed it and I’m glad I did :)
I stumbled onto this website while doing some research, and as I am currently in the process of buying a new car, took a look at this article. While I feel you make some good points, I tend to agree with those who say that this may be an extreme “rule” and not be viable or even reasonable for many people. Also, shouldn’t we look at someone’s bigger financial picture, rather than focusing on a hard guideline for one specific category?
I am an admitted “car guy”. I drive for work, and my cars are more than Point A to Point B transportation devices (no, I do not deduct my vehicle on my taxes). That being said, obviously I prioritize more spending on a car than your guideline recommends. I am 28 years old, and earn approximately $90k gross annually. No consumer debt, and my housing totals 7% of my gross income. I save a total of approximately 38% of my gross income (combination of pre- and post-tax investments and liquid cash). My current net worth is approximately $150k. My current truck is a 2009 Tacoma valued at $15k, with no lien. It now has 135k miles on it. Now, according to your guideline, I should keep that truck (in fact, even it’s current value is 2x more than I should spend). However (and I suppose here is my real question) – if my net new car purchase is $30k ($50k -$20k cash/trade), and my total debt to income is now approximately 18% with a Debt Service Coverage (net income/debt payments) of over 3x, is that not still being financially conservative and smart? I do not swap cars often, and this is a 10-15 year vehicle for me. You could argue, I suppose, that my average vehicle cost is $3k/year (although that would be inaccurate).
Further, expecting a $8,000 car to last as long as a new one is a pretty agressive assumption. Yes, cars today are more reliable than they used to be. But they’re still mechanical – they wear, and things break. I had a 1995 Toyota Avalon in college – to this day, still the best car I ever owned. I bought it for $5,000 in 2004 with cash. It had 130k miles on it, and was in immaculate condition (still had original plastic coverings in some places!) with a full service history. That being said, I still put over $2,500 in repairs in it by the time it was totaled via a deer in 2008. Things that were no fault of the car – shocks, struts, tires, brakes, belts. In your previous articles regarding your old Land Rover, you talk about how little you’ve put in it and how great a car it’s been. However, you also mention numerous deferred maintenance items that made the car a potential safety and mechanical hazard (check engine light, brakes, bald tires, possible faulty airbags, etc.). What’s better – spending a reasonable amount of money to on a newer/nicer car to keep yourself and others safe and in dependable transportation, or deferring maintenance and safety items just so you can say you were more frugal? Personally, I’ll choose the former.
Sorry for the long post. I just think it’s important we look at an entire financial picture, as opposed to touting hard and fast rules that don’t fit many (or most?) situations. Critcizing people for spending more on a car than you would, when they may not have the same financial goals as you, gets us nowhere. Instead we need to focus on educating people on budgeting, financial planning, and understanding their total debt load. For instance, I have no dreams of retiring at 35, owning a Hawaii home, and spend very little on travel. That does not make me any less financially responsible because I drive a car above 10% of my gross income.
“I do not swap cars often, and this is a 10-15 year vehicle for me.”
“My current truck is a 2009 Tacoma valued at $15k”
“I am currently in the process of buying a new car”
Something is amiss here.
I didn’t explain my situation fully, which is my fault. When I bought my 2009 Tacoma (slightly used), I drove my personal vehicle for work. In the 5.5 years I’ve owned it, I’ve put 140k miles on it. For the past 2 years I’ve had a company vehcile for when I do travel, so my annual mileage has gone from about 35k/year to around 10-15k. So while the Tacoma has not been around for 10 years, this next vehicle will be. Possibly even longer, depending on annual mileage. Hopefully that explains my situation a little better.
You will realize when you get old that you have your money in the bank and never used it in right way. Car is not to take you from point A to point B. Drive a corvette, Audi R8, 911 and you will realize…may be you won’t…Something is seriously wrong with you…see a doc as soon as you can!
1. Day to day, driving a slow car fast is more fun than driving a fast car slow.
2. Cheap and cheerful doesn’t have to be boring. Drive an old GTI or something.
3. If you play it right, you get old and have millions – you can spend your well-earned free time and drive *all the cars*.
I have a pretty slow ‘slow car’ — a 2010 Wrangler. With the soft top [up or down], I’d just say it is pretty terrifying to drive it faster than like 70 MPH… :)
I also have a 1993 Corvette, it is reasonably fast. I have to say it is an utter blast at any speed.
I went overboard on my first new car. I splurged on a $34k Toyota 4-Runner. I paid it off in about 3 months to avoid interest. I was making a considerable salary back then as a consultant, but it was still about 1/5 of my annual salary. I’ve now had the truck just over 15 years. Still driving it!
Seems like it has been a good investment for me… since I haven’t had a car payment in 15 years and my insurance goes down every year. I no longer carry collision on it either… so that helps keep costs low. And it still looks and rides good. I love it.
Just wondering if I’ve been wrong all these years in thinking it was a good investment.
Nice job Marco holding it for 15 years! I love them old 4Runners.
I guess it depends on what you would have done with the $34,000. Invest? Buy a property, etc.
But, the main reason for the 1/10th rule is to protect the middle glass from desire and blowing up their cash flow and retirement.
Yeah after I posted I ran some calculators. It seems if I had taken 20k and invested it for 15 years is be sitting on $70k right now.
I should have nabbed a 7-8 year old 4-Runner and still been driving it today. With 70 grand in the bank! Dang it!
I have liked your rule for years now and got a chance to apply it to my recent car purchase. Had to replace my wife’s car because it was hit and totaled by someone without insurance. Ended up buying a 2008 Lexus ES350 from a private seller well under 10% of our annual income. My wife loves it. Your rule is great but it falls apart at the very low income ranges… Public transportation isn’t always an option and not everyone is willing to move away from family and friends to have access to better job opportunities.
Since when is buying a nice car about the image? It’s about the experience. I bought a car that cost me about 50% of my annual income, that might sound like a lot to many of the readers here. The thing is though, I get a lot of enjoyment out of my ride. I use it to participate in track days and autocross events on a regular basis. I’m not sure I would be a very happy person without it, some of you might find enjoyment in saving massive amounts of money for retirement. Me on the other hand, I’m quiet content putting away 15% for retirement, splurging on a car, and budgeting like crazy everywhere else. It’s what makes me happy and I wouldn’t change it.
I can agree the driving experience can be a huge factor in what car you buy but there is one car that eliminates the excuses for overspending to have fun behind the wheel. Have you ever heard of that the Miata?;) It’s often praised as one of the best driver’s cars available. It’s the most raced car on the planet and they can be had for next to nothing. There are driver’s cars for almost any budget. What kind of car are you driving if you don’t mind me asking?
I have a 2014 Focus ST, I use it as my daily driver (over 30,000 mile / yr in commuting to clients).
While the Miata is a great car, I’m not sure I could get one for 1/10th of my income that would be reliable enough to drive 500+ mile week and race on the weekend.
I gotta say, after 10 months of driving a $20,000 2015 Honda Fit, I feel like I’m driving an amazing luxury car every day. And yes, I’ve driven race cars before. The size, convenience, handling, gas mileage, and texhnigy all Rock!
The Honda Fit is a great car, I’v always wanted one. Ultimately they’re a bit pricey for me though. Honda just doesn’t negotiate on their cars the way the American brands do.
My previous car was a 1995 Honda Civic that I paid $2,000 for and drove for five years (I actually still own it), it was however turning into a maintenance nightmare. I meant to purchase a new Civic to replace it, but ended up in my Focus because the dealers were more willing to work with me on pricing. I got my Focus OTD for $5,000 less than the sticker price.
Gotcha. Yeah, the cars have low margins so Honda doesn’t negotiate too much.
And for those who want a cheap and easy upgrade to spice up the car, just tint the windows. Looks sweet.
Here’s the thing. the percentage of gross income idea is solid, but if you save money specifically for it, then it’s not so bad. I had the cash (slightly over the 10 percent rule but not too much), but the credit union offered 2.71 percent.. I took their money and put mine in dividend stocks paying between 2.0 and 3.4 percent. I could be wrong.. Doesn’t seem like a ‘huge’ risk though. And I was getting the full coverage 100/300/100 2.5k deductible insurance on it anyway…..
I think the 10% rule is pretty solid, though may be a tough pill to swallow for a lot of folks, unless the average household income hit $240K/year when I wasn’t looking. I have a couple of follow-up questions/comments:
1. Clearly, spending 10% of income on a new car, and then trading it in for a new car at 10% of your income every year, would not be a good application of this rule. How long should I go between buying cars?
2. Is there a sweet spot for value in a used car based on how old it is? I.e. A new car depreciates the most in it’s first year (plus you’ve paid sales tax on it), so getting a car a couple years old makes sense. At some point, however, reliability becomes an issue, which is why buying a 20-year-old car might not be smart. Basically, I’m trying to find out at what age a car’s depreciation becomes linear for the subsequent ~5 years (or however long we should own a car).
3. Perhaps a better question, which encompasses both #1 and #2, is how much should I spend on a car per year? E.g. Would 2% of gross income on car expenses (in perpetuity) make sense? Total cost would include car payments (or equivalent pro-rated amounts if paying cash) and maintenance costs (to penalize buying a too-old clunker), and maybe insurance.
Thanks for the info, and congrats on the successful blog and side-gig with Personal Capital (I use their app and have chatted with their advisors – good folks).
Dave
Hi Dave,
After researching multiple blogs including this one here are my opinions followed by how I plan to proceed.
1: Go as long as reasonable without buying a replacement car. Take that 10% monthly and set it aside in an investment to gather some interest or pay off high interest debts.
2: The sweet spot is a minimum of 3-4 years. https://www.edmunds.com/car-buying/how-fast-does-my-new-car-lose-value-infographic.html If I can get a well maintained four year old car with less than 60k miles that is at or below Kelley Blue Book fair market value and get it to last 6+ years I call that a win.
3: Ideally 10% or less of net monthly gross income goes to paying for transportation. If the vehicle is reliable save the remainder to build wealth.
This is where I plan to diverge from the 1/10 rule.
a. I currently own a 14 year old Nissan X-Terra which has some major engine problems and will probably cost well over 10% to properly repair and maintain. It is worth less than 10% of my income and still runs – barely.
b. If and when it dies I “have to” buy a replacement. I live in East Los Angeles County and 2.8 mile walk with my bad hip to and from a bus stop to work 5 days a week is not a sustainable and can lead to permanent injury.
c. A $5,500 is ideal and I’m looking, However I plan to keep the vehicle for 7+ years. I have no desire to spend 10+% every year to maintain an aging vehicle. (I might get lucky and find a 7 year old Honda at that price.)
Before reading this post I was planning on a $18k – 24k new car (total cost out the door) and ideally would keep that vehicle for at least 10 years.
If it doesn’t get damaged. A big assumption as each car I’ve owned has incurred some damage over that time and a body shop to repair.
After reading this post I’m planning to compromise in the following ways.
Saving 20% every month preparing a down payment that will make my financing less than 5% of my net monthly income over a 48 month loan.
A $16K 2-3 year old car out the door will require a $8,500 down payment to stay within my 5% goal. Anything more expensive will require a down payment of well over 50%.
Taking the 1/10 rule into account and modifying it really puts perspective on the real cost. 30% of my income seems reasonable while spreading the remaining 50% over 4 years with. While I’m saving that mythical $5,500 car may actually show up.
Originally, planned to finance a new car at over $400 a month. Now I can free up the difference and apply it to building investments and savings.
Hi as any 18 year old, smart financial decisions aren’t the first thing I think about when it comes to buying a car. Buying a car for only 1/10th ratio proves that the only reason you need a car is to get from point A to point B. There’s a ton of people out there as myself who spend 40-60% of our income on a car. It’s not the smartest financial decision to make and im aware of that, but car enthusiasts like myself set priorities on cars higher then what a typical car owner probably would. I think it really depends on how you prioritize things. It also depends on your own life because everyone is different. I’m lucky to have parents that do practically everything to give me the best life possible by providing me with necessities to the finer things in life. For me a bmw m3 is not a car any average joe gets to go from one place to another. Cars like those are bought by people with a passion that truly care about what they drive. It’s not what I NEED but I think when your young and crazy you’ll make stupid financial choices early without realizing, but one day I can look back to myself and say I made the best of it ,but hey that’s just me.
I disagree. When you’re young you should be saving as much as you can. The power of time and compounding interest can mean hundreds of thousands more for you, maybe millions, in the future. Take advantage of the situation you’re in right now having very few expenses and save what you can. When you get older its much harder to save with so many more expenses (kids, house, loans, etc).
But I will agree with you on one thing- most people need a car. A car is a tool to make money. You need it to get to work to make more money. A reliable car is insurance against losing your job and wasting time and money in a repair shop. A reliable car doesn’t and shouldn’t be a luxury purchase though. If you’ve got to spend 5 grand on a reliable car when you’re only making 30k, you’ve got to do that to get a job and get ahead. If you’re blessed with having public transportation that’s great, but make sure to weigh in the extra time that those transit systems take when you decide to buy a car. As they say, time is money.
The people you see driving around nice cars are doing so because they can take out a lease on it then write those expenses off as “business” expenses. Avoid the temptation to “keep up with the Jones'” because there will always be someone with something newer than you, better than you. Spend your money on experiences, vacations, trips with friends and loved ones- you’ll get more satisfaction out of that in life.
Hmm I’m going to take your advice and start making some smarter decisions. Thanks :)
It is not about having something against public transportation. It is about the accessibility of public transportation in a vast majority of the United States.
I just live in the Bay Area California (east bay to be more persistence). I decided to Google a couple routes via Google maps using public transportation versus using my car.
Work:
32 minutes via car
67 minutes via public transportation (walking to nearest bus station, taking BART, taking another bus, then walking over a mile to work).
Grocery store:
5 minutes via car
21 minutes via public transportation (walking to nearest bus station, transferring bus because there is no direct route to the store, walking to the store about a block)
Maybe you live in an area where public transportation is vastly superior to mine. Maybe you do not care about how much your personal time costs. Either way, your advise is only applicable to those who live in very specific areas and or do not care about their time. The majority of America is Rural or at minimum in the Suburbs. Anyone living in one of these areas should own a car as soon as physically possible for a variety of reasons in my opinion.
Apparently auto correct changed my misspelling of precise to persistence.
I don’t usually comment but the ridiculousness of this article has left me with no other option. According to the article anyone who makes $25,000 or less should not even own a car.. I’m not sure if the person who wrote this lived in a city or just made 100k a year at age 17 but that insanely impracticable. How can you even get around. And THEN used cars up to 75k.. I agree spending half of your income on a car is ridiculous but thats why they have car loans. Spending half your salary is equivalent to 10% of it a year for 5 years.. most new cars will make it 8-10 years before needing serious maintenance AND they have a warranty. The most important thing about car buying is buying something you are happy with because you’ll have to drive it everyday and I’d rather have payments on a car that I’m happy with than no payments on something without A/C
May I ask why you are against public transportation?
Maybe because it doesn’t exist unless you live in a big city?
I really wish for public transit(I so loathe driving), but the vast majority of the US lacks such. When my car recently wouldn’t start I got to do the 10 miles to the nearest rental place to my home on foot(the repair shop was in the opposite direction and the tow folks like to make it clear they aren’t taxis, They’ll drop you off if it is on the way, but otherwise you are outta luck, particularly in winter when they are busy).
Back when I was still unemployed and job hunting the average commute I was looking at was close to 45 minutes to an hour one way(which is about double the average commute in my area, most people try to move closer to their jobs). And I don’t even live in a particularly rural area, in fact I live in town, just not many jobs, particularly not after the economy tanked(not much population density, but compared to some areas in the states we are packed). So tell me my good fellow How someone is going to manage the equivalent of an 45 minute drive without a car or access to public transit(that would be about a 30 mile trip, so at least 10’ish hours walking for the average person or 3’ish hours on a bicycle if I recall base speeds correctly right)? I have heard there is a taxi service around here, but I imagine that would bleed you dry real fast. Even if halved for the average commute of my area, that is still quite a few hours spent in transit.
The bike might be doable, but I would wonder if those extra hours each day couldn’t be better spent. Say you got overtime instead of commute time? That would be a lot of extra money each year. Of course most employers wouldn’t give that much overtime. And even ignoring time. Ice and snow and sleet. I got snowed on in late March on my walk to the rental place. What do you think February is like? Frequently Below Zero for one. And the snows are bad enough(though infrequent thankfully) that you are considered insane if you don’t own a big truck or SUV for the winter. So yeah, a lot of people up here own a summer car and then their snow truck(often with a plow) so they can get to work in winter.
And the problem with cheap cars is the chance of scoring a lemon. The lower you go, the higher your chance. And unless you are mechanically inclined you really don’t want to end up with a lemon(had a co-worker go through two cars that way. Both had very major failures that would cost more than the car was worth to fix on pretty much the first day she had it). A lot of the cars running around 2.5-3k would require significant work to run reliably(I know, I had to go car hunting not much more than a year ago due to my old junker finally dying or at least choking. It would technically still run as long as you don’t need to go more than 10 or so miles in a single burst). I ended up going with a roughly 5k car(once plates, first 6 months insurance, taxes, etc were all on it) car rather than play mechanical roulette. My mechanical skills are equivalent to a D&D’s Barbarian’s skill in literacy.
Wow, I’m impressed you walked 10 miles! Sounds like a scene out of a movie :)
If you can walk 10 miles, then you can definitely bike 10 miles. That would be like a walk in the park in comparison.
I hear you on freezing winter weather for months a year. $5K for a vehicle sounds very reasonable. I drove a $8K vehicle purchased used back in 2005, and drove it until 2014. For the last five years, it was probably only worth $3-4K.
I enjoy your writing! Thx for sharing.
I would have to disagree with this in the sense that SO many cars in the $5000 range (based on $50,000 salary obviously) are very unreliable. a $5000 car will most likely have very high miles and/or be 10+ years old, which equates to more repairs. I think INITIALLY when in your early 20s, having a cheap car like that while reducing other debt and establishing your career makes perfect sense. over the life of that initial car, saving up for a car over the 5 year ownership, for example, allows you to buy something maybe at the 25 – 40% of your income level, which will (typically) be much more reliable for the long term. 10% just seems too low for a legitimate day to day, high-use vehicle that you’re wanting to last.
Also, this doesn’t apply to folks like me who are car enthusiasts and see a car as more than just a chunk of metal on wheels :)
I know what you mean about car enthusiasts seeing a car as more than a chunk of metal. Besides the STi I also owned a 06 Evo IX and an Eagle TSi Talon for a short period of time. They were all a blast but all of these cars set me back by constantly maintaining or modifying them. They were also all 30% or less of my income (bought the TSi outright).
A lot of the people I met with GTR’s, Lambo’s, etc. all did so by being patient and getting that financial foundation down first. Even if they financed or leased the vehicle that had enough cash to buy their car many times over if they ever wanted.
Our plan is to take the extra cash freed up by having a Hyundai, no consumer debt, and decent paying jobs and use it towards buying and completely paying off rental properties. Then at some point using the assets to pay for the fun toys, that’s the plan at least.
The hardest part is being patient, it’ll prob. take the wife and I 10-15 years to get to that point. By then we’ll be able to look at buying something a little more exotic than a 4 banger turbo and do so with cash.
I purchased a $5K Hyundai Elantra out right well over a year ago with 130K miles. I only spent $125 on repairs so far. The passenger headlight wire became loose.
On average I spend around $150 a month on my car, which is just gas and full coverage insurance. My last car was a performance car (07 Subaru STI) which was $20K I was easily dropping between $500-700 a month. This was for car payment, insurance, and gas.
I took the savings from downgrading and was able to pay off the rest of my consumer debt within a year. Plan on driving the Hyundai for 2-4 more years hopefully. I also plan on putting the extra income to work in an index fund along with a few other things.
7-15 years from now if I’ve planned everything alright and have a little luck, hopefully I’ll be in a position to buy a similar car to my Subaru out right without thinking about.
I came across this blog while looking for a total cost of ownership figures, as I am thinking about buying a new car.
The one thing I see missing, both in the article and comments, is that the maintenance cost of an older/used car is not taken into account.
According to the 1/10th rule, a person or family making 60k$ annually should buy a 6k$ car … but that is an old car and will require maintenance in order to remain reliable.
Is there a web site that has information on maintenance cost (of different brands/models) beyond 5 years? Preferably until 15 years, as I would like to keep a paid off car as long as possible. :)
Will a $6,000 car require a lot of maintenance though? I owned a 5-14 year old Land Rover (owned 10 years), and the average maintenance cost was about $300 a year.
Well, that is why I am searching for large datasets.
Both cars I had required several times more in the similar timeframe, though I was erring on the side of caution/reliability.
Let’s not over-analyze what has been suggested as a good rule-of-thumb for the average consumer. The 1/10 advice is solid – make your adjustments for your particular circumstance from there.
Jamie, when it comes to your family and safety I say forget the rules and buy what you feel is the safest for yourself. If something happens you’d choose a life over $$$ any day.
My family income is about $700K/year and only small mortgage debt which should be gone by age 40. My 12 year old Honda (worth about $2K) is getting long in the tooth and I’m concerned re: safety now that I have 2 kids. The other car is a 2013 Subaru for which we paid cash ~40K.
I’m fairly frugal – I couldn’t imagine spending $70K on a car (or is it 5% each for 2 cars?), but definitely need a safer upgrade to my old clunker…
So would you recommend that our 2nd car cost $30K to total ? (ie. 10% for both cars)
Thanks!
Wait, are the incomes in the chart before tax or after tax?
I think 1/10th rule is excessive. It sounds much better to do a 1/5th rule…but only if your 25k or higher.
All rules that people don’t like are excessive. Though, actually you mean arbitrary not excessive.
Making $30,000 and buying a $3K car instead of a $6K car is actually probably a bigger saving than for a person making $90,000 buying a $9K car instead of an $18K car.
The point of the article is that a car is incredible money suck at any income level (both as an immediate lost opportunity cost and an ongoing running cost). So, spend less on it.
Ok, let me get this straight…
I make $130,000 a year and average a 3% cost of living pay raise per year for the last 11 years. I also have had promotions but my yearly cost of living increase is 3%. I’m not going to get into the fact that this barely accounts for inflation as in 10 years things will cost more, but hey you are buying the car at the beginning of this theoretical 10 year plan and the cost will not change for this 10 year span.
So in 10 years, I will make $1.49 million, so this theoretical $13,000 car will be .872% of my 10 year gross income. Amortized out (even though paying cash up front) it would cost exactly $25 a week. So you are saying that my car should cost me less than going to the movies with my girlfriend each week?
For you a car may just be a means of getting from point A to point B. For many of us that spend more than an hour (I am about 1.5 hours a day round trip) in our car every day for 48 weeks a year; our car is a second home. I like having a nice car with all the amenities available to me, and those features mean much more to me than what I would spend on a trip to the movies.
Now, I do not own a $13,000 car. I own a $50,000 car (on purchase 5 years ago), and is currently worth ~20,000 today. At that rate of depreciation there will be approximately $8000 in equity at the 10 year mark. This puts me at ~$80 a week for my car over the 10 year span. and I think the additional $55 a wee was one of my best investments. By investment, I do not mean from a fiscal point of view, rather a quality of life point of view.
Sorry mate, there is a difference between being fiscally responsible and just being a penny pincher. Quality of life matters to many of us. I will not go into details, but I had someone taken from me well before their time. I do not advocate spending like you are about to die, but if you are simply living so that you build a bank account, you are not really living.
Not everyone gets enjoyment from a car, and those people should indeed buy the cheapest rust bucket they can find. For those of us who get a lot of enjoyment from our car, your 10% rule is not logical at all.
This is how I think of it too. I’ve been a real estate agent for 10, It has always been crucial for me to have a luxurious late-model car to drive buyers around in when showing houses. In 2007 I bought a 2004 Mercedes E320 that had an MSRP of $51,000 for $26,000, I sold in in 2010 for $9,000. In 2010 I bought a 2008 BMW 750Li that had an MSRP of $98,000 for $41,000. I sold it in Jan 2014 for $25,000. In Jan 2014 I bought a 2012 BMW 750Li with an MSRP of $103,500 for $47,500 which I still drive right now and it is still worth $42,000.
26k – 9k + 41k – 25k + 47.5k – 42k = 38.5k.
$38,500 total I’ve spent on cars in 92 months which comes out to around $420/mo for fantastic luxury cars with all the bells and whistles on them. You can barely lease the cheapest BMW or Mercedes for that price and I’ve been driving the much more higher end models for years on that price. I don’t make close to $385,000 a year so I guess I’m not following the 10k rule but I think its safe to say I’m winning.
Love it! Your comment made me smile it with out a doubt sounds like you are winning. Good for you that’s awesome!
I just started the best paying job I have ever had and I am currently driving a $685 full size v8 winter beater station wagon (anybody in in the Great Lakes region feels my pain right about now). 131k (maybe 231k) and it keeps on chugging 17mpg at a time. It is under 1/100th of my salary, I think I deserve a cookie.
Of course, this doesn’t account for how much the rest of my cars “initial purchase price” have been over the years. I’ve never exceeded the 1/10 per year rule, but I wouldn’t recommend it to the faint of heart.
Long live GM muscle!
Interesting article, but honestly, this is ridiculous advice! I mean really?!
A doctor making 250,000+ a year is going to be driving around a in a god-damn Honda Accord?!!
you must be kidding!
This is the worst advice I’ve ever heard. if you make 100k a year, save like 10-20% of the car’s cost for down payment, and paying the rest in monthly payments for 5 years, there is NO way you couldn’t afford a 60k-80k car, that is if you insist on buying new. Personally, I would let a 100k+ Audi RS7 depreciate 50k after 3-4 years, then i would buy it. The person who buys knew will always take the BIGGEST hit. Unless your paying mortage for like a 3,000,000 dollar house, which is stupid in it’s own way as well. Just my 2 cents.
What’s wrong with a Honda Accord? It is SWEET!
The doctor who joined medical school in 2000 thought she was going to make $400,000 upon graduation. Now they are starting work at $200,000 with lots of debt.
You’re telling me they should now go ahead and buy a $60,000-$80,000 car, which requires $100,000 in GROSS income to earn?
Perhaps you should read, “The Average Net Worth For The Above Average Person“. Do you mind sharing your age, income, and net worth so we have perspective on where you are coming from?
thx
I’m somewhat in agreement with Eduardo. Beyond a certain annual salary, liquidity amount, and debt-to-income ratio, the ten-percent heuristic breaks down, in my view. That is, you won’t “feel” the impact of either outright buying, financing, or leasing a vehicle worth more than ten-percent of your annual, after-tax income. Likewise, you won’t “feel” the depreciation of the vehicle, let alone the potential return on investment of that amount over a multi-year timespan.
It’s difficult to quantify where the break-down point occurs. My sense is that if you have no debt, liquidity at least either equal to or double your annual salary and investment return, and are making over a $250k per year before taxes, then you could comfortably extend the ten-percent heuristic to anywhere from twenty to forty percent. Moreover, you should own a house outright and be maximizing your annual retirement contributions. Before these conditions are met, you will likely “feel” the price of the car on either your monthly expenditures or your potential investment earnings if you exceed the ten-percent heuristic. You can incorporate net worth into the mix, but I feel that including illiquid assets can misrepresent your purchasing capability.
In my case, last year, I had an allocation for a 991.2 GT3, which was around $155k after I had included various options. According to the ten-percent heuristic, I should be making over $1.5M per year, pre-tax. I definitely don’t.
However, I do meet all of the criteria that I outlined. I have a few million in tangible and intangible assets; the intangible assets are primarily patents, which also generate annual license fees. Several times my annual salary is liquid. I have no mortgage and only worry about property taxes, upkeep, and annual home and car insurance. I have no debt of any other kind and never had any student loans to worry about. I have aggressively pared down my monthly expenses to just food, fuel, and sundry purchases that don’t exceed a few hundred dollars. I have no utilities payments, aside from sewer-usage fees, since my house has a full solar system and a water well with a treatment system. My solar system actually generates passive income too. My job is essentially a well-paying hobby, so that cuts back on most of my entertainment costs. I also travel the world, for free, several times per year as part of it and mix either low-or no-cost vacations into those trips. I maximize my annual 401(k)-equivalent and IRA retirement contributions. I funnel more than two-thirds of my after-tax salary into a mixture of savings and additional investments.
Let’s now do a comparative analysis. Assume an investment account with a balance of $2M and annual contributions of $120k. With a bullish 7% annual return rate, compounded over four years, I would have a net gain of $1,191.6k. Adding the price of the GT3 to the annual contributions over that timespan would yield a net gain of $1,375.7k. The difference between the two returns is around $184k. Buying the GT3 meant that I would be out the $155k price of the car and a hypothetical $29k gain from the second scenario. However, that seemingly non-negligible gain becomes almost negligible when you compare it against either the cumulative income during that four-year period or the cumulative annual contributions. I certainly wouldn’t “feel” the loss of $29k during that timeframe. I did notice the loss associated with purchasing the car, though, which was mainly psychological; that is, I’d look at my account and notice that it was less than it normally would be. Buying it didn’t impact my saving and investment targets in the slightest.
In short, could I have invested that money? Sure. Would it have made a difference? Probably not one that I would “feel”. It wouldn’t change my lifestyle, cause me to stop saving, and so forth. Moreover, given historical trends with Porsche GT cars, I’ll also likely be able to recoup either most or all of the original price of the GT3 should I choose to sell it within the next few years.
I don’t know.. I have a friend who is a partner in his law firm making around $200k. As far as I know, he still drives the same Toyota Scion xb he had in college 10 years ago. Would you rather look rich or be rich?
Eduardo,
Statistically, doctors are the second worst financial managers of any “highly paid” profession. (Athletes are #1). Your hypothetical doctor is probably not a good example for smart financial decisions.
My wife and I are both engineers and together we make well over $250,000. We just splurged on a brand new Mazda SUV $28K. We paid cash for the car and our house is paid off. I drive an 11 year old truck. But we would not have the same financial strength if we took out huge car loans and drove Audi’s.
I hope someday the average American figures out that car debt is the WORST type of debt. It completely wrecks your monthly cash flow and wealth building. I think it’s even worse than credit card debt! At least credit cards will limit an individual’s stupidity. You can walk into a dealership and go into $80K car debt in 15 minutes.
How is this relevant to me in India when a HIGHLY paid skilled engineer earns $800 a month.
Great read! I’ve been working as a dentist for three years, and I just bought a new Accord with a pretty nice down payment that I saved for two years. I plan to keep this car for years to come, hoping that I can drive it until it reaches 300k (like my last Honda did)!
Glad that I’ve read this article, because lots of my dental school friends are riddled with loan debt, but are out purchasing BMWs and Audis. I just want to be happy doing what I do, minus the headache of paying 500+ a month for a car payment over six years…
Interesting article. I have a friend with a salary of $1 million a year, with a net worth of $10m. Do you think he could afford a lamborghini aventador (400-450k) or a bentley flying spur (250k) or a rolls royce (400-500k)? He has two kids and their college is paid for.
The author also has a 5% net worth rule; as it sounds, you can purchase a car up to 5% of your net worth. That should cover your buddy for any of the cars you listed; and it doesn’t matter where the kids are in life.
Here it is. The Net Worth Rule For Car Buying
My guess is that this rule is for the excessively frugal individual or someone with little to no savings. There is no return on investment when talking about a car unless you’re talking about the intangible return of gratification from owning a vehicle you thoroughly enjoy or the amount of convenience it provides. You’re not going to get any money back out of it that is equal to or greater than what you paid for it and put in to it.
I bought a challenger hellcat after saving $150k while still investing in my 401k. My family was upset because I’m young (28), but the satisfaction of owning this vehicle has been well worth it. It is definitely a car I will have for the rest of my life. I only drive it about 6k miles a year and baby it.
Could my money have gone elsewhere? Sure. But I’m not going to wait until I’m old to decide I want to enjoy life. Plus I’ll probably never have a job that pays $650k (the hellcat was $65k). I still have access to first time home buyer programs and probably will keep that until I’m in my early thirties. I live in an area where houses are very expensive so that wasn’t a viable option for me. I also have no debt so that was not a burden on my shoulders when I made the purchase.
If you’re still paying loans or you don’t have much in savings then this rule is definitely something you should consider. If you have a decent amount of savings and a decent salary, maybe consider something a little less frugal. You shouldn’t spend more than you can afford even with credit. However, don’t be afraid to spend on yourself. You can plan all you want for the future, but what if the stock market crashes, what if you get sick and can’t do things you enjoy, or what if you die? Was never buying something nice that you would have enjoyed for those years worth it?
Be smart with your money, know the consequences of your actions, don’t be afraid to enjoy the finer things in life, but don’t be a fool. I may have a job that pays well and a $65k car, but I also have 2 roommates, only eat out once a week, and buy everything on Craigslist or somewhere on sale. Spending once isn’t going to ruin your financial future, but doing it on a regular basis is guaranteed failure.
Whatever makes you happy mate. What is your net worth currently?
Check out my post: The Average Net Worth For The Above Average Person. This is the #1 article in Google when someone searches for average net worth.
My only fear is like many of us who end up working for 10-15 years, we start burning out. And when we no longer want to work, we begin to regret the overconsumption we made when young that robs us of freedom and opportunity when we are tired.
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.
I would say a single person making $50K in a smaller town should be even MORE disciplined in saving money. If s/he starts spending aggressively now, the bad habits will cary on and really weigh down his/her wealth accumulating abilities.
But again, my 1/10th rule is just a guideline. It’s not the end all, be all rule. But it is something that I believe will help plenty of people build more wealth over time.
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.
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.
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.
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.
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.
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!
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.
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.
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’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!
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
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?
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.
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’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.
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.
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/
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