If you’re looking for a car buying rule, let me introduce you to the 1/10th rule for car buying. The 1/10th rule will help you spend responsibly, reduce your car ownership stress, and boost your net worth over time.
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.
The government’s $4,000 rebate for trading in your car ended up hurting hundred of thousands of people’s finances instead. With a median household income of only around $50,221 at the time, spending $24,000 on a new car was clearly too much.
Instead of buying a $24,000 car in 2009, if you had invested the $24,000 in the S&P 500, you would now have over $70,000 in 2021. That’s quite an opportunity cost for buying a new car!
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 Car Buying Rule To Follow: The 1/10th Rule
The #1 car buying rule to follow is my 1/10th Rule for car buying. The rule states that you should spend no more than 1/10th your gross annual income on the purchase price of a car. The car can be new or old, it doesn’t matter so long as the car costs 10% of your annual gross income or less.
If you make the median per capita income of ~$42,000 a year, limit your vehicle purchase price to $4,200. If your family earns the median household income of $68,000 a year, then limit your car purchase price to $6,800. Absolutely do not go and spend $36,000, the absurdly high median car price today!
If you absolutely want to buy a car that costs $36,000, then shoot to make at least $360,000 a year in household income. You might scoff at the necessity to make such a high amount. However, it takes at least $300,000 a year to live a middle class lifestyle with a family in a big city today.
If you actually want to save for college, save for retirement, take care of your parents, buy a home, and not stress out about money when you’re old, please keep your car purchase to at most 10% of your annual gross income.
Once you buy a car following my 1/10th rule, your goal should be to own your car for at least five years, if not 10+ years. Don’t go selling your car every 2-3 years like most Americans do. If you do, you don’t experience the full value of the car. Further, you end up paying wasteful sales taxes each time you buy a new or new used car.
Buying a car you cannot afford is the #1 way to financial mediocrity. Since Financial Samurai was founded in 2009, my goal is to help readers achieve financial freedom sooner, rather than later. Ideally, I’d like every reader to achieve an above average net worth for their age.
Financial independence is worth it. A car you cannot comfortably afford is a great headwind.
Why You Shouldn’t Spend More Than 10% Gross On A Car
Let’s go through specific reasons why you should follow my 1/10th rule for car buying.
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) More 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.
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.
Like Silas does in The Da Vinci Code, whip yourself into submission! OK, maybe don’t go to that extreme. However, 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 1990s 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.
Please note that there is NO SHAME in owning a car that’s worth less than $10,000. I bought a second-hand Land Rover Discovery II for $8,000 and drove it for 10 years until it was worth less than $2,000. The car was great and loads of fun. With the money saved from not buying a more expensive car, I diligently invested the money in stocks and real estate.
Put your ego aside so you can have true wealth: all the freedom in the world. Your goal should be to generate enough passive income as possible so you don’t have to work and can spend your time as you please.
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. We’re all spending way more time at home now. Might as well try to make some side income online.
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 1/10th car buying 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.
Recommendations
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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. Going into debt to buy a depreciating asset is unwise. As you grow your wealth through savings and investments, make sure you stay on top of your net worth.
Sign up for Personal Capital, the best free financial tool on the web. I’ve been using them for free since 2012 and have seen my income and net worth skyrocket. The app keeps me motivated to spend smartly and invest wisely. There is no rewind button in life. Best to get your financial life in order.
I think that in 2020, 10% of your annual income is on the way too cheap side for an entire car. For one, that leaves the average consumer in the $4,000-$7,000 range which anyone who has ever shopped used cars knows that’s the “Goldilocks Zone”, as in the supply just doesn’t exist. I can also tell you that for that price you aren’t getting anything under 100,000 miles. I can also tell you as someone who has owned many cars in that price range and mileage that your WILL have expensive fixes to handle. In fact, any car over 100k miles needs to have the timing belt, water pump, serpentine belt, pulleys, fuel filter, spark plugs, and probably struts swapped out immediately to continue operating, which adds an extra $1000 at least. I’m someone who has to drive 300 miles a week commuting. That means you’re suggesting over 15,000 miles a year on a beater car for 10 straight years. Yeah, screw that buddy, I’ll spend a couple extra thousand and get a warranted car with a few lower miles. 25% of income seems more reasonable for people who aren’t Mr.Krabs. I spent that much about 4 years ago and now I make almost twice as much so it works out well. The car still hasn’t crossed 100k and it’s still worth about 10% of my yearly income. Nothing horrible happened and my car is better than yours.
You obviously haven’t heard of Tesla. Cheap cost to operate, very little maintenance, and with full self driving coming it is an appreciating asset.
I’ve heard of Tesla. I’ve been an investor in the company since 2018 and am very happy. I actually know a couple people who could have invested in Tesla in 2018, but bought a Tesla instead. Ouch. They’d have over $500,000 in gains today.
Exactly. Instead, they sad and poor today. If they had only thought about how much happier and better than other they could have been if they had purchased the stock instead.
I bought a Tesla. Yes. I would have been better off financially if in invested the money paid for the Tesla, in Tesla stock. However, getting to know the car and see how awesome it was made me decide to invest in Tesla too. Not so many stock but still. So, buying the Tesla was a sound investment. After three years it is still a joy to drive and I don’t regret anything. Life is too short for that.
I bought A a tesla model X and a model S and I have never had an issue with money. It might also be that I make over 500,000$ in anual household income A year. I agree that tesla’s are amazing and I still love to drive them. my other car’s were BMW and audis but I say that tesla is way better! I saw up there the cars you should buy but I say if you can afford that car and it’s what you like there is no problem buying it! So I say tesla 100% all the way.
What if my company pays for car worth 25% of my Gross annual income , and, every 4 years I am entitled for new car ? Company pays for insurance also every year.
If I don’t buy the car then amount of car is paid to me in 48 installments, after 30% tax deduction.
Will this 10% Rule will have relaxation to 25 % ?
Why are there so many replies here looking to cheat. I remember in school where teachers would discourage cheating in an exam by say, “If you cheat you only fool yourself.” That didn’t necessarily seem to be the case though.
But this is like dieting: cheating will only postpone the goal of becoming independently wealthy, and being able to retire early if desired. You can spend it now, or save and invest and have much more later.
Putting some numbers on this: we’ll assume an income of $100K. The company will pay $25K toward the cost of a car over 4-years. And I’m not really clear what Dinkar was saying, so I’m going to assume it means that he can opt to get cash of $6,250 per year, plus insurance ($750) and buy whatever car he wants, or use a bus or bike. So Dinkar’s income for the purpose of this column is $107K, and therefore he can afford a car valued at $10.7K, which he should drive for as long as he can.
So the rule gets relaxed from 10% to 10.7%!
(Note, this really all goes out of the window in the face of the pandemic, and if there is a real societal and cultural shift in how we approach work and heading to the daily office, we may change our approach and fully be on board with your 10% rule if cars become kind of useless and collect dust in our garages).
In the old days before 2020, we treated our cars almost like a sanctuary to how we treat our home, with respect and care, as it’s a place where we spend at minimum one hour a day, and at *least* 8 hours a week in. That’s around 400 hours a year in our vehicles at the very lowest range, without factoring road trips or longer drives for site visits and other business needs. I really don’t think someone making 200k a year should be schlepping it in a 10k car (if a family of two vehicles to get around) under your guidelines.
Where I live, browsing on Autotrader, that’s a really low bar unless you love working on vehicles or are best friends with a mechanic. You’re getting maybe a beat up 7 year old Corolla, a 10 year old RAV4 or 8 year old Nissan Rogue. *Generally* speaking you do not want to keep a vehicle much beyond 15 years of its life, so in the best case scenario, someone would own a 2013 Corolla and a 2012 Rogue (which by the way is way too small for a family of four, especially with car seats), in 2020! For a couple that makes *200K* a year! Frankly I think that is ridiculous and selling yourself short unless you live within minutes to rapid transit and can easily get around without a vehicle. Maybe applies if you’re in downtown Manhattan with a 5k mortgage I suppose, or right in the heart of San Francisco.
Spend 8 hours in a 2018 Acura and spend 8 hours in a 2012 Nissan and you can decide for yourself if it’s worth it, but to me it’s a no-brainer if it doesn’t significantly impact the rest of my life and my monetary allocation. The comfort, enjoyment and smile on my face – and I’m not a gearhead or a mechanic – is well worth buying a few less electronics or a marginally smaller home in my life. I’ve owned 20 year old Toyotas and have owned a 1 year old Lexus and it’s a complete world of difference when commuting.
I think a 25% rule is much more sensible and practical, and aligns better with most life stages if you have superb financial sense and management abilities. A family pulling in 120k can pick up 30k worth of car, maybe a single newish mid tier SUV like a RAV4, or CRV and a used Civic. Totally makes sense, is reasonable, fits their incomes compared to the rest of the country. 200k income – 50k of car, can go up to an almost new Honda Pilot and a lightly used Acura TLX. Again, very reasonable, great vehicles. No way this family should be driving 10 year old Corollas if they care at all about comfort and where they got to in life!
300K and you should be totally fine getting a brand new BMW 3 series and a Nissan Murano or used Lexus RX. And anyone who lives in a household with an income of 500k can pretty much own whatever Tesla, Range Rover and Jaguar models suit their fancy in their garage honestly unless they’re horrible with their money.
My spouse and I are middle-upper middle class (150-200k range of household income) and have absolutely no problems affording two cars that combined cost 1/3 of our annual gross income – a lightly used Japanese SUV and a lightly used BMW sedan. We are in excellent financial shape, including for retirement. The two key things are: we bought them used, and we paid with cash incurring no debt. Bad idea you say, at historically low interest rates? Well, we wanted to allot more of our available lending ability to acquiring more property that could be used as investable assets, and rates aren’t great for used vehicles. By going the lightly used route, we kept the warranty for major issues in the coming couple of years and have very nice and enjoyable vehicles to spend our time in, that we plan to keep for 8-10 years.
As always for most of the posts on this blog, we think the financial advice is brilliant and well worth listening to and considering, I just wanted to provide a contrarian anecdote for this point and do not feel we are completely out to lunch. Thanks for writing!
This may be OK if you have no savings or investments. But, if you have two paid for houses and a net worth of about 2M, what is the harm in a super-clean $15K car that you are NOT going to buy every year? Especially if the purchase price is only 10-15% of your cash on hand? Unlike most people, my cash on hand exceeds my annual income. I know cash is a terrible investment, but I keep it around just for situations like this.
I bought a used low-mile Accord earlier this year and gave it to our daughter. In some ways, that car is nicer than the one we are driving!
I totally get the depreciating versus appreciating assets idea. I’m a math professor. But, does that mean no one can never eat steak, only hamburger, and only from Aldi?
They make a damn good burger now for less than $10!
If you’ve got no debt, a multi million dollar net worth, and have your expenses under control, then go for it. Feel free to buy whatever you like.
This car buying rule is for people who are still on their financial journey and who are likely under a lot of debt and trying to max out their 401(k) and build passive income.
Love it when common sense is applied.
My employer determined that government-forced wfh has been so successful that half of us are authorized to do so forever. The remaining half just moved into a building that saves the company well over $1.3 million per year.
This in turn, has reduced my family need for two daily drivers. It’s time to put my beloved 18 year old F-150 Supercrew (with original spark plugs!) out to pasture.
Many thanks for helping re-index my priorities.
What are your thoughts about Car Subscription Services like Volvo Care? These subscriptions include car payment, insurance and maintenance with little money down. Each subscription also includes 15,000 miles/year, which sounds more than reasonable to me.
IMO, this Volvo program is horrible, overpriced and designed for someone just looking for a convenient option. If you separate the three transactions, it can cost less than $700. Depending on your area, a XC can cost from $400-$550 per month. Depending on your driving situation, insurance could be cheaper than $150 and Volvo offers complimentary maintenance. They just bundling everything . The price sounds right until you do research and realize you could be saving money.
I think everyone complaining that 1/10 is too little money is missing the entire point. It means the VAST majority of people can NOT afford a new car. They also can not afford an off lease used vehicle.
This rule does not mean if you make $50,000 a year you can afford to spend $5000 a year on a 10 year loan so therefore can afford a $50,000 car, it means you can only afford a $5000 car(purchase price). While this may shock you to think someone making six figures($100k/yr can only afford a $10,000 car but if you want to grow your wealth you can’t spend that much on a depreciating asset.
While I can hear all the naysayers saying, so how are full time minimum wage folks(lets assume 20k/yr @10/hr) meant to get around if they can only afford a $2000 car? The answer is buy a $2000 used car, or ride the bus and take uber’s. They realistically can not afford a vehicle. With Insurance, registration, drivers licenses and fuel alone they can easily spend $3k+ a year where if they did the math on what it would cost for ride sharing and public transport they would come out way ahead.
Not everyone can afford a vehicle, and most people can’t afford a new vehicle. The math doesn’t lie and its one of the main reasons most people never get out of the rat race.
This advice makes no sense. If anything, you should recommend that the monthly payment not exceed 10% of the gross (or take-home) monthly income. No one purchases a new (to them) car every year, and if you hold a car for 3-4 years, the effective amount you’re spending on the car each month is in the single-digits. The purpose of your advice should not be spend the least amount of money on everything you consume/purchase – but to make smart purchasing decisions that allow you to afford a better future.
Totally agree that this is more realistic!! And when there are zero other debt liabilities…then go for what you want to pay.
This article completely misses the forest for the trees. Author actually suggests not owning a car if you only make $20k/year; really? Good luck holding a job or having any quality of life whatsoever in just about any city without robust public transit (most of them).
Why even bother with housing? You can steal a tent from a homeless person and squat in the woods for free. Think about the savings!
While you’re at it, stop throwing money away on food. Grocery stores and restaurants throw out perfectly good food every day; dig through their dumpsters every night and you have and endless supply of food completely free! Better yet, just stop eating all together you don’t even have to waste time dumpster diving. You might die eventually but think of the cost savings of not being alive!
How on earth did you afford a computer and have the time to write this based on your own advice. You are either homeless and sharing you unhelpful point of views from a library computer, or you live in a household that has everything taken care of and no concept of anything but a ton of opinions on everything.
Thanks for telling me that I shouldn’t exceed 1/10th of my gross annual income when it comes to my new car purchase. I was about to look for Honda dealership around our area when I came across your article, although I’m really glad that I did. It taught me that I should think twice about my purchases especially if it is a big investment like a car.
Cars are NOT investments! They are depreciable assets.
Tell that to the guys that bought GT Porsches and doubled their money within a year. Or the guys that bought a LaFerraro for $1M and sold it for $4M 2 years later..
Zero debt. No mortgage. >$2m in total assets. Wife has a 7-year old Highlander XLE and I have a 3-year old VW GTI SE. We might replace the Toyota in another 7 or 8 years, or when the oldest kid is able to inherit it. The average term of ownership for a Highlander is 14-15 years anyway. The GTI might not last as long, even though it’s newer, simply because it sees more city driving and is a VW, but we’ll see. I do plan to replace it with a VW ID GTI, assuming we get one, although the Honda e looks amazing… I doubt the US ever get sit though. Maybe an electric Civic SI though? Definitely electric. I drive 50) and my office has charging stations. Once the kids are out of school and either in college or working we won’t need a Family Truckster like a Highlander and we plan to get something smaller, likely hybrid or electric, depending on infrastructure. We’ll need something with more 500 miles of range to drive to family.
ANYWAY, point being, this article is obviously directed at people who don’t have a solid grasp of their finances or are utter penny pinchers who probably also separate their double-ply toilet paper into single in order to save money. For the rest of us, just do your research and shop HARD. DOn’t get into a situation where you have to buy a car and accept the first deal that comes along. I spent months crafting the deal on my GTI – it’s a 2017, I bought it new after the ’18s had arrived for less than $25k (original sticker was $32k) out of state, pitting about 6 dealers against each other. It’s the EXACT car I wanted, I love it, and I’ll keep it until it’s no longer reliable, viable transportation. Get the car you need (meaning afford, in addition to basic practical requirements), and if you can, the car you want. Just be smart. Know your limitations. Don’t let someone take advantage of you. YOU have the high ground because YOU have the money. Take your time. Research. Shop. Negotiate. And if the deal sucks say See ya.
50, single, no kids, $125K/yr. My condo will be paid off in 10yrs. About $680K net worth not including equity in my condo. Paid $33K for my Camaro SS. I drive around 5-7K miles per year since I work remote (since 2014). I owe $13K on it, and will probably pay it off this year. I put away $ every month in savings plus a big chunk of my check to my 401K. I financed the car since I tend to trade cars too often when I pay cash (less paperwork involved). I don’t spend $ on travel, clothes..etc. Pretty frugal. Only vice is I like sports cars.
The sound, power, handling…..it feels like a supercar when I get behind the wheel but it cost nowhere near one. To me, it’s worth it. I get it if cars are just A to B to you. If not, why work your butt of everyday and not have something that is always exhilarating to you and you can afford it and still save? Instead I could driving a $12K car for cash, lose out the enjoyment, and save a little more $ potentially…… to have for what?
We share a similar story. I’m 27, earning $160K a year with no kids or debt. I have a net worth of $320K & travel about 4-5 times a year but I do not enjoy trips to the bar or expensive dinners.
I also have designated bank accounts and source of income for each initiative. Vacation is paid for by bank account bonuses and profit from my first side business. This budget resets annually and funds roll over. Investments are done from my salary. Cars are funded by straight profit from my second side business.
All said and done, I am in a comfortable financial position and make enough sacrifices to be able to afford a drive the car that I desire.
The 10% rule is great advice but it does not directly contribute to my level of happiness in life. I’m quite sure that I am just as happy or probably happier than those are solely follow the 10% rules. Congrats to those who do.
When I was 27, I was making $8/hr, lol. Only thing I don’t like about having a nice car is the “worrying” about it. The joy of driving it comes with keeping it relatively clean, not sending it through crappy car washes, avoiding curb rash, not wanting to park super close to other cars. I’ve had much cheaper cars and I don’t worry about any of that stuff. Wheel covers are easy as hell to clean too :)
Totally agree! Balance is everything in life.
How about people who see their car as a toy? I’m a “gear head” that enjoys racing and tinkering on my car. What’s an appropriate amount to spend on “hobbies and recreation” that could be lumped into the transportation category for use towards a vehicle.
Financial Samurai, I am 38 years old, my wife and I earn about 550k/yr and we are worth about 3.4mm. We have 2 cars. One was purchased new for 28k and one is worth 20k new but leased for 200/month. My wife wants to replace the leased car with an upgraded car when the lease expires. Does the 1/10 rule apply to total cars or per car? Also, do you use original cost or current cost? The most conservative application would be that our 2 cars combined should be max 55k and one was 28k, so we can spend 27k max on new car. We would lease that for 275/month but using purchase price as a barometer. I know it’s cheaper to own than lease but we feel leasing is a nice luxury and we are conservative so we are ok with this. Plus the tech improves so much every 3 years. The car my wife really wants is 60k and leases for 650/month but that’s outside the bounds of this guidance.
Total cars. So $55K maximum value of cars at purchase.
Leasing costs more than owning usually, but if you’re following the 1/10th rule, the potential extra cost doesn’t matter.
I leased a 2015 Honda fit for three years for about $215 a month. Business expense of course. It was a great little city car and I didn’t feel the lease payments one bit. It was nice to just hand over the keys to the dealer and not have to try and resell it on craigslist.
I then paid cash for a larger vehicle given we had a baby. I plan to on the vehicle for 10 years and I feel I got a good deal at the time.
Well if you want to stick with the FS, then you ought to go with his other metric for auto affordability: 5% of net worth. That would allow you to purchase $170K worth of vehicles. So with your current vehicle, she who must be obeyed can still shell out $140K and you’ll still be on the way to financial independence.
Being obsessed with material possessions is unhealthy, such as a car. On the flip side, being obsessed with building one’s net worth is also unhealthy.
In light of hyper consumerism and materialism, exhortations to be frugal, are certainly welcome, and people should listen to those voices, but people should also think critically about their own situations and apply the spirit behind the advices.
If you make $30k, spending $30k on a car is likely to be financially irresponsible. Buying a $3k used car that will likely expose you to higher risk of harm may also be irresponsible to your well being.
The ultimate goal in life isn’t to have the material possessions (or some ideal) of your dreams. It also isn’t to become financially independent by 40 either.
But who believes/cares about ultimate things anymore. Surely, only very few people.
In a city where public transport is widely available, one can wonder why even having a car. And if you consider a car a transportation tool and you don’t care for it, why bother? A car is a car, a dish washer is a dishwasher. In the midwest, public transportation is next to nothing. Where we live (in the state of Misery), you really NEED a car. In fact, since we both work, we need 2 cars. Car pooling is not an option. We make in total $60K a year so we are far from rich. Fortunately we have no revolving credit card debt and no student loans and a affordable mortgage on our small home, but other than that, things are not easy for us financially. There is no way that 10% of our gross income can take care of 2 cars AND their aggregated costs of car ownership. We always had older cars and paid for them, but one of them really gave us trouble to the point where my wife and kid got stranded in a not so kosher neighborhood. It wasn’t fun. And this was the moment where we sat around the table. The kids went from 2 hobbies to one, we squeezed some on our household budget and we replaced the lemon with a CPO Toyota Corolla (No more American). Simple but reliable and transportation Thanks to Corona we actually got a good deal, also in terms of finance. Our car payment is about $250 per month for 5 years, but a Corolla of a couple of years old should last 15 years with due maintenance. Actually, the goal is that this car will stay in the family for the kids. This is the first time that we ever took out a loan for a car, but my wife in particular wanted something more reliable after that episode. You got to understand, for a lot of people, where money is tight, cars are needed depending on locality and work distance. The 1/10 rule, as well as the “car per salary” table is ridiculous for most working class families without reliable public transport. Well, at least I got a raise, which was not expected in these weird times.
Seems to me you guys are making thoughtful and responsible decisions given your situation. Not everyone can get an MBA and score a finance job that will skyrocket you to the top 10 and likely over time top 1% of average annual income.
Your mistake is to be concerned with the price of the car compared to Total Cost of Ownership (TCO).
If you buy a complete piece of crap used economy car in order to stay under 10% – then you’ll be spending more on gas, repairs, etc.
TCO analysis is CRITICAL.
I recently bought a Tesla Model 3 for $40k – intending to keep it for more at least 5 years. Multiple studies have shown that over 5 years, TCO for the Model 3 is less than a $25,000 Acura or Corolla.
Since I don’t earn $400k/year – if I took your advice, I’d be spending MORE money on a $25k car.
Once you follow the 1/10th rule of car buying, the TCO becomes mute because you can easily afford all the costs that come your way. Nothing wrong with a $25,000 car!
I got a 2017 Corolla with 23,000 miles for $13,599. Toyota’s will last well over 150,000 miles and I financed at $205 for 48 months with about 5,500 down(from bonus from work). I MUST be at work, and I help take care of my elder mother so I can’t risk having a car that will break down even for a few days. I have bought used beaters and I will never risk being broken down on the side of the road again. I spend 13% of my monthly income pre tax on my car and my insurance combined and some may say that is too much. I am willing to pay a little extra for the peace of mind that comes from having a reliable car in my driveway. I get the lower price of the car means I can afford repairs but I would rather put that on a low monthly payment over 48 months on a very reliable car over continuously poring money into a bottomless pit on wheels.
I’m wondering your take on leasing. There are 199 leases on Toyota’s (and other comparable cars) with around 2500 down.
So you are basically renting a dependable vehicle with no maintenance costs. Does this ever make sense?
For many people, a car is a need more than a want. It should be budgeted as such like rent and food. The 10% rule works for financial freedom. Seems to make more sense to apply it to lifetime earnings. For example, someone making 50k/yr is 1.5m over 30. That’s 150k or 5k/yr over 30 in lifetime for car expenditures (insurance, gas, payments, etc). So yeah, you can buy a 50k car off 50k salary. Two or 3 of them over 30 years. Of course, you can also lower the percentage to 5% of lifetime earnings for added freedom. Wouldn’t be impossible to drive two 35k cars for 30 years. Metrics also changes if you’re not trying to work for 30 years.
lmao at the article and comments. Advice is especially useless unless in an urban setting. A good saver can easily spend 50% of their ONE YEAR earnings on a conveyance that will last them MORE THAN 10 YEARS. With everyone offering 0% APR, the average would then be 5% year, which can easily be budgeted for most. You worked in finance? Yikes!
Yeah this article is an absolute joke and doesn’t factor in the total cost of ownership along with the cost of not having a reliable car when you need it. Total farce, very surprised this guy worked in finance.
I have regretted a fairly expensive car purchase. It was paid for in cash, so it wasn’t a loan issue. More the opportunity cost of investing the money. Ultimately I decided it was a sunk cost since I’d lose so much selling it and just drive my money out of it.
This article seems odd to me, surely a 10% rule would be spread across the monthly payments? Who pays off their car in 12 months? Admittedly I only skimmed the article.
My wife earns of north of 250 and bought a 50k glc, I earn the same and have a 2013 A4 that I didn’t pay much for (25k if I recall), but If I spent 60k on my next car, it’s not a stupid amount of money. I think I read something like if you want a 30k car you should earn 300k, that’s too funny.
To the person that wants the Mustang in their 20s, crack on. You are only young once!
Some people spend more on cars, some people spend more on clothes or food. Some people spend more on a big house (though an appreciating asset, bigger houses also cost more to maintain). One thing is for sure, you cannot take your money with you in your grave. And nobody knows when he/she is going to die. Not even FS. It can happen sooner than you think. But spending your money wisely and with due consideration is the key. Of course, having a proper retirement plan is a must. Paying off credit cards, students loans etc is key for financial success. I have a government job with a decent retirement plan. I don’t drink (alcohol), don’t care for fancy clothes (Goodwill has surprises, try it out!), I don’t smoke, have an ordinary sized home. No revolving credit card debt, no student debt and neither does my wife. So after all these years driving old sh1tty cars, 2 years ago, I bought a nice brand new $32K car that came from $40K due to years end model, at 0.9% for 5 years. Wife said, go for it!. So now we spend about 15% of our monthly income on cars (payment, insurance, gas). We can easily afford it and I enjoy every drive in my new car. You only live once, remember that!
I’m curious of the writer’s input on my situation, as I do not technically follow this 10% rule but I think of myself as financially responsible: I really enjoy driving and working on cars, and my car is a large part of my monthly entertainment.
I’m in my mid 20’s, single, make 120k a year, save 2k every month for retirement, have an emergency fund and no debt, and am saving up for a house to buy in my early 30’s. I am planning to buy a used low milage 2018 Mustang GT for around 30k in cash. I feel like I can afford it, even though it is technically more than 10% of my gross income as I am meeting all of my other savings goals, have plenty of money left over in my budget after planning for the increased gas, insurance, and maintenance. What do you think, acceptable or stupid?
I think it’s a bad move. I understand loving cars in your 20s. I loved the 5.0 Mustang GT from 1990 myself back in the mid-90s.
But don’t bank on loving what you do in 10-20 years. You’ll want options and I recommended building your taxable investment accounts to build as much passive income as possible.
At the end of the day, you want FREEDOM. And money buys freedom. And freedom is way more valuable than money or a car.
At least challenge yourself to make more than $120K for 1 year if you want to buy a $30K car.
Considering our lives basically revolve around our jobs and money, what’s the point in making money without spending it on things you enjoy? The dude is still saving 2k a month and clearly has solid financial plans for his future.
Your advice should be given to people who only want to indulge in their hobbies during retirement.
Joe, if you’re reading this I say go for it man. As long as you know you can afford it then life is way to short to not treat yourself and have some fun. I got myself a golf gti and it makes me smile every damn day. I’m sure your mustang will do the same :)
I love the FS, but I have to go with McKenzie on this one. I am a car guy also so I may be partial. The thing is that you are both right. The FS approach is like scoring %100 on a test while McKenzie’s and the original OP’s approach scores you a healthy %92. Now this is where we get into diminishing returns. 100 percent is awesome but the effort to go from 92 percent to a 100 will be way more that 8 percent. Now is 50+ present more effort, energy etc worth it to achieve the remaining 8 percent, is the ROI worth it? For me I am usually happy with my 92…but again I am not shooting for greatness
Love this article. First car after graduating professional / graduate school was a slightly used Mercedes for $42k when I was $250k in student loan debt with my wife. I sold the car after enjoying it for 2 years when I purchased my first home.
Following a rule similar to this, I delayed vehicle gratification for the next 12 years and I’m $3 Million net worth wealthier. It took time to accomplish my investment goals after seeing my household income increase from $250k to $1 Million+ per year over this period.
A large car payment would have been a barrier along the way no matter how much I tried to justify based on annual income. Now, I’ve got a growing financial nut and a 5% net worth number to work with. Unfortunately, I care less about cars, my wife gets a company car, and I get a car allowance. I drive a used Toyota and don’t care about all the Range Rovers and luxury cars dropping off kids at school in the morning. I’m content knowing that I could quit my job and survive for 20+ years based on my monthly expenses or pay cash for any of the vehicles that I typically see if I desired them that much.
Nice! What is it you do that earns you guys over $1 million a year?
Don’t knock the Range Rover. I love mine! It’s the perfect family car and also the perfect car to take up to Lake Tahoe during the winter.
But such an environmental disaster. Consider a Rivian instead: FAR more enviro-responsible, capable of anything the road to Tahoe could throw at it in any season, and priced at $75k.
On the positive side, thank goodness the coronavirus and the 2+ month long global lockdowns have done more for the environment and global warming than ever before.
Ending globalization would be a permanent solution to waste and environmental degradation. How much would a 65″ TV made in The U.S., and not in The PRC’s CCP owned, non profit manufacturing complex (search: Category: China Government Owned) cost? If The U.S. were to manufacture more of its own things, it would also be more likely that people would repair things, instead of just throwing them away, and order another from 7,000 fossil fueled miles away.
Lincoln’s economic advisor, Henry Charles Carey would be rolling in his grave at the decline of his country since the financial sector has been steering it to deindustrialization, especially since 1971.
@Marty Frazer You ignore the fact that a 65″ TV made completely in the US would cost 3x as much as what’s available now, and would still only last 5 years on the top end, because capitalism.
The US has pooped the bed pretty hard on quality items they manufacture. There’s almost nothing that the US makes that other countries don’t do as well/better, and cheaper.
Since most of the nation’s electricity is derived from natural gas and coal, The Rivian is a fossil fueled car, and a lot of CO2 is produced just to make the batteries, alone. There is a woman who’s had an old, 1950s Chevy for something like a half century. In 50 years, the average EV owner might have gone through 4 or 5 cars, even if they maintained it very well. If everyone were like that old woman, however, we could have 75% fewer factories producing cars, and most of the parts of those cars. It would be better for the environment to get a low mileage, gasoline truck and make it last a few decades.
Replacing a battery every 10 years that is charged at home via solar uses far less fossil fuel than consuming them on the regular for the same amount of years. And it is a step in the right direction and as many of us as possible must each take those steps as we can to begin turning the ship away from the iceberg so to speak. . . Of course they are not perfect – yet – but they remove at least one major portion of excessive gas and oil from our world. Plus those Rivian suv’s look like tanks – they will last.
Be on the right side of history and make an effort.
the power plants are far more efficient in terms of fossil fuel output than an individual car engine. orders of magnitude dfference
I think the point of this article is savings rate. A lot of people want to finance everything and feel like they can afford it if they can make the payments. Live life how u want.
I think a lot of other things should be taken into consideration and the rule should be adjusted to suit personal situations. If I make $100k a year by myself, I should most definitely be able to own a brand new Corolla or Camry that costs about $20k. I would put in a nice down payment, pay about $200 a month and pay off in 6 years and realistically expect to own the car for 15+years. At $100k salary, I wouldn’t just be buying a car, I will also have other expenses in my life. What if I’m someone who spends frugally in those other areas of expenses? Should I not be able to afford a better car if I cut down on other expenses? If my peers are spending $50-$100 a month at Starbucks but I’m not; if my peers are spending $200 a month eating out with coworkers for lunch but I’m not; if my peers are spending $300 a month on clothing and makeup but I’m not, should I not be able to afford a better car? These are just examples of course, but the point is we all get to choose how we want to spend our money. I think buying a nicer car that I feel good about driving and will be driving for as long as it runs is a good investment and it makes me happy.
I agree that there are really good deals out there for buying used cars and they will carry you for many more years to come but there are also bad deals out there where your car breaks down… say… 2-3 years down the road. As much care as you might take in buying that used car, sometimes you just don’t know whether or not there are hidden problems. I would rather buy a reasonably priced brand new one, have my peace of mind and drive that car for what it’s worth. Some people may disagree and that totally and completely fine. The point is we all think and behave differently! We have to make decisions that make sense for us. It’s all about balance.
I’m struggling with your advice in this article.
I gross about $350k per year and I’m leasing a Mercedes-AMG C43. The purchase price is around $65,000, however for my lease I traded in a car worth $11,000 and put $10,000 down. The monthly payment is around $600.
Using your math, the purchase price of my vehicle weighs in at about 18.5% of my gross income. That being said, the monthly payment is only about 2% of my gross monthly income. I live very frugally in all other respects, living well beneath my means when it comes to housing, food, clothing, and travel.
I suppose I could have invested that $21k instead of using it as a down payment on a lease, but I feel like I already have enough money. I’m maxing out my 401k and putting over $100k into index funds each year. I think life is more important than hoarding up as much money as possible and maximizing the return of every single dollar.
If I’m being honest, I do regret leasing my current vehicle, but not for financial reasons. I live in an area with ever-widening inequality. I feel very self-conscious driving it around when I know there are many families in my area who are struggling to pay their rent and put food on the table. My heart is in a constant battle between wanting an even fancier AMG model (because I feel like I can afford it), and wanting to break lease and drive something more frugal so I can better support my local community through giving.
I guess what I’m trying to say is that building wealth is not the only reason to spend beneath your means. Check out Luke 12:16-21.
The FS also has another metric for affording a car which is 5% of net worth. This is a better measure for wealthier individuals. So for a $65K car, you’d need to have a net worth of $1.3M. With an income of $350K it shouldn’t take long to achieve a net worth of $1.3M.
And if you don’t have that kind of wealth, then maybe you are spending less carefully than you think; and a cheaper car would be a wise choice.
Regarding wealth disparities we live in a country where a huge number of people don’t think medical care is a human right. We care more about building bigger and better bombs, than giving decent medical care to the military who get injured in our quasi-legal wars. We’re an odd country.
“I live very frugally in all other respects, living well beneath my means when it comes to housing, food, clothing, and travel”. You see? Some people spend extra on clothes, wine, cigarettes etc, and you spend a little extra on a car, perhaps you enjoy it. So that’s fine and it seems like you have plenty of opportunity to save in spite of having the car. So there is no issue. Only someone who cares ZERO about cars would say that it’s too much.
You should regret your lease bc you’re not even getting a V8 for all that $$$. C63 or go home!
This makes no calculation of what buying a car with a payment plan (typically a few years old from a dealer) would save you in light of pulling a lump sum payment from investments for an old clunker. Many dealers offer little or no money down, or 0% APR. Those years of doing monthly payments leave thousands of dollars in investments that you would’ve dropped instantly on a private sale older used car.
Moral of the story is that this shouldn’t be a “rule”, but a good use of money if you are upper/middle class. Any car above $50,000 is really a measure of style/luxury that doesn’t increase usability of a vehicle. But I guarantee that anyone who falls into the 10% rule with a $50,000 vehicle has more than enough expendable income to not worry about splitting hair. “Yes, saving money allows you to invest more and have more money later.” No shit!
Lower wage earners should not follow this rule, as a $10,000 vehicle is likely to last much longer and have lower repair costs than a $5,000 vehicle. It only takes one major repair for the lower to eclipse the higher.
A more basic word of advice is to purchase lightly used, basic transportation, and keep it for 10 years/200,000 miles. People waste the most money on loaded new vehicles that they only keep for a few years (or even worse, lease!)
As a someone that works in finance and as a car enthusiast I throughly enjoyed this article as well as the comments.
Throughout my life I’ve driven the best car for the money.
At 17 in ‘10 I was gracefully gifted a really cool fire truck red ‘91 Honda Civic Four Wheel Drive Wagon (yes they made a Subaru like Civic in the 90s) with only 79k miles. It was motorized birth control. Screw it was free and I only drove it to work, friends with daddy’s paid for Jeeps or Bimmer 335s could drive me around instead. That little red shuttle got me through senior year of high school, two degrees in college and the two years at my first job in finance. It was paid for and I love it my little red POS!
At 23, during summer ‘16 I was due to start my first real job and wanted to treat myself to a car. Spent $9.5k cash (using saving and a bit of my signing bonus) on a beautiful one-owner 382 horsepower Navy Blue CLK550 Coupe Mercedes with 123k miles. A trade-in to BMW of Sterling VA that probably only yielded $3k-$6k off the price of the new car as a trade. The CLK had a window sticker of $55k in 2007. I purchased the car for unknowingly close to the one ten % rule considering my income, it felt like a ton of money to me. I had a little money saved ($20k after tax signing bonus, $15k saving). Till this I love my V8 Merc.
Fast forward a little, received a more important role at the company by which I’m employed. A salary increase and fixed bonus came with it. Increased my take home to $154k. Unfortunately, I totaled my little red civic summer ‘18.
“That Civic is a death trap” my parents would say & I finally was scared enough to realize they were right.
So the civic was gone and I was down to the CLK550. Summer tires & rear wheel drive isn’t ideal in snow. I wanted a AWD as a daily. Figured with no debt and a net worth of $172k at 25, income of $154k take home I‘m due for a newer daily. December ‘18, I bought a one-owner real estate agent white ’14 E350 4-Matic Mercedes trade-in from a Cadillac dealership. Had 99.9k miles on the clock and I paid $16.5k cash. Mercedes wanted something like $63k just four years before I purchased it. My point is some people are good with money, others aren’t.
Let the people who aren’t finance savvy fuel the auto industry and just figure out what you can afford using the 1/10 and be FREE.
I do really want a true sports car like 911 or Corvette in my 20s and I’m running out of time. Until I increase my income substantially and have a net worth of at least $500k I know it’s no business of mine to be paying $50k cash for a used car.
For those interested, I find that if you look for cars that are trade-ins at name brand dealerships the miles do not matter as long as the Carfax shows strong maintenance pedegree. For example, say you made take home $100k and had to buy a car. Maybe you’re not like and just want a good reliable daily, I’d look for the newest V6 Lexus I can find at any name brand dealership with a Carfax that checks out. Those cars a virtually bulletproof and because prices of Toyota’s are so strong on the used market the equivalent Lexus usually is a better buy. Seriously!
Would be interested to know what others think of my choices & ideas.
Hope my car buying experiences provide perspective.
Cheers!
Just to clarify my position.
I currently drive a used car that is ~2k.
I bought it new 10 years ago for 12k.
I will replace it with new 40k car.
Moral of the story:
I can keep driving my 2k car and I am fine with it.
But I would NEVER EVER consider buying one from someone (given my current circumstances)
Why? – financial gamble and safety risk. I know my car for 2k, but I do not want to know other man’s used car for 6k.
I honestly do not care for money that much to take on the process of buying used car (Craigslist and all the nonsense associated with it) + taking on risk of wasting my time at the carshops, missing meetings, etc…
Person who will my car from me is lucky but crazy nevertheless.
I think it’s highly exaggerated to have to earn 300k a year to get a 30k car. I make 50k a year and I can comfortably afford paying $300 a month for 5 years.
FS’s other rule is you can spend up to 5% of your net assets on a car. And if your net assets aren’t above $600K with an income of $300K, you certainly shouldn’t be spending more than $30K on a car.
I too earn a good income, but the statistics are correct. A car is nothing but a depreciating asset. I purchased an older BMW X3 12K that I use primarily for work. Car is great and I didn’t pay 55K. Look at older European cars with some mileage on them. You can get incredible deals and not have to think about the 1/10th rule.
You should not treat car as an asset at all. Depreciating or not. You are not treating food, electronics, furniture as an asset, right? Have you ever thought how much your t-shirt depreciates? Will put car to shames.
Car is a consumer product. Some of that product is utility, some is luxury (same as anything else).
It just one of the most expensive things one will buy, so it gets all the attention.
Cars also hold a special place in our culture which allows people to pass judgment on each other.
“Cars also hold a special place in our culture which allows people to pass judgment on each other.”
Surge,
This is clearly true for you as you have literally obsessed over this post for FIVE+ years. Unless your family was murdered by an old car a la Steven King, this obsession you have for trolling this post is truly disturbing. Get some help.
I have read this post only 2 months ago. Thank you for tracking my commenting, but I would rather have you focus on replying/arguing to the actual points I am making.
Lol. Liam sounds so bothered! I receive notifications on this post for a very long time. It doesn’t mean that I care to judge myself and others based on another person’s rule, for 5 years.
I guess with the 10% rule, the automakers would simply go broke. Rednecks would no longer drive new pickups any more.
Not really, If everybody invested the US average car payment in good investments, they would be worth millions in a couple decades. If everyone did that, they would just be buying later in life (delaying gratification) and have no financial stress. Of course these millionaires would continue to be upgrading, passing down trucks at a lower cost to the people who made were in their shoes a decade or so before. Currently, car dealerships flog every dollar out of people making 45k a year buy letting them have the car for 600 a month.
I make drive a 3000 dollar car, less than 5 percent of my income. No, not sexy for a 20 year old to be driving. But hey, with the amount that I invest yearly, I’ll be able to afford anything and be retired withing 20 years.
This is something I strongly agree with! My dad would always tell me “Never buy a new car. Always pay cash.” The simple truth is that if you can’t afford to buy it right now, with cash, you probably can’t afford the car.
The 10% rule seems to accurately capture this reality. When I was starting out, I was making about $40k/year and I bought a $4850 Toyota Corolla. (Not quite 10%, oops, sorry Sam).
However, new cars in the same category could have easily run $25k and I CERTAINLY didn’t have the money to pay cash for one of those.
One of the fascinating things is (much like Dave Ramsey points out in Financial Peace), you can be paying that loan at 4% to the bank. OR, that money could be invested at 7% in the (S&P 500) for the same length of time EARNING you money.
I ran the numbers on this transaction and it came out to a pretty clean $13k that was saved over the course of 6 years. All for being willing to settle for a “not new” car.
I wish I had read this article 5 years ago. Should have bought a used SUV instead of a brand new fully loaded one. Those car salesman are good in persuading me to get all the upgrades wah!
Great article btw.
what you are telling us, is that you are very easily persuaded…either by car salesmen or by the author of this article.
Serge,
You’ve been trolling the comment section of this article for over FIVE years! You need to get a life. If you want to waste all your money on cars, Sam doesn’t care. But don’t complain when you struggle with money. Cars are the #1 money sink in the States, as although 1/3 of people here rent, over 90% of Americans have cars.
*Yeah, I know I’m writing this on Xmas day, but it’s a day where I have time for this. And I learned something new and strange looking for that 90% stat: the Western state with the highest percentage of car-less people is Nevada. Not what I would’ve guessed and pretty much points to the ineffectiveness of all mass transit west of the Mississippi.
Percent of carless people in nevada is still very very low compared to say that in Uk (for example).
The whole premise of rigid 1/10 rule or bike is silly.
1) Reliable car more often than not is absolute necessity for those who technically cannot afford one per 1/10 rule. Irrespective of what FS or anyone here says.
2) Car CAN be an investment as operational asset (get to work, school) to get ahead even if it causes negative cash flow in short term. Sometimes it is cheaper to live farther and pay for car
3) Cars that are less than 6k-8k are not worth buying as they bear too much risk for failure (unless you already own such car and know it). New/newer cars are incredibly cheap (and no I am not talking about bmw, you frugality fanatics). Of course, sometimes one need to purchase a junker, thats life
Surge, good luck in life with your shit attitude.
learn you will, my young apprentice
Judging from your educational history, I am positive I am much older than you. I am 50 years of age, come from a financially illiterate background in an economically challenged area of Texas. I could go on and on about the challenges I have faced in my life, but I had to laugh at the advice you provided in your article. In order to make some marginal improvements to my prospects as I near retirement, my husband (who also has a horrible financial history) and I have been making some very pointed decisions.
I face ridicule at my job in the Austin, Texas area on almost a daily basis. I drive a 2006 Town & Country van. It has peeling paint, I removed the interior headliner (with the horrid Texas heat, it started to sag) and has dings and dents all over. However, it is mechanically sound, the ac works great, it is surprisingly fuel efficient, AND in a parking space challenged area, I don’t care if someone parks too close to me.
Thanks for validating that decision for me.
Look forward to reading more of your articles,
Mr. Dogen,
Possibly the best article I’ve ever read on this topic (and I’ve read plenty of them).
I only wish more people would read it and follow it.
Thank you!
100k miles is NOT the point of failure. That’s nuts. A modern, well-maintained car should have no major issues at 100k miles unless it’s the result of a defect or damage. Most cars made in the past 12-15 years don’t even require you to change spark plugs until 100k miles.
Do some research on True Delta or even Edmunds. Most cars, if they’re going to have a problem, will develop symptoms within the first 20k miles. Direct injection engines can begin having coking problems around 30-40k miles. Turbocharged cars that were driven hard might see some turbine bearing failure before 100k. Some CVTs get “rubber bandy” around the same. But stick with relatively basic transportation, like a previous gen Corolla, with meticulous maintenance records, that passes a third-party pre-purchase inspection, and you’ll have a decade’s worth of reliable transportation. Just don’t neglect it! Get a $20 OBD scanner and manage any check engine lights. Change your oil – and use quality synthetic – every 8k miles or 9 months. Keep the engine bay clean (believe it or not, cleanliness CAN improve reliability). Don’t drive like a jerk. You’ll be fine in that $4500, 10-year old Toyota with 98k miles.
Is this suggestion to own a $4,000 to $6,000 vehicle a joke? You’re just trolling the audience, right? Do you know anything about vehicles and what you end up with if you’re getting a 10% of your salary ($4-$6k) car?
Hint: Problems. That’s what. And routine and expensive ones. Even a more reliable Japanese or Korean car in that price range is a severe financial gamble. You’d be looking at vehicles well beyond the 100k mile mark. Which, as any mechanic would tell you, is the mileage point of failures in vehicles. How does one plan to commute to and from work to keep a job when you’re storing your car or truck at the mechanic/dealership for another costly repair? Plan on using up all your vacation time? Not to mention, the constant labor and parts to fix these decade+ old vehicles (at those suggested, 10% of salary price points). Just how far is that whopping 60-90 day warranty going to take you? Oh, right, you already know.
Newer vehicles are tenfold more reliable then a decade older, 100k+ mile automobile. Another plus, a bumper to bumper warranty. I’m not saying you need to buy brand spanking new, but I think it’s far more intelligent to purchase even a $15,000–$20,000, 2 to 4 year old vehicle then a $4,000–$6,000 “beater” from 2010. In short, pretty terrible advice from you to suggest buying a rolling bucket of problems to someone based on your silly 10% salary rule. Unless, of course, you’re a shady mechanic who is looking to keep their lifts busy.
It became apparent he know nothing about cars when he said that you would need to make $350,000 to spend $35,000 ON A LUXURY car. LOL He knows nothing about cars and it would be amazing if you could buy a quality non junker car for 4k-6k
Well, Adam let me fascinate you with my last used car purchase. 2002 Lincoln Continental with 90k miles. The vehicle was driven by a retiree and maintained by her retired mechanic husband. This cars engine was very clean and had zero rust on the undercarriage, a big deal here in Minnesota, since the couple had moved back from 30 years of living in the Seattle Tacoma area. After talking the seller down because the rear driver side window did not roll down, I bought the car for…….$3,000.
Hi Zack
18year old lincoln cont. For $3k.
Great job on talking seller down! Amazing! and congrats on getting your junker.
You are telling people to spend $3-4,500 on a used car that will no doubt tear up within a year. They will then spend another $3-4,500 on another POS which will do the same thing.
A good car is a wise investment for a LOT of people. Who cares if the value depreciates? I don’t buy a car to resell later. I bought my car to be a reliable means of transportation to and from work.
Someone could easily make a $250/$300 per month car payment if they only made $25,000 per year.
That whole “of you can’t pay cash for it, you can’t afford it” is a crock. How many of you paid cash for your house?
I 100% agree. It’s not like a person buys a new car every year. I make 40K a year, and spent 17K on a 3 year old car w/ 30K miles. I have been driving it for 3 years now. With monthly expenses of 270.00 per month for payment and insurance, I spend 3240.00 per year, less than 10% of my annual income. I am still driving my car and have only paid for oil changes and brakes for repairs. If I had spent 4K on a car, I probably would be buying a new one every year.
I have to admit, 10% seems a little extreme, especially if you make less than $50,000.
That being said, I purchased my 2005 Honda last year for only $3,000 and I would be very very surprised if the car did not last over 10 years. Even a new engine for the car is less than $1,500 installed..
You are not going to be driving a cool RWD coupe with power– but you can certainly find a reliable Honda or Toyota with higher miles easily for under $4,000, all day every day.
The author says flat out– if you are happier living in debt, go ahead and spend 100% of your income on a new car to have “peace of mind” that your car is so reliable (Hint: All cars can get flat tires, or have mechanical issues– maintain any car well and it just happens less often). The truth is you would be smarter to buy a car 10 years older, uglier, slower and without the heated seats and LED lights and invest. But, it’s your life– live it.
Congratulations that this has translated to CNBC! Still holds true after reading the original article! Will be interesting to see how spending changes with economic downturn and how many people regret the cars when things going south!
https://www.cnbc.com/2019/11/04/follow-this-simple-rule-for-car-buying-if-you-want-to-get-rich-says-millionaire-money-expert.html
It is funny to read all those comments from people trying to convince others, but mainly themselves, that funneling a 40% of their monthly income for the next five years to that BMW they just purchased is a bold move, because “used cars are unreliable, they all break and then you spend a lot of money and stuff”
I am not sure why are you so hung up on the idea that everyone is buying luxury car. Yes, someone making 40k should not buy 40k car
But for someone making 20k, it might be prudent to buy new 15k-20k car.
But maybe you personally should go out and try driving a bimmer…seems like you might have a thing going for this car
It was only an example, actually, I have driven several BMWs myself, my father had a e36, a friend of me has a 5 series… they are nice cars, but the point I try to make is, there is no point in spending the 30-40% of your income in a car. I know a lot of people that have been chaining loans for decades, when it wasn’t a new car (they really didn’t need), it was an RV, or a motorcycle or a new pool, or whatnot… then one of them suddenly loses his job and you have to listen them whine for months…
Spending 30%-40% of income on BMW is stupid.
But spending 20%-30% on reliable (non-junker) $20k new car under warranty is sometime much better decision than buying a ticking bomb for 8k-10k.
Again, you equate buying new car with buying a luxury car.
Remember, the price of car also includes a risk for maintenance expenses. This is why luxury cars drop their prices like rock after warranty period.
$6k car is really a $10k car. $6k price, $6k deferred maintenance/repairs
Right…because according to the financial Samurai, the only people who could afford a $25K Toyota Camry base model are those earning $250,000 per year. In what world does this sound reasonable, proportionate or practical? It isn’t.
The Samurai said the TOTAL one-time purchase price of the car should be no more than 10% of your income. He did not mean spend no more of your monthly income on a car payment and all associated expenses, which would be much more reasonable (i.e., if you earn $60,000 per year no more than $500 per month all in for payment, gas, insurance).
Each one can adapt the spending to his own values. For me even 10% it is too much. Bike and common transport help me to not overspend on.
Yes, I had to rent/buy a smaller aprt. and closer to my job, but in 10 years I had an aprt. and not a broken old no valuable car.
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.
quicksand – maybe.
You need operating budget to get ahead. Sometimes just to operate, sometimes just to improve efficiency.
Again, completely useless advice because it is applicable to a very limited subset of reality.
So… Let me get this straight. No car? The number of places you can Bike or use mass transit to get to work is limited. Your advice works for someone in an urban area or living fairly close to work. Now take into account many urban areas removing bus routes for cost saving measures and it gets worse. If you claim a Cab/Lyft/Uber are viable options, I strongly disagree.
The long term cost is a much better number to shoot for than upfront price.
Also, ignoring safety for price is a terrible idea.
The advise on buying a $5000 car is pretty good if you can find a reliable one that the price isn’t boosted much higher. Internet car guides are fairly inaccurate in the pricing of older reliable cars. You cant touch a Civic or Corolla that is mechanically sound for under $5.5 – $6k in my area. I helped my daughter get a corolla with 120k miles on it. On paper it had a great service history and no accidents. The lot had cleaned the engine bay so you couldn’t see where seals were bad and fluids were leaking. We paid cash, which I 100% agree with. After 2 years running that car, the cost of ownership, Maintenance+Fuel Was higher than my wifes Camry purchased 2 years used. The mileage isn’t just about the engine. Its about tires, suspension, transmission, body, seals, etc… I have purchased one vehicle new in my life, and its been great base toyota 4runner which was close to the same price as buying it 2 years old. I have owned it for 10 years. The front loaded price was high, but long term cost was pretty reasonable. Yes its uses a lot of fuel but for pulling a trailer and spending a lot of miles off pavement, a fuel economy vehicle would not be capable or have survived the wear. Low cost vehicles are low cost for a reason. FYI I sold my daughters Corolla after 2 years for what I originally bought it for. So it ended up being a great value. Unfortunately that is not the case very often.
Hi Samurai! I know what it’s like to be without a car and making 20K a year. A car is the only way to get ahead when you are poor.
How can someone take on OT pay and holiday pay if the buses in your area do not run on weekends, not run after 6pm, or on holidays?
If the bus takes you 30 min to an hour to get to work, it is not feasible to get to work on time using a bike or walking, especially in bad weather.
Not owning a car is the worst and keeps people poor! It was frustrating for me to turn down better job opportunities, second jobs, and even college internships because I didn’t have a car! With a car, you can say “I can get there” instead of “How can I get there??”.
I paid $7000 for first car in cash it was a 5 yr old Suzuki, had it for 9 years. Owning a car made a HUGE difference for my career! Could find better jobs, always around 30-35% to previous base pay each switch!
That being said, used cars have short term benefit but they are a gamble. You are at the mercy of car shark repair men which I paid thousands to, and used car salesmen who are broke crooks, that close shop and I had to get the police involved to obtain my title. I decided no more used car.
Once I was more stable in career and excellent credit, I went and financed a new car!
With my first car I gave it away for free to someone who needed it.
Agree with you
People are losing their minds with their frugality delusions.
Not own a vehicle if you make 20k. You realize how unrealistic that is for most people right? Your advice is worthless because it takes place in a bubble.
People that make 20k can’t make money. That’s the whole point. The idea that someone that works 40 hours a week and brings home 20k is going to be homeless and carless is so unbelievably ridiculous.
You’re literally saying here that someone who makes 200,000 can only own a 20,000 used piece of crap toyota or something. What’s the point of making 200k? Your advice might not be “wrong”, but it’s not realistic. Get real man.
I made $20K one year and I managed with a car and insurance with gas. It was a sacrifice so not necessarily accurate to say you’d end up homeless. Having the car will open the door for more opportunities.
If someone can comfortably get around then I’d say maybe you don’t need a car now but to tell them no because they earn $20K isn’t ideal. I was able to pay $800 rent, eat , gas and everything plus save money. Having this car made me accept a job offer to become a manager and get paid more.
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.
How is it horrible advice to save money and not spend more than you can afford? If you like staying broke like the average American keep buying overpriced cars that you don’t work for but borrow money for if you want an expensive car start earning more money or get a real job work harder, shovel some dirt and get to work.
What are you? 12?
Your cliched madness about “frugality” is preventing you think clearly and realistically.
There is a British expression…”I am too poor to buy cheap things”. While a hyperbole, it bears a lot of truth.
There are tons and tons of people, who are making $20k/year and absolutely need a car to work. Advising them to buy $2k car (cash) is a terrible advice. And please – no anecdotal evidence about how your beater has no issue… on average – $2k car is few miles away from a major repair/maintenance. This is why it is 2k.
There’s an old American saying, “A fool and his money are soon parted.”
You seem to believe an inexpensive older vehicle is not reliable, that is just not true. Many older vehicles have a long life ahead of them, without huge costly repairs. Like another poster mentioned, you may have some squeaks, rattles, or issues, but that won’t prevent you from getting from point A to point B. If you purchase a $2-$6k vehicle, and then a year or two later have to invest $1k for repairs, that is much more affordable than a $20k+ vehicle loan.
Someone making $20-$40k has no need for a $20k vehicle. Public transport or carpooling would make more sense. Of course, this is the path of someone who wants to be financially free. If you want to be a slave to debt, please go grab a new car loan immediately. I hear they stretch them out 84 months now.
I invite you to use a public transport (or even carpooling) and be able to get ahead…
This is typical frugality trap where focus is only on savings.
Car is investment sometimes..not as an asset, but as reliable operational tool to achieve your other goals.
And please do not give me BMW example again..we are not talking about luxury car
Sorry Surge, but you are simply wrong. Samurai is right.
First of all, you have zero data showing that a new car results in being late to work less. All cars are subject to crashes, flat tires, and unexpected mechanical issues, even $250,000 Lamborghini’s. You are implying that spending 90% more on a car somehow means you are 90% more reliable, and that is false.
He clearly states in the article if you make $20,000 you have no business owning a car. The costs of owning even a cheap car mean that you are spending more than you make and you will never “get ahead” like you said.
I bought a $3,000 2005 Acura RSX last year with 160,000 miles. It is ugly and slow, but it will run just as well as your $20,000 car for the next five to ten years! And even if it didn’t, I can afford to replace the engine five times for the premium you spent on your car!
Financial Samurai gave you good advice and that is to sell your car, start taking the bus and get rid of the deficit you live in!
Taylor, I guess you have plenty of free time and money (to spend on Uber) while you engine is being replaced. And I guess you have a lot of time to go craigslist hunting to get that non-junker car for 3k.
It is utter idiocy to say that someone who makes 20k has no business to own a car. This just shows complete lack of understanding the realities and costs of public transport in 80% of the USA. Keep taking bus and you will be making that 20k forever.
That’s not his advice though. His advice is to spend 10% of what you make in ONE Year on a car. That’s ridiculous. It’s an ongoing expense. Maybe you can get away with that stuff in NY or something, but not most places. I live in Orlando and you need a car, and no one making 6 figures is driving around in a beat up honda with 200k miles.
If he said 10% of your annual income, sure. As in every check 10% goes to your car payment, but that’s not what he’s saying.
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.
How can someone who makes 20k a year even buy a 20k worth car?
If you take a loan with bad credit, you’d end up paying 30-35k across 10 years.
Who in their right mind would choose to do that?
A person with such a low annual income cannot afford a car. It would be easier to simply switch jobs to one that doesn’t require a car in the first place.
why do you equate 20k income with poor credit?
Do about 1 minute of research and you would know. I’ll do it for you though.
The average credit score of someone making under 30k is a 590, and credit score and income have a descending correlation. Therefore, it’s clear that someone earning 20k would have a credit score average below 590. Remember credit score is directly tied to income.
590 is a very poor credit score, and we can assume most people making 20k have a lower score. It doesn’t mean you can’t have a higher one, but it’s not wrong to point out the correlation.
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.
Funny that most commenters here that are against buying expensive car, have a car model in mind that they would love to own…BMW, Ram Rebel, etc….
Somehow, they chose not to own their dream, but rather comment about their prudence.
I love Lamborghini. The V12 Aventador just makes me giggle. Ferrari, McLaren, Porsche… I especially love BMW. I had an E46 M3 for my first car! It was a 333HP RWD monster, and it was a blast to drive (and fix!) and I spent every moment dreaming about it.
But, it was financial suicide for someone making $20,000 a year to own (It was only a $15,000 car, but it was a BMW lol). I had convinced myself at the time that it was a great investment and that I would own it for a lifetime and if I ever did sell it it would be worth more! I am not saying you are living in the exact same illusion as I was, but let me tell you that I was not “Owning my dream” when I was working two jobs to afford just to make ends meet.
The dream for a lot of people here is FI (Financial Independence) and that provides a whole lot more peace of mind than a new car. Samurai isn’t saying don’t buy your dreams– he is just saying wait until you make enough to afford them without being stressed out.
You were poor though. No offense, but there’s a difference between a bad decision and owning a decent car. If you only make 20k you have to do what you must. I make 70k a year in an area that individual income is ~25k and household is around ~45k. Do you really think I’m going to be driving around in a beat up junker, worrying about constant maintenance issues?
If you are searching for financial independence you aren’t going to find it by having a cheap crappy life. I’ve done that, it’s cheap and crappy. I have a nice car, own a house, have almost no debt other than student loans I’m going to pay into oblivion. I spend money when I want, on what I want, all the time. Build your skills and get a better job. I’m not rich, but I’m very very comfortable, and the idea that I’m going to have a $7000 car is ridiculous. It’s something I use everyday, the investment is worth 10% per check at least.
That truck likely wont last you long, and even if it does, you’ll always worry. It’s the guy like you that says “we can’t take the truck, I don’t know if it’ll make it!”. You don’t make enough money to really live the lifestyle you were, that’s understandable, but this isn’t good advice for people in a decent position. If you make less than the US median, you aren’t in a good place financially.
Of course buying a truck that ~110% of your annual income is suicide, but that has nothing to do with what’s being discussed here. This guy is saying you can ONLY afford a $4000 beater and that’s wrong. Sure, if you are poor it’s not a bad idea, but someone with money is going to appreciate reliability. I have financial independence already, so using some of my money now, instead of seeing it arbitrarily raise my bank account is worth it.
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.
New car absolutely worth the premium to avoid smelling previous owner, dealing with previous owner, dealing with all the bullshit from private party.
Dude you’re a troll. There isn’t any bullshit if you pick the right private party to buy a car from in the first place. FB Marketplace makes this easier than it’s ever been before, as you can look for a private car in richer areas of someone who kept great maintenance of the car and are just looking to upgrade or be dumb and get a luxury car. Paying 10k to avoid smelling the previous owner is ridiculous, get over yourself.
I never said “luxury” car. I said “new” car. Most commenters have a glitch in their brain equating new car with a luxury car
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.
Very bad advice. We live in modern world. Not hunters/gatherers society. We trade our skills for other skills via money. We trade our time vs. assets via borrowing/lending.
You can easily brag because your base pay is almost quarter of a million. Yes you should be able to afford everything cash. Financing does not mean that I cannot afford something. I finance large purchases because of the flexibility to keep my money and possibly invest if needed. I am buying a $200K home soon and will be financing it. How does that mean I can’t afford it? I can pay cash & still have $300K liquid cash available? I like to pay cash for small purchases but I won’t knock on someone who personally can’t afford to. When I went to college, I took out interest free loans, simply placed in my cash in Long term CD accounts then repaid the principle after 5 years and pocketed the interest. Doesn’t mean I would knock on my colleagues who financed their education? I did too.
The 1/10th rule is definitely a guideline and can help some people with their achievements. I hoard so much money that I just want to live happy now & not by necessarily buying expensive cars and blings. But by worrying less about the return on every dollar and decision. I just want to relax. I look at others that are living happy without as much money and fancy cars as I do & I’m like damn, we’re both humans, they have less outside but are living contend and happy. I started adding my family members as beneficiaries to all my investment and bank accounts
Ah contraire, you may be financing but that’s because you are playing with the money to make more money. You obviously are skilled at living below your income and saving your income. Excellent job, I wish I was more like you. I wasn’t bragging but making the point with the author. I make a lot of money, comparatively, but spend a lot less on vehicles than people making a quarter of what I take in. If I think it’s a bad decision for me then I definetly think it’s bad for average Joe. You can pay off anything you finance today, so it’s not the same thing. Your money is working for you where as most people are working for their money.
Btw, my income hit 260k last year and I’m still looking while saving a little. College debt is a killer to family finances.
I watch a lot of comments on this article and find it insightful to see that many people who have well above average incomes ($150k+) tend to recognize and agree with this post, while many people who are in the $20k-80k income range have some of the strongest objections to it.
Also, it tends to be that most people who have accumulated a substantial net worth also agree to the premise this article is based on. Keeping the your liabilities as low as possible so that you can invest more until your investments bring your income high enough to afford the nicer luxuries.
The same advice this article is based on advises those finishing college to “keep living the lifestyle of a broke college student for the next 5 years”. Believing you need a separate bedroom for each child, or a car worth more than $5k for it to be dependable, or a new iPhone because yours is 2 years old… is just not factual when you look at what others have done in their lives who forwent those things.
If you want the statistically best chance to be financially average, you can borrow for liabilities and keep your payments below your income. But, most people looking for financial advice and reading blogs like this, are looking for how to be financial winners in life and looking for advice on how to not be one of the 70% of people living paycheck to paycheck. Yes, you can have a car that is 50% of your annual income and not live paycheck to paycheck, but statistically the people doing that are the anomalies and not the norm.
Your observation is correct; but you mis-construed meaning of it.
For someone making 150k+ it is much easier to maintain this fairly absurd rule. For 15k+ it is significantly easier to get decent and reliable car.
Now, someone making 40k…of course people will buy car > 4k. You tend to interpret this as lack of frugality. I argue, that in this situation, it is imperative to get a much more reliable (and expensive in absolute terms) vehicle. Assuming car is a necessity to get to work/school.
Main problem of frugality blogs: Focusing on easy thing and not understanding people and investments in general.
Main problem of this blog: Bring back x-factor discussion. Frugality brings out worst in men.
Hi Al,
Btw, I thought my $160K at 26 was comfortable but now I am aiming for that $260K. Yes, I definitely make, I won’t say smart because it may be subjective, but careful financial decisions and crazy sacrifices. In senior year I walked to school 3 miles RT to save $3 a day. I walked to work the same distance until I needed a car.
The funny thing is, the average Joe is just a comfortable and happy as me today. I totally get your point because I wonder how some people close to me could be so irresponsible with money.
I am fortunate to not have student loans. but based on your income, heck of an investment to make for education. Congrats!
“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 notice that you did not comment on Mike’s point about financing a house. If mortgages did not exist, hardly anyone would be able to purchase a house. Your logic is so faulty it IS ridiculous. Your logic means that hardly anyone would buy a new car, because you would have to earn $300,000 in order to buy a $30,000 Honda. Absolutely totally absurd.
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.
38k car is around 500$/month perpetual lease.
This is new.
You can get excellent new car for $20k, which is around $250 lease.
Very very reasonable for $62k income. Because you’d rather be able to get to office on time and not waste weekends on car repair…
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/
No, there are no non-junkers at 1/10 rule, if you income is 50k or less.
THere is are no if/buts about it.
Go on auto trader and use the filter cars with less than 75k miles. Honda and toyota newer than 2012 and you will find alot of cars with low miles in the 4500 to 7k range
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 b