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.
Back 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, you could have invested the $24,000 in the S&P 500. If you did, you would now have almost $100,000 in 2022. 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. After more than 10 years, the 1/10th rule for car buying has become the standard car buying rule for financial freedom seekers everywhere.
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 $39,950, the absurdly high median new car price today!
If you absolutely want to buy a car that costs $39,950, then shoot to make at least $399,500 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 today.
Minimize Your Financial Stress With A Cheaper Car
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, own your car for at least five years. Better yet, shoot to own it fo 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
If you want to achieve financial freedom, 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. Further, the thrill of owning a new or new used car lasts for only several months. However, 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. Feel the squeeze so that you realize how ridiculous your car spending is.
If the amount of money you’re saving each month doesn’t hurt, you’re not saving enough!
Recommended Cars By Income (Tastes May Differ)
The beauty of the 1/10th rule for car buying is that it is tethered to your income. If you want a nicer car, you must make more income! Here are some suggested cars you can buy based on my 1/10th rule.
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. The less electronics, the less electrical gremlins too. The more you have loaded in your car, the more maintenance headaches you will have in the future.
Below is the chart highlighting you financial status based on your car spending as a percentage of household income. The closer you follow my 1/10th rule for car buying, the closer you will get to financial independence.
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. Then I 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. A decade later, the money grew by over 160%.
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. Be a time millionaire or billionaire! Freedom is the true value of wealth.
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.
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!
The Worst Combo For Your Finances
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. Their cars likely don’t come close to 50% of their gross income.
If you want to achieve financial independence, follow my 1/10th car buying rule. Letting material things stress you out is no way to live.
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
1) Get affordable car insurance
The best place to get affordable car insurance is with Allstate. With Allstate, you’re in good hands. Getting a quote is free and easy. Make sure you have the best auto insurance possible to protect yourself and your family.
Every year, there are hundreds of thousands of accidents on the road. You need great auto insurance to protect your finances as well.
2) 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.
3) Invest In Real Estate To Build More Wealth
Instead of buying an overpriced car, invest in real estate to build more wealth. Real estate is a core asset class that has proven to build long-term wealth for Americans. Real estate is a tangible asset that provides utility and a steady stream of income if you own rental properties.
Take a look at my two favorite real estate crowdfunding platforms. Both are free to sign up and explore.
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eREITs. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, it’s better to invest in a diversified eREIT for exposure and risk management.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations and higher rental yields. Further, growth is potentially higher due to job growth and demographic trends. If you have a lot of capital, you can build your own best-of-the-best real estate portfolio.
I’ve personally invested $810,000 in real estate crowdfunding to diversify my exposure and earn income 100% passively. As soon as you realize the opportunity cost of buying a car, you will be more inclined to follow my car buying rule.
The 1/10th Rule For Car Buying is a Financial Samurai original post. I came up with the rule in 2009.
At some point this rule stops making sense right? Like if you have a household income of $300k you can afford a $50k car easier than someone who makes $60k a year and buys a $6,000 car.
As you make more money your cost of living doesn’t go up unless you decide it should, but a loaf of bread costs the same regardless of your income.
Great article. My partner and I are a one-car household. We own a car that we purchased for less than 5% of our gross annual income. Pretty good, right?
However, I am starting to look at the total cost of ownership more closely. We’ve been considering getting an EV for some time now. With the higher price of gasoline and extra maintenance costs for ICE vehicles, we would actually save money on an annual basis by trading in our car for an EV that is more expensive on paper (paying cash for the balance, of course).
Hi Jesse – You might enjoy this post on the getting an electrical vehicle might finally be worth it.
Thanks for the link! The only thing holding is back is the recent spike in price of used EVs. Of course, if that gets much worse it will make ICE vehicles look good again.Had we bought a Nissan Leaf a few years ago I’d be sitting pretty right now.
Hi Sam.
I’m Brazilian. How can I apply and follow this rule living in my country, with a different currency?
Same concept. Spend no more than 10% of your annual gross income on a car, even if it’s in Brazilian real. This may make things even tougher to buy the car you want. But again, a car is a depreciating asset. So you want to allocate the least amount of capital possible to a depreciating asset.
Old used Camry?
One must really love money and hate oneself to do this
Birthing wrong with a used Camry for folks making under $150,000 a year. My dad used to have a 7-year-old one when I was in high school. It ran great. He retired at a regular age and is comfortable.
My wife and I tried this rule. In 2018 we picked up a 2010 Subaru Legacy for $7500 (cash), we were making around $120k at the time. Later on in 2018, we picked up a 2009 Ford Expedition EL for $5000 (cash). Our income has nearly doubled since then. We did the FS and DR approach all in one. It worked well for us to build up savings, but it was a pain in the backside.
The Expedition turned into a headache, leading to us being stranded several times. We learned that the seller disabled the engine light when we bought it, then later found out (assuming) the mileage was rolled back… A LOT. Yes, we did a Carfax on it prior to buying it but the mileage was most likely rolled back 5 years prior. We ended up putting about $8,000 in the car over the 3 years we owned it, not including oil changes. $13,000 in over 3 years, $1,500 back to us on trade-in.
The Subaru did us well for the most part, we ended up having a transmission issue that was going to cost us $6500 to replace, and we had put about $2500 into the car over the 3 years we owned it. It would have been $9,000 repairs over 3 years PLUS the $7500 we bought for it, so we declined and traded it in. We received $3,000 for the trade in for parts, it would have been $5,000 if we replaced the transmission. If we replaced it, that’s $19,000 spent over 3 years on a car that gave us 35,000 miles – it could have gone more had we replaced the transmission but that cost effectiveness just wasn’t there.
We bit the bullet and bought brand new cars.. 2 of them.. we told ourselves we were NEVER going to buy a brand new car. Our financial situation is/was in a good spot; we didn’t follow the 1/10th rule but both cars will be paid off within 36 months. The comparative cars we were looking at were $30-$40k with 100k+ miles, or we spend $40k on a brand new one.
We have 3 kids and live in rain/snow, so we wanted AWD and space. We had PTSD (jokingly) with buying the Expedition and didn’t want to take another chance – too many DIY people out there that don’t know what their doing to their cars. The car loans are sub 2.5% as well. We bought the two new cars thinking that if they last long enough, two of our kids will have them around the 10 year marks.
We paid a “premium” for space, updated safety, reliability and longevity. Even if we have some repairs that are a few grand every 5 years, and we put 200k on the cars before the kids get them, we KNOW the history of the car and we won’t have any surprises.
All that being said… I do like the 1/10th rule and understand it greatly, especially when you’re looking at sling-shotting yourself into a better financial situation. We are also fortunate enough to continue investing/saving/paying off debt with the car payments that will soon be gone.
Cheers.
Much cheaper to buy brand new cars in a long run.
I don’t know who came up with the 1/10th rule, but it was clearly someone who knows nothing about cars. Cheap cars are unreliable money pits, and your story illustrates that. I’d rather spend more for peace of mind.
But I don’t have financial security. At least I have a nice car!
Very interesting article and very informative to many (but not all) people. That being said, not everyone is in the upper 10% wage earners and can waste their hard earned money on such toys costing the majority or more of their income. Those folks that drive BMW’s & Mercedes…all the power to you if you can afford it. But not everyone lives in California, metro-NYC or similar area and has that much disposable income.
The key (as I am in my mid-60’s) after living all over the USA and parts of the world is DON’T LIVE BEYOND YOUR MEANS. Sure, everyone wants to live on the beach with palm trees and great weather year round. I know, I did it from Southern California to the Castles of Edinburgh and everywhere in between. Now I live in the country far from the big cities and related stress due primarily to financial uncertainty. Why uncertainty? Because NOTHING is guaranteed in life except taxes and death. Not your job, income level, health, stock market, vehicle, spouse, home/apartment or anything else. A simple accident or mishap can alter a persons entire life. With all the insanity in today’s “Covid Culture”, things have gone “Bat-S*IT Crazy”.
That being said, after reading many of the comments in this thread, it is interesting to say the least, hearing from both sides of the financial spectrum. What works for someone living in upscale San Francisco is not going to work for someone living in rural Columbus, Mississippi and vice versa.
Personal opinion, if anyone is living paycheck-to-paycheck and spending $60K on a new truck is either trying to impress the girls or over-the-top with testosterone injections. The older guy’s reading this know exactly what I’m talking about…we all have done it to some point. I have seen young people go without eating, live in a dump and work numerous part-time jobs just to make the monthly truck payment on the $60K PU. Insane.
I have always bought high-mileage dependable vehicles. Yes HIGH MILEAGE and if you park them side by side to a new car, you can’t tell the difference. I have read in this thread that a cheaper vehicle will cost $3000+/year in auto maintenance. Yes, if you buy garbage…evidently the guy who wrote that has no idea on how or what type of used vehicle to buy. Remember, in the 1970’s and earlier (specifically up north) cars that made it to 50,000 miles were considered unheard of. The body would rot before the engine failed. No so much today. I’ve seen vehicles past 400,000 miles on the road! You need to have an experienced individual go to the seller and inspect for anything major. The transmission and engine are the biggies. There is no reason you can not have a decent car for around $2500 if you do your homework.
Think about payments. Unless you pay cash (most do not), you can double the amount of the loan if you take it to full term. A $15,000 loan will be like $30,000 when all paid off. Then the REQUIRED FULL-COVERAGE INSURANCE until the loan is paid off in full. If you live in a big city, that is BIG BUCK INSURANCE. Yes, you might save on gas mileage over time and repairs, but, will you be paying $400+/month in auto repairs? I don’t think so.
Bottom line, do what is best for you and your situation as no 2 people have the same variables. What works for me may not work for you. Personally, I don’t have a “Status Class” vehicle to drive around trying to impress others as is unfortunately so common. I’m happy with my 10-year old Jeep Grand Cherokee that is paid off in full ($3000 at the time) that has no body damage, has over 200,000 miles on it, spent only around $300 over the past 2 years in maintenance parts (I repair my own vehicle) and was worth around $40,000+ when it was new. I’ll drive it until it drops. If I bought it new and took out a loan, I would have been a slave to the bank and insurance company for 5+ years. Less stress my way!
PS – Don’t get credit cards unless you pay it off 100% each month either. The 20% interest will eat your soul if left to pay out over time!
I do somewhat agree with the objective and reasoning of the goal, with one caveat. The rule is certainly achievable IF you can perform some car repairs yourself.
I make about average household income, and I own a 2001 Honda Civic and 1991 Toyota. By that metric, I am meeting the 1/10 rule. But for these cars have repaired them myself. The timing belts, faulty camshaft sensor, replacing brake pads. If you can do the work yourself, buying a Civic, Corolla or Camry, you can reliably get by paying very little for a functioning car.
Also, I don’t stress things like dings in parking lots, thieves targeting my cars, or any other damaging element.
I will say I agree with the author’s sentiment, but I do not think it is a make or break law. If someone does 1/5 instead, but sacrifices other areas, they can still accumulate respectable wealth. But the author already made a table for that anyways.
This post didn’t age well at all considering what’s going on with used car market. Used cars cost like new
That’s because you’re not thinking about the opportunity cost of investing in the stock market, real estate market, crypto, etc.
A poor person thinks only about the cost of the car. A rich person thinks about opportunity cost.
I will share a personal example of opportunity costs. We bought a new Tesla Model S in March of 2015 for $108k and sold Apple stock to pay cash for it. At the time, we were living in NorCal and where Teslas were common in our neighborhood. One of my buddies who ran a large body shop group that was one of the few authorized Tesla collision reapair centers and had toured the Tesla plant in Feemont. He was super impressed with Elon and their business model and was encouraging me to buy at least $100k of Tesla stock as he had just bought $150k. I didn’t buy any but if I would have taken his advice that $100k in TSLA would now be worth $2,545,000. I think about it often as I still use that 2015 Tesla with 126,000 miles on it as my daily driver. It’s worth about $32k now, lol.
How do you spell stupid? W-A-R-R-E-N… And that’s for buying a $105,000 Tesla. People like you are so obsessed with others think that you feel you have to live up their expectations, drive what they drive, go whete go etc. Living in the same neighborhood with the Filthy rich wasn’t going enough. You could of went and bought 2- used Honda’s a couple years old or even just 1 and banked the $75,000. Why Honda over other imports. Because of the reliability factor. That Honda will last you forever in some cases as long as you service it appropriately. My next choice would be a usedLexus. They have good engines and are the cheapest to maintain according to many. If you have to hide your Lexus from your neighbors view then you need to move to a different neighborhood as it seems you probably do quite often. Not listening to your friends investment advice may of cost you in terms of paper wealth but hell we all have made that mistake. If someone told me 20 years ago to put my money into bottled water as it’s going to be a huge money maker in years to come I’d a thought he list his mind. Don’t believe in the market either. Many have gone bankrupt and to jail in that corrupt thinking. Ask Martha Stewart. Playing the stock market is like horse racing. Cheat to win, cheat to lose then cheat again to recoup the losses. Life is too short. And if a Lexus isn’t good enough for ya then you might plan on working til you die. You can’t take that Tesla with ya figuratively although some might opt to be buried in theirs, but you can keep making monthly payments for it til you do die. That’s essentially what one is doing by wasting their savings or inheritance on an expensive vehicles. I’d give anything to have a new Raptor. I’m just not willing to pay $100,000 for one that will lose half its value in few years. Crazy stupid there.
Reading this now as I currently need to purchase a car…and I don’t understand FS’s response. The purchase price of a used car now seems to EXCEED the purchase price of a new one of the same model. If the new and used car both drain $30K, where’s the difference except for the lack of warranty, higher maintenance cost, existing wear/tear, and greater uncertainty in buying used? Without a lower sticker price, I fail to see the value in the current market.
I’m not sure what else to say. Feel free to buy whatever you want for whatever price.
If you are OK with forsaking any potential future investment returns, that’s probably a good thing. B/c it means you are already saving and investing enough for your future.
The YOLO economy is here!
This article seems like another hot take. While I definitely agree with the main sentiment (i.e. people spend too much money on cars), 1/10 is way too restrictive. When I didn’t earn as much, I used to drive real beaters, but it got to the point where the hassle of going to the shop all the time just wasn’t worth it. I now drive a Subaru that I bought new in 2015 for 19k. Given that I make about 170k per year, I’m not even adhering to this rule despite being what I consider to be quite frugal.
Wealth serves to fund consumption and enhance quality of life, but people need to be sufficiently conservative to plan for a lifetime of purchases and “what-ifs”. As noted in the article, it’s also important to be cognizant of opportunity costs. Thus, the article’s main point is well-taken, but (as usual) it’s taken to an extreme.
My car buying rule is actually not a hot take. I presented it to the world over 10 years ago and millions of people have take into account.
Over the past 10 years, we’ve had a incredible bull market in stocks, bonds, real estate, and many other asset classes. I really hope that a lot of people during this time Invested more than spend less money on the a car they really didn’t need.
But this is just my recommendation and guide. People are free to do whatever they want their money. Everything is rational in the end!
Yes this is absolutely a hot take. To apply a 1/10 rule you should be applying yearly. Especially in today’s market, if you go out and buy a $4000 car and it has problems on you throughout the year and then the next year or two or breaks down on you then what’s the difference between that and buying a new car which is reliable and paying $3000-$4000 on it yearly? To apply this one 10th rule you will also have to understand some thing about cars in order to buy used, which not everybody does. I find this article just an extra add to confusion, not a solution. It doesn’t add any value or understanding to the costs of buying an old car or how to even go about it. You don’t just spend 1/10 of your salary on a used car and be done with it for even one year. And under these guild lines you could be missing out on a reliable used car over an extra $1000. This article doesn’t guide you in anyway, it’s pointless. It should be revised or deleted.
Sure. If you don’t like the rule, presumably because you don’t come close to following it, do your own thing. No big deal. Nobody is judging you.
Everything is rational. If you love your car and you are happy with your financial situation, great.
Personally, I am happy to not spend so much on cars over the years so I could invest the money fully into the stock market and real estate market.
I just enjoy making more money so I don’t have to work as much to take care of my family. Earning passive income is something I enjoy more than owning my car.
But after such a massive bull market since 2009, I’m thinking of upgrading and living it up more. Once my Range Rover Sport gets to be 10 years old I’m 2025, it’ll be time to change.
I think the ideal length of time to own a car is about 10 years or until it is about 10 years old.
See: https://www.financialsamurai.com/the-ideal-length-of-time-to-own-a-car/
Wow wow wow car buying advices from a Range Rover owner. Interesting.
Pretty cool right? The 1/10 rule doesn’t discriminate between the type of car you buy. It provides a guidance for how much to spend based on income.
Would you rather read car-buying advice from a bicyclist who doesn’t need or want or can’t afford a car?
It’s really up to you whatever you want to spend. At the end of the day, it’s your money and you can live the way you wan. This article was more for people who artist friend we can arrange to help them achieve financial freedom sooner.
If you want to buy a nicer car, make more money. Making 10 times its value.
And on top of everything I said which you may or may not approve. Is that you drive half of the national average. The cost of you owning a used car which you do not let us privy to it’s cut in half for the average person. And again not sure if you do any of you own work On cars or not.
The cost of driving a used car is not that much higher than that of driving a new car, unless that new car is a hybrid. In fact, in most cases, it’s lower, if you take the cost of insurance and depreciation into consideration.
I respect your opinion but I still think this is way overkill. To get straight to the point, not everyone is sitting on a goldmine of money to pay 10% of their annual paycheck on a car and then end up racking up thousands more in repair bills. Case in point myself. My first car was a 2002 VW Passat which I picked up for $2500 but ended up spending $4000 more over two years, along with sleepless nights before I finally bit the bullet and got a certified pre owned 2017 Nissan Altima that came with an extended warranty. Fast forward to today and I just bought my second CPO vehicle, simply because of the stellar ownership experience I had. Did I lose on opportunity cost. Yes, but I could sleep well at night knowing any unforeseen expense (Like a $1200 wheel bearing replacement I did two years ago) would be covered by my warranty, but also the fact that I had a smile on my face every time I got behind the wheel of that car. Cars are my passion, and I have zero regrets spending on one. I will add that I do save/invest at least what I pay each month for my car loan, so I make up a little of what I lose in depreciation. This is also personal opinion but someone buying a 10 year old Land Rover really shouldn’t be advising others on cars. Those things are so unreliable, I wouldn’t go near one with a 10 foot pole. I did have the option of a 2016 Land Rover when I bought my latest car, but even an extended warranty couldn’t convince me to buy one knowing that parts and maintenance would make me broke, even though a vehicle like a Land Rover is perfect for my outdoor lifestyle. To put things in perspective, I’m 29, just having finished graduate school with a PhD, with near zero college debt, so I can afford to lose a little opportunity cost if it means living a little. Also, the idea of passive income doesn’t really appeal to me, simply because I’d be down to working till I’m 85 if it means doing what I love and making an impact on my field of work. This article has a target audience, like my buddy who’s investing to build passive income and follows the 10% rule to a T. But for someone like me who’s got a game plan in place for owning a nice car while at the same time saving sufficient for retirement, I think it just kills the fun out of life.
I will say though that I am not adverse to risks, so spending on a car and investing in higher risk stocks and ETF’s is my thing, and should not be a thumb rule for anyone else to follow. It’s worked well for me, but I can’t guarantee it’s going to work for you.
I think you are missing the point. The point is that the more expensive the car, the more other costs are (typically insurance). Warranties run out and parts wear out on all cars. Also, we can assume you rent and drive an expensive car.
It is fine to justify the expense. That is not the question, but it is not a smart financial choice. And I drive a 10-year-old Grand Caravan that cost just over $6 grand two years ago.
I don’t agree with the ‘not a smart financial choice’ argument. I don’t think there’s a one size fits all financial gameplan for every person. The 10% rule works well if you are already rich or have a large chunk of money in savings, that way the car you get is actually reliable and comes with a warranty in the case of the former or you have disposable cash that you could put in to fixing the car.
In my case, I bought a certified pre owned Nissan Altima for $16k in 2016. This June, my transmission started giving out and I was at 98k miles, just two shy of the end of my extended warranty, and the dealership couldn’t ‘find’ the problem because shutting off the car and starting it up again temporarily made the problem go away. Now I could bite the bullet, dip into my year old savings(I graduated with a PhD last year so I’m 29 and in my first actual job) or do the smart thing and dump the car while the used car market is skyrocketing and get almost the same amount as I put in when I bought the Altima 5 years ago. I shopped around and found a great deal on a 2018 Equinox with AWD, the premium package and the pano sunroof for $24k. With my trade in value, I’m paying just $50 more for the Equinox each month. I also invest/save around that much so it’s not like I’m living beyond my means. And this is my first transition job post a PhD, so I’m fairly confident I’ll pay off the car sooner than my loan term and still save enough for a comfortable retirement. Now I ‘could’ have saved the $$ I’m paying for the Equinox and invested it but at that point it’s money I probably won’t live to use(unless I live past 100). There’s a good saying: You never see a UHaul behind a hearse. You can’t take that extra $$$ with you when your time is up. I can both enjoy my passion for cars and save for a comfy retirement at the same time with my current trajectory.
This smacks of special pleading.
The rule is a good guideline, and yes, it means many people wouldn’t even have a car if they followed it. But if you want to be like most people, then you will end up like them – which is living paycheck-to-paycheck.
Not sure why you keep mentioning you have a PhD, as it’s irrelevant to the point and only shows that having a PhD is no certainty of financial literacy…
I think a PhD is a bigger investment than putting $500 in the stock market each year for the 6 years you’d spend to get the degree. Education is never a waste of money. I’m not talking about most people, I’m taking about peers with a PhD in my field. My professor with a PhD in my field makes about $250k a year with his wife and they own an Audi E-tron and a Chevy Traverse, they buy new cars every 3 years and are building a new house so I doubt he lives paycheck to paycheck. I also think he’s smarter than someone who makes $250k a year and drives a Toyota Camry because they feel guilty about spending more on a car when they love driving. If you can’t enjoy the money you earn, you need to question your life choices.
I think you just reinforced my point above. And your example professor (if real) is almost certainly living paycheck-to-paycheck if they live anywhere near SF or in any HCOL area.
No I haven’t. I’m saying you can enjoy spending money and save if you make enough money. Even with a temporary post doc position, I still save money despite renting and paying off a car loan. I know that once I move to a full time professor position in academia, I’d probably save even more. Assuming I work till I’m 70-75, I’d have plenty of money to enjoy retirement and then some. You’d need to be splurging on a lot more than a car to live paycheck to paycheck with a $250k salary, so it’s all relative to someone’s lifestyle.
I think this article works well for someone like my sister and brother in law who view work as a chore and want to retire early like the OP. Otherwise, you’d essentially be making money you’d never really end up spending unless you somehow live way past 100.
Well, if you’re a postdoc now, you *might* be a full professor in 10-20 years. Academia is brutal. Why you need to save now.
This has to be the stupidest take I’ve ever seen. If you make $60k/yr only buy a car that is worth 6k… wtf logic is that?!
I deserve a nicer car if I make $60K/year. Why can’t I drive a $50,000 BMW if I want to?
Just because I didn’t do well in school or go to a good college and land some high paying job, I should be able to afford the same luxuries as those who have done those things!
A $50k BMW is overkill, just like this article. You’d be better off with a much more reliable $30k car. Word of advice, don’t buy European vehicles, the maintenance cost will get you eventually. For comparison, a Camry XSE costing ~$30k will hold its own and then some against a BMW 5 series in terms of equipment and features and will give you more than 200k miles of use. You’d be lucky if that 5 series makes it to 100k miles without major mechanical issues.
I believe the person you are responding to was being sarcastic. Read the last bit again…
I can’t even get on board with the 1/10 rule. I don’t want to spend more than $2,500 period, I don’t care if other people think I’m poor because of the car I drive, I would prefer to insure I’m not poor because of the car I drive. The new car flavor wears off way too soon I could never justify paying a car note, the car serves the same function, get you from point a to point b. I’m not paying a premium for that. I’ve seen countless friends take on car notes from $300 to $500 a month, it’s a colossal waste of money. Many of them trade up every 3 to 5 years. I can’t understand that desire to be in perpetual debt, it’s like they don’t even care what the total cost is, they just say “It’s only $300 a month” I’ve never had a car note and never will, I was never able to understand why so much commitment must be given to what gets you to and from work when cheaper options were always available. A $2,000 car that is well taken care of can get you to work or the store just like a $50,000 car. The cost of a car note would have to equate to the cost of extended basic cable in the 1990s for me to justify it and I’d even have a problem with that because it’s recurrent. That was $40 a month. Of course on my income level, this guide also says I should basically be getting around on a skate board or a scooter.
I admire your aim, however at $2,500 I would be concerned about the car’s reliability. Especially nowadays with the inflated car prices. A cheap car is no good if you need it to commute to work and run the risk of not being able to get there.
Hi there! Really enjoyed this article, thank you. Before I get to my financial/car question may I suggest you put a more user friendly “Leave A Reply” / Comment area… I had to scroll an insane amount past all your 1000+ comments until I found the comment box at the very end. Why not install at the end of your article?!
Your 1/10th advice, are you suggesting 1/10th of one years costs per vehicle? So we make about 130k /year, 10% would be 13k. Would that be our budget for vehicle costs per year? Or total cost/life of the vehicle? If it’s just the budget for the year, that’d be estimated about $1083 per month or less.
We bought a car new in 2006, total costs about $25k, paid it off and still driving it today June of 2021. Definitely have gotten our value out of it! We’re keeping this but need another vehicle and want to stay under 30k, well under if we can find the smaller suv needs we are looking for. Looking at your advice, it’d make sense if you’re saying don’t spend more than 10% of your income on a car yearly… but if you’re speaking 10% total life of car, seems very extreme and not a lot of options with that?
Another question, We’ve saved up money and can buy with cash or at least part of it but don’t want to tie up cash in a vehicle IF we’re able to get a very low interest rate? What’s your take on cash vs. loans etc?
Thanks so much for your time and help!!
Hi Sam, I appreciate you writing this, I think it points a lot of people in the right direction, especially those that view cars as a utility. I assume that if someone was to view cars as a hobby and spend the money they have allocated for hobbies as well as 1/10th their income they have on a car, you’d see no problem with it?
My main gripe, however, is that a lot of the reasons you brought up for not overspending on a car (maintenance, insurance, life-style creep) are more closely tied to the make a model of a car than to its purchase price (whether new or used). For example, if someone made 120k, using the 1/10th rule, they could buy a 12-year old BMW 7-series for 12k and it would be better decision than a used 2-year old camry for 20k. The problem is that the aforementioned problems, (especially maintenance), are going to be way worse on the BMW and cost way more in the long run, making it a worse decision, despite the lower purchase price.
My point is that I think a car’s affordability has a lot more nuance to it than simply the purchase price of the vehicle. I’m interested to hear your thoughts on this. Thanks!
If income 120k, according to 1/10 rule one should get 12k Camry, which for sure less maintenance than a 12k BMW 7.. Nuance is that with same budget you still need to look for less mainenance and less insurance car, but that apply to new or used car.
If you can justify how newer 20k Camry cost less than a 12k Camry after maintenance, insurance…etc then yes 20K Camry will make more sense than 12k BMW.
How does this rule apply to households that need 2 cars? Also we already own one car flat out and will need to buy a new car later this year.
It’s the same. 1/10th rule applies to total household income for as many cars as you want to buy. $200,000 household income, perhaps buy two $10,000 cars.
The car buying rule is to encourage families to either be disciplined spenders are encourage families to try and make more money from a day job or at home.
My income is around a million, I owe 150k on my house. No other debt.
I just dropped 150k on a new Mercedes G wagon.
I understand your 1/10 rule, but i think as the income goes up, the 1/10 ratio can change.
I don’t feel guilty, irresponsible, or foolish for spending 150k on a car in my situation….I have no boats, no cabin, toys, no kids and and a conservative wife.
But I realize you are providing general advice…
Nice! I had a MB G500 before as well, when I was 25 years old and only making about $200,000. But mistake. But it was fun while it lasted! Bought a condo in 2003 soon after I got rid of it.