If you’re looking for a car buying rule, you’ve come to the right place. I’ve come up with a car buying rule that 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 roughly $70,000 in 2020. 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.
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 $65,000 a year, then limit your car purchase price to $6,500. 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 car buying rule.
1) Maintenance costs: The more you drive, the more you will pay to maintain your vehicle. With thousands of parts per car, something will inevitably break or need upgrading. Not only do you have to pay for maintenance costs, you’ve also got to pay for insurance, parking tickets, and traffic tickets. Furthermore, the thrill of owning a new or new used car lasts for only several months, but the pain of paying the same car payment lasts for years.
2) Opportunity cost. When you buy a car you lose the opportunity of investing your money in assets that will likely grow and pay you dividends in the future. Everybody knows to save early and often to allow for the effects of compounding. Buying too much car is like negative compounding! Imagine how much money you would have accumulated if you invested $300-$500 a month in the stock market since 2009 instead of paying for a car?
3) Stress. When you pay more than 1/10th your income for a car, you will become more stressed. You’ll feel stressed whenever you get a door ding after parking your car at the local grocery store. You’ll get stressed whenever you incur wheel rash after parallel parking too close to the curb. Sometimes when you’re driving in traffic, you’ll feel more on edge because you don’t want anybody damaging your car. If you are within 1/10th of your income, you drive and park stress free. You stop caring about door dings, bumper scrapes, even break ins. Stress kills folks.
4) Makes you want more. The nicer your car, the more you want to spend on other things. You start thinking stupid thoughts like: I’ve got to buy a matching chronometer watch, driving shoes, and outfit. You start paying $20 for valet because you want people to see you come out of your car instead of park for free.
5) Makes you feel stupid. Deep down, you know that if you can’t pay cash for your car, you can’t afford the car. Each payment you make is a reminder how foolish you are with your money. Why would you want to be reminded every single month of being dumb? The thrill of owning a nice car fades after about six months. But the payment stays the same for years.
If You’ve Already Bought Too Much Car
Look, everybody makes dumb financial moves all the time. The important thing is to recognize your mistake, stop, and fix it! Here are some things you can do if you’ve bought too much car already.
1) Own your car until it becomes worth 10% of your income or less. This is the simplest solution if you’ve spent too much. Drive your car for as long as possible until the market value is worth less than 10% of your gross annual income.
2) Bite the bullet and sell your car. If you’ve spent anything more than 1/5th your gross annual income on a car, I’d sell it. It’s making you poor. Even if you have to take a little bit of a hit, I think it’s worth getting rid of your vehicle. Don’t trade it into the dealer because you’ll get railroaded. Instead, try negotiating via Craigslist.
3) Punish yourself. If you don’t punish yourself, then you will repeat your mistake and feel fine with what you have now. For the life of your car loan, take away a food you love to eat such as chocolate. If you are a coffee addict, swear never to drink that stuff again! Save more of your income after taxes and feel the squeeze so that you realize how ridiculous your car spending is.
Recommended Cars By Income (Tastes May Differ)
Cars built in the 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 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
Best Gas Rewards Credit Card: The Chase Freedom Unlimited is a fantastic rewards credit card that offers 1.5% unlimited cash back on all purchases. New Chase Freedom Unlimited cardholders also get $150 cash back after spending $500 on purchases within the first three months of account appointing. Finally, the Chase Freedom credit card has no annual fee.
Lower Your Auto Insurance Costs: Check out Esurance online for some of the best plans with the lowest rates around due to their lower overhead costs. It’s worth spending a moment filling out a quote to see if you can save some money. Car insurance is one of the largest ongoing expenses for car owners. Esurance has good driver discounts, and multi-product discounts as well. There is no obligation to sign up once you get a quote either. You want to leverage the internet to get the lowest rates.
Track Your Net Worth Religiously: Hopefully you are now motivated to make more money to afford the car of your dreams, instead of going into debt and buy a car you can’t comfortably afford. The easiest way to grow your wealth is to know where all your money is going.
Sign up for Personal Capital, the best free financial tool on the web. I’ve been using them for free since 2012 and have seen my income and net worth skyrocket. The app keeps me motivated to spend smartly and invest wisely. There is no rewind button in life. Best to get your financial life in order.
Updated for 2020 and beyond.
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.
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!
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.
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.