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.
I make $150K a year and mostly live a frugal live but it is hard to buy a decent car with your 10% rule. I am doing a lot of research and most likely will buy a 2018 Avalon XLE rental car with 37K miles for $18K from Hertz. I can’t believe this car is $35K brand new.
Why don’t you look at a 2014 or below model from a private seller instead of a late year fleet model? You certainly can find a well maintained, reliable Korean / Jap model for < $15K.
New car absolutely worth the premium to avoid smelling previous owner, dealing with previous owner, dealing with all the bullshit from private party.
Dude you’re a troll. There isn’t any bullshit if you pick the right private party to buy a car from in the first place. FB Marketplace makes this easier than it’s ever been before, as you can look for a private car in richer areas of someone who kept great maintenance of the car and are just looking to upgrade or be dumb and get a luxury car. Paying 10k to avoid smelling the previous owner is ridiculous, get over yourself.
I never said “luxury” car. I said “new” car. Most commenters have a glitch in their brain equating new car with a luxury car
I think this article is well intended, however your points are ridiculous.
Unsure why you are assuming everyone is buying their car out right.. if everyone followed the “total price of your car should be 10% of your income” the luxury car market wouldn’t exist.
You also should realize it’s beyond absurd to simply say “ figure out a way to make 300k” so you can afford a low end Lexus. I am baffled at the fact that anyone would take this article seriously.
If this holds true, then let’s consider housing costs . You should aim for 20-33% of your income to go to housing. So you would need to make 1 million a year to afford an average house.
Crazy this thing called Financing exists that allows you to buy something you wouldn’t be able to buy outright today.
This article is worthless bc it goes against what I believe in.
Mike, it sounds like you shop for things based on if you can afford the payment. Save up and pay cash. My base pay is 225k so achieving that 300k he’s doable for me. I’m in need of a car and I’m considering, coincidently, the Mustang on his recommended list. I only want to spend 12 to 15k max.
Very bad advice. We live in modern world. Not hunters/gatherers society. We trade our skills for other skills via money. We trade our time vs. assets via borrowing/lending.
You can easily brag because your base pay is almost quarter of a million. Yes you should be able to afford everything cash. Financing does not mean that I cannot afford something. I finance large purchases because of the flexibility to keep my money and possibly invest if needed. I am buying a $200K home soon and will be financing it. How does that mean I can’t afford it? I can pay cash & still have $300K liquid cash available? I like to pay cash for small purchases but I won’t knock on someone who personally can’t afford to. When I went to college, I took out interest free loans, simply placed in my cash in Long term CD accounts then repaid the principle after 5 years and pocketed the interest. Doesn’t mean I would knock on my colleagues who financed their education? I did too.
The 1/10th rule is definitely a guideline and can help some people with their achievements. I hoard so much money that I just want to live happy now & not by necessarily buying expensive cars and blings. But by worrying less about the return on every dollar and decision. I just want to relax. I look at others that are living happy without as much money and fancy cars as I do & I’m like damn, we’re both humans, they have less outside but are living contend and happy. I started adding my family members as beneficiaries to all my investment and bank accounts
Ah contraire, you may be financing but that’s because you are playing with the money to make more money. You obviously are skilled at living below your income and saving your income. Excellent job, I wish I was more like you. I wasn’t bragging but making the point with the author. I make a lot of money, comparatively, but spend a lot less on vehicles than people making a quarter of what I take in. If I think it’s a bad decision for me then I definetly think it’s bad for average Joe. You can pay off anything you finance today, so it’s not the same thing. Your money is working for you where as most people are working for their money.
Btw, my income hit 260k last year and I’m still looking while saving a little. College debt is a killer to family finances.
I watch a lot of comments on this article and find it insightful to see that many people who have well above average incomes ($150k+) tend to recognize and agree with this post, while many people who are in the $20k-80k income range have some of the strongest objections to it.
Also, it tends to be that most people who have accumulated a substantial net worth also agree to the premise this article is based on. Keeping the your liabilities as low as possible so that you can invest more until your investments bring your income high enough to afford the nicer luxuries.
The same advice this article is based on advises those finishing college to “keep living the lifestyle of a broke college student for the next 5 years”. Believing you need a separate bedroom for each child, or a car worth more than $5k for it to be dependable, or a new iPhone because yours is 2 years old… is just not factual when you look at what others have done in their lives who forwent those things.
If you want the statistically best chance to be financially average, you can borrow for liabilities and keep your payments below your income. But, most people looking for financial advice and reading blogs like this, are looking for how to be financial winners in life and looking for advice on how to not be one of the 70% of people living paycheck to paycheck. Yes, you can have a car that is 50% of your annual income and not live paycheck to paycheck, but statistically the people doing that are the anomalies and not the norm.
Your observation is correct; but you mis-construed meaning of it.
For someone making 150k+ it is much easier to maintain this fairly absurd rule. For 15k+ it is significantly easier to get decent and reliable car.
Now, someone making 40k…of course people will buy car > 4k. You tend to interpret this as lack of frugality. I argue, that in this situation, it is imperative to get a much more reliable (and expensive in absolute terms) vehicle. Assuming car is a necessity to get to work/school.
Main problem of frugality blogs: Focusing on easy thing and not understanding people and investments in general.
Main problem of this blog: Bring back x-factor discussion. Frugality brings out worst in men.
Hi Al,
Btw, I thought my $160K at 26 was comfortable but now I am aiming for that $260K. Yes, I definitely make, I won’t say smart because it may be subjective, but careful financial decisions and crazy sacrifices. In senior year I walked to school 3 miles RT to save $3 a day. I walked to work the same distance until I needed a car.
The funny thing is, the average Joe is just a comfortable and happy as me today. I totally get your point because I wonder how some people close to me could be so irresponsible with money.
I am fortunate to not have student loans. but based on your income, heck of an investment to make for education. Congrats!
“The luxury car market wouldn’t exist.” – Exactly. Just like the luxury space ship market doesn’t exist. Or the luxury private jet market is exists but is a minuscule size of the automobile market. The purpose of your life shouldn’t be to perpetuate the existence of a luxury market that sells depreciating assets to a population with sub-zero savings.
Financing exists that allows you to buy something you can’t afford – Isn’t that exactly the problem with the entire leeching financial industry. I wish most people had basic arithmetic abilities before they jump into financing things they shouldn’t buy anyway. Financial security is traded away for knick-knacks. An older generation that lived through depression would be shocked.
I notice that you did not comment on Mike’s point about financing a house. If mortgages did not exist, hardly anyone would be able to purchase a house. Your logic is so faulty it IS ridiculous. Your logic means that hardly anyone would buy a new car, because you would have to earn $300,000 in order to buy a $30,000 Honda. Absolutely totally absurd.
I am reading this and laughed at someone making 200K should buy a mazda3 hahaa, seriously.
I understand that knowing how to “wisely” spend your money and saving/investing your money is very important, but why snag a car worth 20K while making 200K is a good compromise? but accounting for parking tickets and traffic violations is fine to “budget” on? If so, your priorities are wrong and your financial management needs tweaking.
I’m not sure if this article predates another one you wrote in which you say in essence, “By all means buy a good car if you can because you have to protect your family from the war zone that are the streets.”
Still, I have to disagree with the 1/10 of gross income rule stated in this article. It’s pretty impossible for most people to do. That means you’ll have to make $250,000 just to buy a run-of-the-mill $25,000 new car. Of course, I know you’re saying to buy used (which is what I did when I bought my luxury car). Still, I about 30% of my gross income for my car because I was tired of the road noise and low crash safety rating of my old car. I was also willing to consume the cost of the 5-year loan because I know very well my return-on-investments will more than cancel out the cost of the car loan.
In the end, personal finance is personal. To say “must” does a disservice to people. They have to find the solution that is best tailored to their personal finances, wants, and needs.
It is true, everybody should do what they think is best for themselves. I don’t think it’s a disservice to share the 1/10th rule. I have gotten feedback from hundreds of people since I first introduced the rule saying how much they appreciate not spending too much on their car and investing the money in this bull market.
Nobody has to do anything if they don’t want to. It is only the people who feel the worst about their car purchase decision who will get the most offended by this post.
I think a $20,000 to $25,000 car is great. And some people want more and that’s fine as well. But when people spend big bucks on their car and wonder why they don’t have as much money as they want, that’s when things got kind of funky.
For god’s sake, stop spending 50% or more of your take home on an automobile. Why is that so impossibly hard to understand!!!!!!!!!!!! Argggggggghhhhh!!!
It sounds like simple math but everyone is incredibly worried about what their neighbors will think and incredibly insulted that they can only afford to drive a jalopy. Well, sometime the truth is hard to hear.
Anyway … I make over 200K per year and wouldn’t ever consider paying these insane car prices. It’s insane. Please stop!!!!
New or late model cars are much safer than old cars. Newer cars offer an array of safety tech that can avoid accidents and not just save you from injury or death but others as well. Following the 10% rule will mean 95% of people would not be able to benefit from technology that can save lives. So I completely disagree with the 10% rule. To the point where I think it’s patently absurd advice.
John the world is overpopulated anyway. If some buyers affordable cars lack 10 airbags theyll either drive better, slower or the population will “correct” for their shortcomings. I make around $26k, live in expensive New Jersey & drive a 280,000 mile chevy cruze. So i dont wanna hear it bro!
I think it’s reasonable.
1/10 of household incomes roughly 11k,
That covers our cars a 2011 odyssey and a 2012 Nissan Leaf.
The leaf would have been covered by someone making $35k following this rule, and the odyssey around 60k.
Neither of which I would say were unsafe or Jalopys.
I think the tone of the post is to be reasonable, in your vehicle consumption, you don’t need a 25k car when you make 27k a year.
If your worried about safety, you’d be much better served by owning a 20 year old sedan that you drive 1k miles a year than a brand new car that you drive 20k miles a year, statistically speaking.
Some food for thought:
If you live in a rural area with inclement weather, 2wd vehicles will generally not be a worthwhile option. If you have a 2wd vehicle there will be days when it is NOT safe to drive to work. What is the new plan? Are you just hoping your boss will understand? What if you work on commission or hourly? If you drive a 4wd vehicle, the cost isn’t going to be comparable at all. Show me a 4wd/AWD vehicle for $4k and I am going to show you a vehicle that HAS or WILL HAVE serious issues (I have had MULTIPLE of these vehicles, one of which was even a Toyota). And a lot of times these issues are not cheap. Twice the amount of differential work, high and low gears, overdrive, not to mention it probably has a larger engine to help push the vehicle along. Meatier tires, because if it is 4wd/Awd doughnuts likely wont cut it. What if you use your car as a part of your work? Maybe you are a traveling salesman and see 50k-60k miles a year. Maybe it is a part of your hobbies/side jobs. I am an outdoors man and contractor, and would have a really hard time loading up myself, 4 friends, and my dog with all of our gear in a Civic, not to mention it will be nearly impossible to access the locations that we need to get to. Some lumber? Nope. (Well, you could probably figure something out.)
I know that a used $8,000 Land Rover is mentioned above, but what do you really spend on maintenance? How many miles do you put on each year? In these rural areas 20k-30k is not at all uncommon. What if you are not very mechanically savvy, how much are your repair bills really costing you now? If you are mechanically savvy, how much is it worth to you to take away from recreational/family/friend time to have to work on your car? Is wifey going to be happy because your Ramen noodle dinner date was interrupted by you having to replace the fuel pump, otherwise you don’t have a way to take the kids to school tomorrow?
What happens when you find out that your alternator is shot at 7:00 a.m. as you are getting in your car to go to work and your battery is dead. Are you hoping the manager understands? Is that worth getting fired over? Would the extra money spent put a smile on your face as you drive places, or at least keep you from worrying about turning the key off cause your aren’t 100% sure it will start back up again? Is it worth saving that money to have to dry the inside of the windshield with a paper towel continuously because your A/C fan motor is blown and it is going cost 10% of the value of your car to change the motor out?
Then there is what I call “micro-stressors”. To me, small stressful items add up to a lot of stressful tension. Does the headlight being out, the dent in your passenger door, and the cracked windshield keep you from getting good sleep at night? How many dollars is this worth to you. Are you a jerk to loved ones cause you can’t get over the hole in your exhaust that wakes all of the neighbors dogs up? What if you are in a line of work where appearance really DOES matter (i.e. real estate agent, talent agent/marketer, car salesman?, politician, board member/appointed individual, etc.). Are you worried about the resale, or maybe if it will even be worth anything at all besides scrap?
I am not saying that older/used vehicles on a budget are a bad idea. I have had multiple, and I absolutely adored them all, but most of the issues listed above are actual issues that I have had with those vehicles. It needs to be understood that there IS a diminishing point of return in vehicle value and that people need to be cautious of a “One Size Fits All” budgeting approach to vehicle buying. I know it is safer to tell people to spend less and hope they follow suit, but my examples above are strictly to provide the understanding that you need to do what fits your lifestyle, and budget. You need to be very honest with yourself when asking, “What is this worth to me?” Quantify your life, your free time, and your needs. There is no guarantee that a more expensive vehicle will keep you from experiencing issues, but I will tell you again from experience, my most recent and most expensive vehicle, has had none at all. (I also really enjoy driving it.)
Globally speaking, only 80% of people even live to see the age of 65. 1 in 5 of us will not even SEE the retirement we are saving for. You are welcome to eat your Ramen, and spend your morning commute sweating through your polo, wiping the front windshield with paper towels while listening to the drone of your leaky exhaust through your duct-taped window, but I would rather make a plan with more critical thinking involved, that allows me to drive something that is reliable, comfortable, and enjoyable.
*I love Ramen.*
hi Sam,
I’m tempted to try the Personal Capital resources but part of me is quite nervous about giving some corporation access to all my finances! I know the info is out there already in a decentralized form, and I do think I could benefit from having a clearer more centralized picture… But I’m on the fence.
I notice they’re in SF. Have you talked to them in person by chance? You must feel they are pretty secure and upright. What about their system security? Am I kidding myself? How can a layman even begin to gauge corporate system security? Aaaaah!!!
A friend once said to me: Use the technology, just don’t let it use you. I love that statement but it’s a real trick figuring out how to do that in most cases.
Open to your feedback
Thanks!
Sonia
Yep, I actually consulted with them part-time from 2013-2015. I’ve met all the founders and c-level executives. The founders founded an online security firm called Passmark.
If you don’t feel comfortable using technology, don’t use them. Paper and pencil work too! Just don’t lose the paper.
For some reasons, I’ve always been comfortable using technology, credit cards, buying things online, etc. Online, there’s a record, so I trust things will be resolved.
Related: Is Personal Capital Safe To Use?
It is fascinating when an article stirred up strong emotions. It reminded me of the college years when I used up three cars in 3 and ½ years and finished my B.S in Engineering. Each one of the car was 1/30 of the income at the time.
I chose to drive $400 cars because it is the only way I attained the college degree – a dream beyond the reach of both of my parents.
The author of this article has his heart in the right place, but he may have crossed the boundary of telling others on how to exercise their hard earned resources.
Financial Independence is very simple. It is not rocket science and it based on simple math.
The following proposed money plays are based on the Trinity study.
85/15 Money Play – spend 85 cents and save 15 cents on every dollar of income. Put the saving in investments with the return between 6% to 7% for 35 years – after 35 years, the accumulated saving along with the compounded interest will give a 30 years of income with 95% or greater probability of success.
60/40 Money Play – spend 60 cents and save 40 cents on every dollar of income. Put the saving in investments with the return between 6% to 7% for 20 years – after 20 years, the accumulated saving along with the compounded interest will give a 30 years of income with 95% or greater probability of success.
50/50 Money Play – spend 50 cents and save 50 cents on every dollar of income. Put the saving in investments with the return between 6% to 7% for 15 years – after 15 years, the accumulated saving along with the compounded interest will give a 30 years of income with 95% or greater probability of success.
40/60 Money Play – spend 40 cents and save 60 cents on every dollar of income. Put the saving in investments with the return between 6% to 7% for 10 years – after 10 years, the accumulated saving along with the compounded interest will give a 30 years of income with 95% or greater probability of success.
None of these Money Plays require the specific incomes, and they do not tell you what to buy, what to eat, where to live and how to live.
You just have to pick a play and it is your creativity and resourcefulness that will make the play a success.
Good luck!
Great principle….while we are at it. Everyone needs to spend 10% max on their vehicle (vehicles to multifamily units), then spend no more than 10% on their mortgage, then spend no more than 10% on utilities/food/entertainment….that way they can save 70% of their income every month to invest.
What rock are you living under? I get the principle, but that is not the way society operates today. Great, lets all go back to the 1940’s and get our priorities aligned right?!?!
This is whimsical thinking and not something that most people will follow even a little bit.
My advice is give advice that is applicable to today’s society and social norms and you will get a whole lot more bang for your buck.
P.S. – I have a net worth of 5.2 mil. And even I don’t subscribe to the 10% of income philosophy (I make 450k yr.) and I am doing just damn fine.
The author has a parallel calculation of 5% of net worth; and one can go for the higher recommendation. So unless you are motoring around in Koenigsegg, you’re probably within his guidelines.
The “social norm” about money is to be broke because people buy things they can’t afford (poor) or go into massive debt buying things they can’t afford (middle class). I think the whole point of this website is NOT to follow social norms. But for some reason the car has became fused with most Americans’ identities, hence the constant flames on this old article. Believe it or not, you are not your car.
If you ever worry about being judged by others (especially strangers) because of the car you drive, you have problems way beyond what you pay for a car and financial freedom/security will likely always elude your grasp.
Well said. The average American is not getting ahead in their finances because they’re not saving aggressively, not investing properly, and spending too much on things that are unnecessary.
$38,000 after-tax for the average new car price in 2019 vs. a $62,000 median gross household income is completely out of whack.
Student loan debt, credit card debt, everything debt is keeping people from achieving financial freedom.
It’s what people want. I don’t want to be average with my one and only life. Time is way too precious.
38k car is around 500$/month perpetual lease.
This is new.
You can get excellent new car for $20k, which is around $250 lease.
Very very reasonable for $62k income. Because you’d rather be able to get to office on time and not waste weekends on car repair…
Why not add the Model 3 to the $250K-500K bracket?
This is not good advice.
If you only spend $4000 on a car there is a good chance that in 2-3 years you will be spending another $4000 on another car because the cost to repair it—the gear box, for example—will exceed the value of the car.
You can find well running, 8 year old Honda Civics for $4,000 – $5,000. Up to you if you want to spend more of your $40,000 on a car. It really is your choice. Don’t let me tell you otherwise.
I loved my used Civic and used Land Rover Discovery.
Can’t see where to post a new comment. Please respond to this repost:
“Yo says
May 12, 2019 at 1:24 pm
is this assuming you change your car every year? If you plan to keep your car for 5 years do you mean 10% x 5?”
The awful, horrible truth is that most Chinese (especially mainland Chinese) people who grew up or whose parents grew up under Communism are so focused on wealth, money and how to get rich that they have absolutely no clue about what it means to a) actually live and b) what it means to be truly content with what you have. I highly doubt the author’s wealth was earned merely by his intelligence and hard work; it’s virtually a certainty that he started out without much but, that his family or relatives gave him the financial power he needed to get where he is today. For example, where did his $million education at Harvard come from? His pocket money or savings? My point: don’t preach to others about things you know nothing about. Your advice won’t be worth what you think it is.
This is a great tangent. How did it come about and what does race etc have to do with not wasting money on cars?
Some related posts:
https://www.financialsamurai.com/rich-spoiled-clueless-work-minimum-wage-job-at-least-twice/
https://www.financialsamurai.com/what-if-you-go-to-harvard-and-end-up-a-nobody/
Wow!! You can sense the emotional attachment to car spending in these replies! I wonder if people felt so strongly about paying more for their wooden wagons back in the day?
Anyway, good read and mindset reality check-in. Alas…it will be difficult to overcome the big auto marketing machine. We all know undermount blue lights on hand holds are required to get from point A to point B after all.
But I digress…I actually have what is probably an inane question but will ask it it anyway because it’s applicable. In a single-earner, two person household…10% PER (assuming two vehicles)…or TOTAL??
(You have to admit…it’s kind of funny to think how yesterday’s top of the line luxury is now considered a clunker that half the replies here suggest is unacceptable to own! is there such a thing as luxury inflation? my iphone suggests so…)
10% total if you can make it happen. GL!
I have benefited from the articles on this website before, but I must join the chorus of those concluding that this article contains terrible advice. I would advise those reading this article today (June 2019) to take the principle behind this article to heart (“don’t buy too much car!”), but ignore the specifics and establish a more reasonable standard than 10% of gross annual income. There are two primary reasons for ignoring this advice:
1.) The advice is impractical for most of the country. F.S. treats vehicles as if they are pure luxury desires in the way chocolate, entertainment, or vacations might be. They aren’t. Most of this country requires a safe, dependable vehicle to get to work each day, to shop for groceries and run errands, and to raise a family.
The reason that F.S. has overlooked the impracticality of his chart is that he has spent almost his whole life in NYC and SF, two cities with extensive public transportation systems and clogged roads. These are cities, in other words, where real alternatives to cars exist and where driving a vehicle to work is often more a headache than a luxury. That situation is not the reality for most people. Dependable vehicles are necessities.
2.) The advice will likely prove costly. Does F.S. have any practical experience with what a $4,000 vehicle is actually like?
In the same breath that he complains about the associated costs of maintaining a vehicle, he recommends that someone making $40,000 a year should purchase a $4,000 junker?
Thought experiment: what should that same person do when (s)he learns, six months into spending 10% of their annual income on a vehicle, that the transmission has failed and that the cost of fixing it is $2,000? What about the next year when the brakes require total replacement for $1,200? These are not fantastic or rare examples. Anyone familiar with vehicles in the 4K to 8K range will know that such things happen often. You are guaranteed problems at that range, no matter if a mechanic checks it out beforehand or not.
With this advice, F.S. puts someone in an impossible situation. Either dump their broken vehicle for a terrible depreciation (likely less than 1K), or reinvest 50% to 75% of the vehicles worth just to make it functional again. Not even to mention the non-existent resale value a 4K vehicle will offer, no matter how much money you waste making it functional.
I suspect, once again, that this advice comes from a place of practical ignorance. F.S. is not someone who has much, if any, experience with vehicles in this range and thus unwittingly leads his readers into a terrible financial trap.
Note to readers from someone who has tried this path: don’t waste money on either a clunker or a new vehicle. Save money for a strong down payment (4-7k), take out a modest loan (again 4-7K), and purchase vehicles anywhere from 8k-14k, depending on your financial situation and auto needs. It will save you money so long as you maintain the car well.
I drove a $2,100, 1987 Toyota Corolla FX16 for 6 years up to 160,000 miles while in Virginia from 1993-1999. The car was fine.
In 2004 I drove a 1997 Honda Civic for two years and it was fine.
Then for 9 years, I bought a used Land Rover for $8,000. It was fine too.
So yes, I absolutely have experience driving economical cars.
But you were also single, and just a student. For a family (with kids), buying a car that cheap is risky, unless you are a solid mechanic by profession. As much as you are correct about the depreciating factors of cars, for a family in rural area, you have to have a solid vehicle. For those people, a 4-5 year old car has already gone through a great chunk of depreciation and yet, such a car can go easily another decade with normal maintenance. Remember, the situation is different for a young single student in his early twenties versus a family of living living off 50K a year. different situations need different advice.
I agree with you about safety. It is a must. But more importantly, be a safe and defensive driver above all else.
Plenty of non junkers for 1/10th income.
See: https://www.financialsamurai.com/the-safest-cars-to-survive-a-crash/
No, there are no non-junkers at 1/10 rule, if you income is 50k or less.
THere is are no if/buts about it.
Go on auto trader and use the filter cars with less than 75k miles. Honda and toyota newer than 2012 and you will find alot of cars with low miles in the 4500 to 7k range
Your modest loan of $7k is worth $10k over 5 years which pays for 4 transmissions, 2 brake jobs and a massage.
lol stellar reply. Sometimes we think that spending way more for something more reliable will save us money, when in fact it just means we end up spending more than our “worst case scenario repairs.” It comes down to doing your homework and researching which models are more likely to fail. They’ve been on the road for years and surely some info must be available on which gremlins each model has. Even your 8k-14k car is not guaranteed to be free from failures, especially if not well taken care of.
I’ve never owned a car worth less than $5k, but in my experience, most people who own cars cheaper than that don’t bother to fix the A/C or cosmetic damage. They just concentrate on keeping the car moving, even if it means having to wipe the inside of your windshield with a cloth when its raining because of condensation. I could add other annoyances like having everything rattle, noisy engine/transmission, rough ride, a slow car. Either way if you want a car that cheap, it’ll get you from A to B, just not very gracefully.
is this assuming you change your car every year? If you plan to keep your car for 5 years do you mean 10% x 5?
I think teaching people to be frugal is good especially given that on average Americans are spending a lot (saving rate is low compared to other countries).
But I also have to say that 10% is extreme and putting too much emphasis on saving things; do not forget that (i) life is not just defined by how much you save or how financially successful you are, and (ii) sometimes saving too much means that you have to DIY a lot (e.g., repairs) and all those hours of DIY work could be used to earn income (i.e., the so called opportunity costs).
On (ii), for example, a doctor or lawyer or consultant or alike is usually paid a couple hundreds $ an hour, and sometimes a car breaking down can cost him/her a client. Let’s say you lost 5 hours a month to doing repair or driving to repair shops after you bought a used car. 5*12*$200 is 12k annually and 5 years means 60k which can buy you a Audi A6. Well, this is not completely truth because income is taxed, etc. but you get the idea. Not to mention the business interruptions you got from car breakdowns.
And this is just purely financial aspect. There is the invaluable memory of driving a cool car.
So there are many aspects to consider… and I think the article here is bit on the extreme side and does not apply to an average American. Perhaps it worked perfectly for the author’s circumstance and the author’s values, but perhaps not for an average American.
I am a university professor in CA (not to validate my argument but just some background info.; people from different background have different perspectives).
Why are parking tickets and traffic violations used to bolster your argument? Aren’t those independent of what car you drive? What does that have to do with how much to spend on a car?
The problem with this advice, and the staunch stance of the author, is the lack of nuance. The REAL answer is “it depends”. There are many factors to consider that the author, well, didn’t. Why not? Because 10% is easy advice to give, it’s more marketable to throw out this nice round integer and be dogmatic about it then it is to consider all the myriad of situations people can be in, all the factors to consider, and actually consider the intrinsic value of driving something you like. Think of how much longer and harder to write this article would be if the author actually considered multiple perspectives. Sorry, but this is just lazy writing.
If you like nice short fluffy phrases, “Follow those who seek the truth, run away from those who claim to have found it.”
Wow… Happy new year 2019!
After a careful reading of this post, I have come to the conclusion that 10% of annual income spent on a car is a lofty goal to attain, but simply impractical for most people.
I get the need for savings and investment, and I am an almost religious user of a budget.
With that being said, penny pinching and eating noodles so you can amass a fortune after your productive years is not the way to go.
There is joy for sure in a pile of stash in the bank, but happiness is always relative – there is no state of absolute happiness for the human soul.
In lieu of the fact that misfortune may well happen to you before you are ready, and that low income earners may very well remain at that salary level for the rest of their lives through no fault of theirs and regardless of hard the work, I say it’s a bit cold-hearted to suggest they never own a car until they can manage six figures salary – which may be NEVER.
I say buy a car (used or new), just let it sit between 10% to 30% of your YEARLY INCOME, and you’ll still attain your financial goals on schedule.
Personally I’m a used car fan, buying from 100k miles to 150k miles and driving till 200k miles to 300k miles.
If you are a car enthusiast and would not mind spending really BIG on a car purchase, or you earn minimum wage and a 30% annum car is not safe in your books, I say spend up to to 50% of your annual income and draw the line there.
But have it at the back of your mind, that you have increased the time it would take to reach your goals NORMALLY.
50% annual income should be the maximum you spend on a car, so you can have enough to eat, live and change that car oil..lol
Spending above 50% is very risky and should be discouraged.
At over 50%, you would not recover quickly if your car were to immediately breakdown, also you would have lengthened the period it will take for your wealth and savings to grow.
Therefore as a general rule, I’d say try not to exceed 50% no matter what!
You see, we WANT many things in life but the reality is that we only NEED a few things in life.
Always let your car buying decision be governed by NEED and not WANT.
Satisfy some of your wants in some other ways, preferably with the lesser expenses in your budget.
And NO, you’ll never be fully able to satisfy all your wants no matter how wealthy you become
Apologies for the long sermon, I do tend to ramble at times, but I hope I have been able to assist someone, somewhere.
Full disclosure I am 30 years old with median income, 45kish per annum.
PEACE!
P. S.
The percentage values I stated above represent a single or lump sum car payment, not loan or lease.
I totally agree! While spending 10% or less on a car is probably sound advice in some situations (young person, someone with a very low salary, anyone with lots of other debt), I think it is extreme for many. I just purchased an almost new $70k vehicle and am quite happy about it. I actually own 4 autos, and one of the others is also a $70k vehicle. I am a crazy budgeting fool, love listening to Dave Ramsay, and like reading things by people like the financial samurai. However, my goal in life is not to be majorly wealthy. I like being debt free except for a car payment, having a good retirement plan, owning a nice place, eating very well, driving very nice autos, traveling, etc. In other words, while I love managing my money and controlling it, enjoying life is more important to me than being rich. I enjoy life, consider a car payment to be acceptable debt for the moment (although before long I should be able to drive very nice cars without debt – yay). I also like spending on vacations, expensive foods, etc. But, hey, why not? I make decent money, manage it well, and live well. Yes, if I was very frugal I could be very wealthy some day, but that is not my goal. For those of you who want to be rich – fine. I understand. I do. Happiness and not being enslaved to others because of debts is good enough for me. I will leave becoming billionaires while driving older, untrustworthy autos and eating beans and rice to others. And, I HAVE driven many 10yr+ autos. Two of the ones I own right now are such. They have their place for farm vehicles and sometimes local driving, but I love road trips and need reliable autos for that so that I am not stressed about breaking down everywhere I go!
Blah blah blah… I this I that. Stopped reading at the 3rd “I”
Spot on Brian
Is fun reading all the comments.
I think the article is bang on.
The purchase price of your car at 10% of income sounds perfect to me.
If you are making 40-50k you can find 100’s if not thousands of cars to choose from in the 4-5k range. You take them to a mechanic before you buy and they will tell you if is worth it.
A new car still needs tires, batteries, wipers, oil changes, fluid changes at same interval as an older car.
If making less than 50k it become more cost efficient for you to take a couple days off work if you need the time to fix your car yourself. Than pay 1000’s of dollars for a mechanic to fix in one day. I do my own repairs and have never had to take more than a weekend to repair my now 14yr old that I bought as a 9yr old used car. I’ve had people comment mistaking my car for a new one just because I redid the headlights.
At 5-10k the options open up to pretty much any make model. At 10k-20k you can get used Porsches to even some Ferrari’s.. 20-50k will get you pretty much any enthusiast car could want.
People spend 60-70k as much on a new SUV or pickup truck as some people spend on a used Lamborghini 70k that looks every bit as good as it did when had a 300k price tag a decade earlier.
You can get a new 20k-30k economy car or a used 20k-30k Porsches that most people can’t tell the difference to what year it is.
In the end is your own money to do as you wish.
Thanks for the article I reference it whenever I try to help someone with car buying budget. I can’t remember how many years ago first read it.
I know this is an old post, but I just had to add to this because I think everyone is missing the point about how much to spend on a car. I love all your articles and you have helped me with finances for sure, but this article, meh ….. I drove my last car I bought brand new for 17 years, then gave it to my son 2 years ago and he is still driving it. If you spread the cost over the time used, it averaged out to a little over $1300/year – not bad. Maybe the 1/10th rule would make sense if you looked at it on a per year basis. Don’t spend more than 1/10th of your salary A YEAR on a car, but to say 1/10th total seems unrealistic. “Regular people” new cars are around $25000. If you spread that out over 5 years with 0% fianancing, then 1/10 would be $2500 per year, which hopefully is less than 1/10th of their annual salary. But the absolute biggest reason I would not follow this advice is because you are talking about driving around in a beater and there is no way on God’s green earth I would ever drive my 4 year old grandson around in a beater. That is why I got rid of my 17 year old car that was still okay to drive – it was okay for me to be in it, but not my grandson. I bought another car that had all the safety features I could find to make sure he was as protected as possible. I would be negligent to drive him around in a rust bucket. If you would drive your kids around in a beater just to save money when you are a millionaire, that would be almost criminal. Also, a junker out on the road is a hazard to all other drivers. It’s not always just about money.
You are welcome to believe what you would like, but the believe that all vehicles that are 1/10th of someone’s salary are unsafe rust buckets would be completely inaccurate and fed by feelings and not actual data. In case you haven’t checked… there are a lot of very nice vehicles that are all newer than 10 years old that cost $4-6k (right around the average income. Just to preempt the $6k higher than 1/10th the average, try negotiating.
A quick search on craigslist shows there’s nearly 600+ for sale that meet that criteria in Nashville alone.
https://nashville.craigslist.org/search/cta?min_price=4000&max_price=6000&min_auto_year=2008
If you believe those are unsafe rust buckets that are dangerous to all other drivers, you are in the minority.
Pete, I know this is about a year later, but you have bumped your head. This article also mentions 90’s vehicles. 90s vehicles are some of the worst cars you can buy, when it comes to reliability. Even worse than the Detroit crack years. There is a reason there aren’t many on the road.
And back to bumping, private sellers are the worst way to go, unless, you have a few grand to repair and refurbish, or the private seller can produce all service records not on a Carfax.
The advice in this article is for a young person just starting out, and is evem wrong there, because with today’s new prices, used cars have gone up. I recently bought a used vehicle, and what sold me on it? 3 years old, certified, warranty, new tires, checked from top to bottom by manufacturer certified mechanics, and those small problems fixed Before I bought it. Yup, a few hoses were bad, even after just 3 yrs, and if I bought as is, or private, that was another $800 right off the bat. Just like when I did buy as is, a while back, 4 yr old car. 3 months and $600 later I had a running car for a full year, then evey 6 months I had to park it for 6 months to a year until I coild afford, or someone helped me get intake manifold fixed, computer fixed (after 1200 in other repairs that didn’t work), and after 14 yrs, I sold my 9800 used “gem” to the scrap yard for $350.
So, to you, and the OP, 10% a year should be a better buying tip in financing.
Hi,
I agree with you. It is not advisory to spend more than 10% of your income on a car. It is interesting materialism has lead to the point of cars becoming financial symbols in our society. I personally enjoy commuting to work by train. However, should I want a car it would definetly be a Lexus as this is a small dream of mine I have had since I was a small kid. In case you live in an area where a car is a must, financing services can help you out.
While I totally agree with the logic behind de 1/10th rule I also disagree with the way is transformed into buying advice, as it doesn’t provide guidance to all variables involved in the adventure of owning a car.
Let’s say I follow the rule strictly , I still can run into trouble (buying gas guzzler, buying a 10+ year old car, etc).
A better approach is to calculate the TCO (total cost of ownership over a 5 year period) and then calculate what percentage of your earnings it represents.
Let’s say you make 70,000 USD a year and drive 15,000 miles a year.
Option 1 (Buying a USD 7,000 2008 Ford explorer)
Over a 5 year period you will have the following expenses
1. Depreciation: USD 3,500 (half the price)
2. Gas: 15,000 miles a year (15 mpg @ 2.8 USD/gal) = USD 14,000
3. Repairs and maintenance: USD 6,000
4. Insurance: USD 5,000
5. Total= USD 28,500 for 5 years = 5,700 a year (8.1% of yearly salary).
Option 2 (Buying a USD 20,000 2015 Honda Accord)
1. Depreciation: USD 10,000 (half the price)
2. Gas: 15,000 miles a year (25 mpg @ 2.8 USD/gal) = USD 8,400
3. Repairs and maintenance: USD 3,000 (newer car)
4. Insurance: USD 5,000
5. Total= USD 26,400 for 5 years = 5,280 a year (7.5% of yearly salary)
In option 1 you are following the 1/10th rule while in the second option you are clearly violating it (30% of your yearly salary!!! God forgives us!). But over a 5 period time if cheaper to own the Honda than it is to own the Ford Explorer. I am already listening the cynics saying that I am comparing different types of car, but before you shoot me, the 1/10th rule also doesn’t account for this either; in fact I chose the examples on purpose.
Another advantage of this approach is that you can factor all the cars in the household and the total shouldn’t be more than 10% of the household income, ideally it should be closer to 5%.
Sounds like you enjoy your new(ish) Accord and there’s nothing wrong with that but you’re omitting significant costs from your analysis. First of all, analyze similar vehicles.
Option A:
1.$20,000 2015 Honda Accord
2. Gas: 15,000 miles a year (25 mpg @ 2.8 USD/gal) = USD 8,400
3. Repairs and maintenance: USD 3,000 (newer car)
4. Insurance: USD 5,000
5. Loan interest = $1500 (most people cannot afford $20k without auto loan)
Total cost after 5 years = -$38,000
After selling car = -$28k.
Option B:
1. $5,000 2007 Acura TSX
2. Gas: 15,000 miles a year (25 mpg @ 2.8 USD/gal) = USD 8,400
3. Repairs and maintenance: USD 4,000
4. Insurance: USD 5,000
5. Compound interest + investment savings of spending $270 per month ($15k car payment with $5k down) on low interest index fund: -$21900
Total cost after 5 years = +$1371.
After selling car: +$5371
Therefore driving a slightly older, though similar car for 5 years was completely free.
Thanks for pointing out that I didn´t include the financial cost. I normally use my savings to buy a car, and since interest rates (low risk) where around zero for a while so I didn’t find it relevant to factor that in the analysis. But you are absolutely right that doesn’t apply to everyone and I forgot to mention it in my analysis.
I compared different cars on purpose, to point out that blindly following the advice on the article is a mistake. There are other factors to consider like the ones we seemed to agree on (plus the financial cost).
Owning and driving a car is never free, is you hadn’t buy a car at all, you would have probably +26,000 USD after five years. Comparing that to your estimate of +$5,371 there is obviously a cost.
At the end of the day, financial analysis is just one factor we actually use to make a final decision (otherwise nobody will get married and have children based solely on the financial numbers). It depends on how much you drive, how much you enjoy driving, how important is reliability or having the lastest features in a car. Obviously the more you want the more you’ll end up paying.
P.D. I have never owned a Honda. Just data I found with a quick search on google.
Sounds like you’re still missing the point of the 1/10 rule. Your attempt to debunk it using TCO isn’t convincing when you look at the numbers we provided. We assume that someone making $50k a year needs to buy a car and has narrowed his options to a newish Accord or a used TSX. Sure you can fudge numbers by deliberately picking unreliable clunkers, but let’s assume a basic level of intelligence/financial acuity.
The original difference in price between the 2 options is $15k. After 5 years the net worth for the person picking option A plummets by $30k while option B remains the same. Unless the TSX requires multiple engine rebuilds, there is no way the Accord would ever be the better buy for someone making $50k since the opportunity cost of getting a $15k loan is so high. To correct your analysis you need to include opportunity cost in your total cost of ownership which includes loan interest and 5-8% return from your average mutual fund.
The reason the 1/10 rule works is because it allows you to use the markets to offset your depreciating assets. Someone making $500,000 can easily afford a $50,000 car because if he invests the same portion of his income as option B, his car will essentially be “free” as well.
Ran across this article this morning and totally agree. I’ve only owned 2 new cars in my life and after the second one regretted it completely. Since 97 I’ve been buying good used cars and investing the rest in property which is now paying off our dream home and also putting enough away for a stress free retirement. All my cars have been around the 10-15K mark and driven until they could be driven no more. Yes it is a choice but I personally know what that choice will give me now and in the future. I have employees that buy a new car every 3-4 years yet they own nothing, are drowning in debt and refuse to listen to any advice because of that so called lifestyle. Maybe they will figure it out, who knows. But I digress, thanks for the excellent article.
I agree with the author of the article. Buy used cars that have a proven reliability record. Since 1989, I have spent $47,800 on automobiles. I estimate that I have spent $4,500 on repairs. That is a total of $1800 per year. Yes, this is extreme, but I have invested the savings into my 401K with remarkable success. I do not believe in spending money trying to impress people who I don’t even know. If the people who know me don’t like me because of my car, tough! I got over peer pressure when I was in grade school. The point is that we do have an easy opportunity to accumulate wealth if we are wise about automobile purchases. Alternatively, I have travelled to 14 countries, and don’t hesitate to go out to eat. With vanity ruling, I could have easily spent $126,000 on automobiles in the 29 years, rather than the $47,800.
1. $47,800 for car over 29 years. You must not know what new automobile technology is! Try to live once!
2. You don’t need to impress anyone. It’s for your own enjoyment.
3. If you have money to afford luxury, pay for luxury! Of course, after retirement saving!
I know you are right about my ridiculously low amount of expenditure on automobiles. However, everyone cannot have high salaries or wages. I have chosen a lower stress occupation, and others legitimately don’t have too many open doors of opportunity. So, for middle class or lower middleclass, choices must be made. Perhaps it is twisted, but I enjoy seeing how far I can stretch my “automobile” dollars. I could not have spent much on automobiles and been able to travel, unless I choose a high-stress occupation. I appreciate your comments, but I do not feel at all “cheated” in life after my automobile choices. My current vehicle is a 2005 Nissan Titan, 4 door, 4 wheel drive and it doubles as my work truck. It is comfortable for a long-legged 6’2′ guy. Great sound system, quiet, and smooth ride for a truck. It really loves gas stations. Your comments are OK, but some people are so hostile to other opinions. When this author wrote the article, it was not intended to be applicable to everyone’s circumstances. Old saying- “if the shoe fits…”
This post is so wrong. Do you even know what you are talking about, Mr. Executive Director?
I agreed with Lou above. Making $200k/year and driving a Toyota Camry is miserable. Enjoy life a little before you die!
Current driving a Mercedes Benz and I am total happy, financially independent, have no issue with car payments. Plus, I also maxed out my 401k $18k/year for the rainy day plus stock trading account for annual bonus.
Knock on wood. If I crash, a MB will save my life, I don’t think a Camry would do munch. My lief is worth more than just a few thousands dollars a year.
My net worth is a bit less that Mr. Lou but I think I can afford a lifestyle of driving a luxury car which has pilot parking, 360 camera for my own safety and convenience.
Thanks but no thanks!
—————————————————————-
“Lou says
June 7, 2018 at 2:25 pm
Thank goodness I have never taken advice from someone who makes 35K a year. I am 49, working, and have a net worth of 3.8 mil. The thinking in this article is what I loath.
I spent 2 million in the last 30 years on vehicles that brough happiness and memories, otherwise id have 5.8 million and be living in remorse. At death you better have spent some of the fortune amased….otherwise it was all for not.”
If you spent $2 million on cars in the last 30 years you are missing a lot more than that from your current net worth. If you would have driven more practical cars and had invested in something like the S&P 500, your net worth would likely be double what it is now. I get it, I lived in California for the last 2 decades and many of my neighbors have the same attitude towards driving nice cars as you do. I drove company cars and my wife drove mostly used cars in the $12k – $25k range until 2008(at age 43)when we spent $45k on a new vehicle that she drove for 6 years until handing it off to our son. We paid cash for that car in 2008 and sold stock in the tech company she worked for at the time. Those shares of stock would now be worth $460,000. Maybe we should have bought a used car or something practical like a Honda Accord at the time, lol.
My point is there is a big opportunity cost, especially when you are young for driving expensive cars that depreciate 50% in 4 years or less. We were super frugal with cars when we were raising kids and it helped us become financially independent before age 50. Had we purchased all the toys and expensive cars that many of our neighbors did, we would certainly not yet have a net worth and passive income that puts us in the top 0.1%. We are now 53 and I’m retired and my wife only is working because she loves it and we still have our youngest child living with us. As soon as she is off to college my wife will retire and we will enjoy spending time at our 3 homes and traveling the world.
BTW, I have nothing against expensive vehicles, I just couldn’t bear the opportunity cost when we were in our 20′, 30’s, or 40’s. Our current vehicles are a 2015 Audi S5, 2015 Tesla, 2018 Range Rover, and a soon a new Boxter S.
I make 200k a year, base. No debt. Total comp about $250k, and I drive a 15-year old Honda Accord without a working radio. My net worth is about $1.6m (I made much less money until recently). This article has convinced me I might be able to spend more for a car than I might otherwise. Maybe I’ll splurge on a new, base Accord or Charger (if I can dicker the price down to about $24k).
AGAIN… another completely out of touch post… you’re writing posts about how everybody makes $300k a year and now all of a sudden people make $24k/year. whoever takes your advise must be incredibly gullible and inexperienced.
if you’re buying a clunker, your service cost will outweigh the cost of a new car, you put yourself and your family in danger, you put other drivers in danger. it’s true you shouldn’t spend 100% of your salary in a car, but you’ve made it clear in other posts no one earns so little… so make up your mind. either they do make money or they don’t.
used japanese cars tend to be bullet proof and these are great for college kids or people with low income jobs, once you break $60k/year move to a city where you can live comfortably and buy a normal new car.
you write about getting out of the rat race and your pushing everyone into the same generalization… not everyone is as clueless as you are.
I admit, I am clueless many times. But at least I’m free.
I did not feel bad driving an $8000 car For almost 10 years that depreciated down to about $2000 when I sold it. It actually felt incredible investing for savings in the stock market and real estate market since 2010.
How about yourself? What’s your background?
The rule does not talk about cost over time. You need another rule for that.
If you are spending 10% of your salary every year, that’s a lot more than spending 20% of your salary every 4 years. The latter has been my experience.
I have been calculating the purchase cost per mile (purchase cost plus major repairs minus disposal price divided by miles driven). I’ve had cars that I drove for $.02/mile.
I always have a fund setup for the next big car expense. I’ve never had a car loan by doing this.
I usually keep my car for a long time. I had two cars for over 13 years. Unfortunately, I had to replace them at the same time. I probably would be ok paying of these two cars. I just feel like I’m always in debt for long period of time and I guess I’m just tired of of owing money.
There are quite a few things to consider age, total asset, and your goal. Fifty eight thousand dollars in debit for all of your assets including a house is not bad, if you are young. However, if you are about to retire than it is not so good unless you have a assets that will support your retirement. Like you said should be able to pay off the 58K in a year if you cut down your spending. The problem seems like it is your family spending habit that keep you in debt.
FWIW. I don’t disagree with you on that. My wife is the one who doesn’t spend much. I’m the one that spend way too much on toys. I’ve always like the new gadget new toys. Cars has always been my love. This year, I have curbed my spending but I just free like I want sell the car and get a fresh start. Even if I sell this car, I still have one great car and a commute car. I am considering to buy an old 05 Lexus LS430 around 9k to replace this vehicle and make it as my commute car. Give me current commute car to my son when he is ready to drive in few months.
Chuck, I can understand not including minor costs of keeping a car such as oil change, or wipers, as that cost, while not a constant, probably wouldn’t vary much. But I was just wondering is there a reason why you don’t include the cost of fuel in your per mile calculation?
I wish I follow this rule sooner. I would said I enjoy my life way too much and seems to be always in debt. I have an Audi S7 which I brought used last year for 44k. I have been thinking of selling to get out of being always in debt. I will only get 35k selling to the dealer, but I also don’t want to deal with the hassle of selling it privately. I also brought my wife a lexus suv which will still owe about 25k. My wife and I have total income of 200k. I own about 15k on the Audi. I have a total debt of 58k with CC and Car and the mortgage. If I am frugal over the next year, I probably can paid off most of this debt. So my question is, should I just get rid of the S7 and just take the loss?
I had an internship on the West Coast about 5 years ago and was under 25 at the time. Was told that car rental for the two months that I was going to be there would be ~$2,200 for an average American sedan. Wound up buying a 1994 Corolla with new tires, a new clutch, and no rust, but 215,000 miles on it, for $2,200. Drove it around for a few months and took it everywhere (I did a lot of sightseeing on my weekends since I didn’t know anyone out there). Wound up driving it home (to New Hampshire, a ~3000 mile journey, with some detours) and still drive it today; it now has just under 300k miles.
Total maintenance costs during my ownership have been about $1,500 (tires, brakes, including rotors/drums/2 calipers, 4 tires, a used set of steel rims ($80) to replace a rim bent from an incident with a pothole, a new, cheap radio, a door handle, an exhaust manifold, a flex pipe, rear brake lines, a fuel filter, plugs, wires, a distributor, and some other minor stuff). The car has only stranded me once, and that was a relatively easy fix (the distributor).
Parts for cars of that vintage are incredibly cheap and readily available and I do all of my own work on my vehicles (lots of space and no fancy electronics make this relatively easy). Registration and insurance are also dirt cheap (Its around $200 a year without collision, but with comprehensive/liability). There are also very few electronics to go bad (manual locks/roll down windows) and the car is pre-obd II, so no real annual inspection since the garages don’t have the right equipment to interface with the car; visual inspection only. That Toyota is the best car I’ve ever owned and, although its underpowered, its also light (105hp/2300lbs, 5 speed manual), so reasonably peppy.
I gross ~$125k and my wife grosses about $60k (she drives a 2006 civic with 255k miles that we bought with 130k miles). I see friends who make much less drive far nicer vehicles, have issues with them, and trade them in at a loss while I still drive my same vehicle. I restore older vehicles/motorcycles on the side for fun, drive them around for a bit, and then make a (typically) small profit on them when I want something fun to drive. Would never consider buying a new vehicle and having to take the immediate depreciation hit.
I didn’t own a car until I was in my late 30s as I had lived in NYC and didn’t need one. Now I live in the burbs and bought an old Japanese car for under $2000 3 years ago. I love it, it’s reliable and I will drive it forever. I would never buy a new car, but if I need to replace it I think I would be ok sticking with the 1/10th rule which would be about a $10,000 car.
I am not sure how dead of a post this is but I was looking to see how much I should spend on my car, obviously. What math did you use to come up with this 10% number?
I make 70k, ~58k after taxes.
I am about to finance a 50k car.
With this car payment, per year it is only 18.5% of my salary.
Rent is only 16%.
Everything from groceries to electric to eating out and gym is 23%.
AND I still save(invest) 37.5% of my money every year with 5% left over in case of “emergencies.”
Obviously I could spend less on my car and save more but how can you justify that saving almost 40% of my money after taxes is not financially stable because you claim by you chart that I would be in huge debt. I am just trying to understand where this large chunk of spending is in your scenario.
Shoot for a $7,000 car and save/Invest the rest.
I agree with FS here. I now make around $200k and have been driving an $8k truck I bought a couple years ago after my $5k car sent a deer flying down the interstate. Out of full disclosure: I also bought a $5k motorcycle last year and last week bought a $6k car because the truck is a diesel f-350 and I finally grew tired of trying to parallel park it downtown. But, I got along just fine for years having vehicles in the $5k (or less) range. Now that my income has grown, I choose to have my 10% spread between multiple vehicles, each with a different purpose, instead of just one $20k vehicle.
If I was in your shoes (which I was only a few years ago) I’d spend follow FS’s advice above. Then instead of spending 18%/year of my income on a vehicle I only have to spend 2%/year in maintenance on it and I’d continue to invest the other 16.5%/year. I know that next month or next year something else will come around that I want. If I’m already spending 16.5% of my money on the car I locked myself into, then I can’t spend it on the other things. Whether that’s traveling, kayak, new mountain bike, charity, RV, etc. You’re talking about spending $800/month on something that plummets in value. You’re investing a lot already, which is great, but you’re talking about locking yourself into payments for a single thing you want now and not considering all the things you will want later as well.
Something else to consider: did you know you can take just about any vehicle and have them redo the seats with new leather and add heated AND cooled seats for about $1200? You can also have a fancy radio with touch screen, camera, wifi, etc for under $1k more? All those fancy things the new cars are selling are not that expensive to add to any other vehicle. If you find a well maintained vehicle for a good price, you can just add the actual features you want without spending anywhere near $50k.
This is a great article. The best car I gas ever owned to date was my 1992 Geo Metro 5 door. It was a 3 cylinder, 49 horsepower masterpiece. It cost me a mere 1100 dollars and got 45 miles a gallon regularly. It was dirt cheap to insure, dirt cheap to fix and downright fun To drive. I will forever miss this car. It leaked oil, it leaked gas, and the ignition key had to be perfectly aligned otherwise all the interior electronics didn’t work. It was fantastic. I’m truest bullish on cheap high mpg vehicles.
I don’t see how simply stating 1/10th income is enough of a guideline. It really needs to account for how long you keep the car and then decide what percent of you income that costs you for the life of the car. It really should be what percent of you annual income every year you should spend on your car. If you spend 10% of your income on your car but have to replace it every 5 years then that will cost you more than buying a car for 20% income and keeping it for 10 years because the purchases every 5 years will cause you to pay 2 times as many tax and transaction costs.
Paying 10% of income upfront for a car does not include all the maintenance that will come with it over the next few years so that is another reason you should be looking at the cost per year of owning a car relative to your income instead of just the 10% cost without including how long you will own it or estimated maintenance.
Again FS offers sound advice, although I disagree with Yoda FS on a ROTH account.
The 1/10th rule limits your ability to purchase depreciating assets that suck your wealth building power.
It’s insane how car payments for 60 months, then repeated for life, can impact your chances at financial independence.
Save up, pay cash, drive for 12 years. Invest that money you saved. Boom! you will have some wealth built up.
Never underestimate the power of modern marketing and the Dark Side of the Force to separate you from your wallet.
Long, spirited debate!
I think the recommendation is practicable with some caveats. As many have mentioned, the rule will put lower income people into cars that are more likely to be unreliable.
In my experience, it’s very hard to find a car that will run reliably without near constant maintenance (like feeding it a quart of oil every other week) under $3k. Cars in this range are really just stop gaps because they’re likely going to have some sort of major system failure (rust on the body that compromises safety, transmission, engine) within 18 months that will require either a significant investment or, more prudently, the purchase of another car.
Above $3k, you start to find cars that will run reliably with only routine maintenance. For 3-5k, you should be able to get 3+ years out of it. Above 6k or 7k and the car may last closer to a decade. I’ve had my Toyota Camry for over 8 years now and I originally bought it for $7500. I’ve only had to do routine maintenance and I’m sure it has another couple years before it really needs something major.
So, to get back to the 10% rule, I think those that make less than $30k should have the allowance to go up to 20% so they can get a car that can reliably support their career and salary growth. Having an unreliable car IS stressful (I’ve had a couple) and can limit someone’s career and income growth.
Above 50k though, this rule is definitely practicable and, really, if you can ignore the marketing out there and focus on function, there isn’t much actual “NEED” to spend more than 10k on a car (though I thoroughly support people with the means spending as much as they want on a car). I’ve owned more interesting cars in my life but this used and slightly abused Camry has helped make my net worth interesting.
Thanks for this important topic. New cars burn up money fast. Over the next couple of years, we need to be careful of cars with flood damage following two years of hurricanes. Those flood damaged cars could wind up being sold anywhere in the country. Rust begets rust. A talented young guy who worked on our house thought he got a terrific deal, then spent $1000’s as his truck rusted away.
Our 2004 that has been so incredibly reliable, etc. (only 90,000 miles) that we decided to repaint it, suddenly needed $2100 in repairs this month. Because we paid 0.00% over 4 years (yes, ZERO %,) the car has cost approximately $2335 per year (purchase price + major repairs, not including routine maintenance, insurance, gas, etc.) Assuming we drive it another 5 years and it needs another $2500 or so, our average yearly cost will be about $2000 per year. Our second car (1999 model) that will be donated or driven straight to the junkyard (whenever we get a super deal on our next car) was purchased 5 years old for cash, has 185,000 miles and will average approximately $1100 per year (purchase + major repairs.) The difference in average yearly cost is simply the difference between buying a new car and buying a five year old car (they are different models, of course, but the same brand and essentially the same style.) I wouldn’t buy new again. I would buy, for example, a five year old BMW (super reliability as well as comfort and driveability,) with the idea of driving it for 20 years. Other than that, I would look for a new style that people have been crazy about (remember, you are buying 5 years old) so that the car will look newer and fresher for longer. If you are in sales, especially in Real Estate or corporate sales, this is all terrible advice. You need the image of a new car (and sharp clothes.) Sales people might be best served by leasing.
Hey Guys,
I have a hard question that I’ve been trying to figure out. I drive an old beater 98 civic that only has 150k miles on it and should last at least another 100k miles, or about 10 more years. However, my dad wants to get my brother a car and he’s willing to sell me his car for prob around 13-14k plus maybe give me enough for a down payment in exchange. His is also a honda (2015 accord) with 50k miles on it so I’d be getting a good deal bc it wouldn’t be sold through a dealer (saving 2k approx) but I feel like I might miss out on opportunity costs if I invest the 200-250 per month it’s gonna cost. I’m already investing like crazy at 22 yrs old but still not sure if this would be a smart move or not. Also my current yearly is about 45k (after tax).
Thanks I could use advice on this.
Don’t spend money if you don’t have to. How much do you drive and rely on your car? Do some research and find out what the average per-repair cost is for a 20-year old Civic. How have you done with preventative maintenance? At that age things like gaskets, seals, hoses, and some fittings need to be replaced, which can be expensive and potentially catastrophic. Is it a manual or an automatic? Honda autos tended to be troublesome, and again, potentially expensive for an older car. Luckily parts are a dime a dozen and if you have a good mechanic, even a full engine/trans swap isn’t TOO terrible a prospect. But also factor your time. Say you do have major issues – can you afford to be without your car for a week?
That said, just because a car is newer doesn’t mean it can’t have problems too. It’s just far more likely that a 20 year old car, even one as remarkably well-engineered and built as that generation of Civic, is going to give you trouble. The question you have to answer is will that trouble cost you more in the long run than buying a great newish car that you could easily keep for 15-20 years.
If it were me in my early 20s, I’d sell the old Civic to a high schooler for a few grand, buy out the Accord, and keep it for a decade or two.
First off thanks for the advice. Yeah repairs are definitely something to consider I have had repairs in the past involving oil leaks and hopefully that nightmare is all over with but you never know. I think I’ll probably end up buying the newer car thanks!
Definitely consider safety as well. My previous car was a older Civic as well. It’s really an amazingly reliable car, but it’s a tin can compared to my new car. I would not want to crash that car and I’m not going to put a value on my life. So for me it’s worth it to pay a little more to be in something that meets modern safety standards.
As a father now, I am 100% for safety. I’m not willing to compromise the safety of my family to save money, or as much money anymore.
See:
https://www.financialsamurai.com/safety-first-family-car/
What would you recommend an individual do with all the extra money not spent on a car? Diversified investments? What’s the point of saving, investing, and amassing great amounts of wealth for the sake of wealth? I’d surmise that having a reasonable safety net, living comfortably, and having the means to being happy would apply to the majority of people as opposed to draconian cost reduction schemes imposed on every aspect of life. What good is a large lump sum at age 50 when it only took the past 30~ years of penny-pinching to accumulate? I can easily see young folks dedicating decades of their lives accumulating wealth only to realize later that they never got to do the things they wanted to do in life while their bodies were younger and more able.
tl;dr I’d like to know what your core values in life are and how they guide you in your financial decisions as well as the viewpoints expressed in your website.
These comments have been interesting and I would like to know what the thought is for our situation: We have a 2001 Nissan Altima – 170k miles – car needs ~$2k in repairs. We drive it less than 5k miles a year so I think we should just repair it.
Our other car, a 2013 Toyota Camry (bought new, on clearance, 0% interest) is almost paid off – 5 months left.
I would love to be w/o a car payment but my wife is concerned with the safety of the Altima.
Thanks FS community!
I like your blog a lot. I even recommended it to somebody last week :)
That out of the way, this post is less about spending money on cars and more about you advertising you are not a car guy and see no value in them. Telling a guy who makes $190k that he shouldn’t buy anything more than a new civic is only possible if you get nothing whatsoever out of cars.
A guy who makes $400k, but he shouldn’t buy more than an avalon? I drive an avalon now (I am below your avalon income bracket). I leased it with $0 out of pocket and I pay under $400/month for a brand new, safe vehicle, that’s luxurious and that I enjoy driving. Even if I bought a brand new car for $500 it would still cost me money in repairs (more than my new car), gas (more than my hybrid avalon). Meanwhile I’d hate the car, and it would be significantly less safe, as newer cars are continually releasing safety updates. I have run the numbers and the difference between driving my avalon and something cheap like a new toyota corolla is around $150-200/month.
I wear the same $30 watch I wore when my household income was 1/4th what it is now. I wear the same kind of clothes, too. I live in the same house as when my income was 1/3rd what it is now. In fact, I haven’t changed my lifestyle at all except for basically driving slightly nicer cars. I still don’t vacation, don’t spend money on gadgets, etc.
It’s possible to be a ‘car guy’ and spend less. I remember having my VW in for service and driving a loaner base-model Golf. I was pretty impressed (as a car guy) at the ‘value for money’ proposition. And that’s just a new car off the top of my head. Used? Tons of options. The hard part is breaking the mindset that you ‘deserve’ to eat $10-12k in depreciation each year.
Thanks. It’s all good and personal preference at the end of the day. I just don’t want people to regret buying something they couldn’t comfortably afford or get sick of years from now and regret having spent so much.
I absolutely know that if you spend 10% or less of your gross income on a car, you will not regret the expense because it is insignificant. And if you take my message trying to earn more to get that fence your car, you will actually feel awesome to be able to afford such a nice car and have a nice income stream.
I didn’t mind driving a Honda fit for three years, nor do I mind driving a Range Rover sport now. Both followed my rule.
I’ve always been mystified by how much our California neighbors were willing to spend on a car and I’m 100% sure that driving expensive vehicles has delayed retirement for 5+ years for almost all of them. When we bought our first new house in a nice suburb of Sacramento in 1998 for $230,000 the neighborhood was full of Mercedes, BMW’s, and luxury SUV’s. The homes were all tract homes and none of them were worth more than $350k. My wife drove a VW convertible at that time that we bought used for $12k and I had a company provided mini-van. We bought our first new car, a Buick Enclave, when we were 43 years old. We felt somewhat guilty spending $45k on a vehicle even though we were paying cash and my wife was getting reimbursed about $700 per month for mileage from her company for that Buick. We waited until age 50 to buy our first luxury car, a new Tesla Model S. At that time the Tesla was less than 1/20th of our annual income but we still had to think long and hard about it because it was exactly the same price as our first home in 1995. We are now in our early 50’s and I am retired and my wife is only working because she loves it and we still have our youngest at home with us a few more years. I’m convinced if we had spent like our neighbors the last 25 years on cars, motorcycles, boats and RV’s, I’d still be working and our retirement nest egg would be a couple million dollars smaller.
Guys (and gals) who make $190K or $400K can avail of the author’s other suggestion which is spending 5% of net worth on a car.
And if one makes $400K, and if one’s net worth is less than $800K, one definitely ought to opt for a cheaper car.
Think you’d get a kick out of the new Kia ad https://youtu.be/m7L9XRfGULo
Hah! That’s great.
I think this is a great rule. My husband and I make about $100k between the two of us. We have been on a debt crushing crusade now for the last 4 years and have paid off everything (88k) except for my school loans which will be paid off this year and then no more debt.
Now, no more debt means no car loans. During this time we have been able to save for two used vehicles (8k and 13k <– partial business expense) we were able to pay for our wedding and honeymoon (15k) in cash.
My vehicle is a little Mazda 2 that cost us 8,000 that we paid for in cash. when I bought it, it was 3 years old. I have had it for 3 years no issues. Wonderful vehicle and we also bought it from a dealership.
So not only do I think this rule is great but I also love the fact that you advocate purchasing the vehicle right out. When you do this, you get ride of the extra couple grand you would be spending on finance charges and probably the extended warranty since you are most likely purchasing a vehicle you can't afford and therefore can't afford to fix.
When you purchase a vehicle in cash you make better money decisions and what I mean by that is you weigh your wants and needs. I went from a SUV with leather heated seats and a sunroof and more perks to a Mazda 2 manual tranny that the only real feature is the electric doors and windows :) When you have a set amount to use to purchase rather than a payment (that might extend for 84 months!!!!) you really say to yourself…do I really need that. 99% of the time your answer will always be no.
Now, the plus side to saving all this money on something the depreciates so quickly is that you can invest what you would have spent into something that will actually gain you income or even pay off other debts. This helps lower the amount money that is getting flushed out of the household on unnecessary interest charges or even pay off your home early and save thousands and thousands in interest :)
It pays all around. :) :) :)
Awesome! Now this is the attitude that Gets it. Especially in this amazing bull market.
“If you want to detonate your finances and end up working longer than you want for the sake of a nicer ride, then go spend more than you can afford.”
Perfect example of the false dilemma fallacy. What you can afford is an entirely subjective term and you haven’t defined it, so you cannot possibly say what someone can afford. If you take afford to mean “having spare money to invest” then maybe, but if you take afford to mean “being able to pay bills and love comfortably”, then you might also be completely wrong.
Also, why is having a nice ride lower on the priority list than other pleasures in life – like stopping working earlier? Some people enjoy their work, and would also like a nicer car.
Here you go. https://www.financialsamurai.com/how-much-have-americans-saved-for-retirement/
And you just have to look at your own finances and see how you are. You can do whatever you want.
If by 10%, you mean 10% of your salary per year, then fair enough. If however you mean that someone on $50,000 should only buy a $5000 car then you don’t live on planet earth. Someone on that salary can easily afford to have any reasonably priced car they want. I’m on about $37,000 per year (by current exchange rates – I’m in the UK) and I wouldn’t hesitate to buy a $15,000 car – although I don’t need to as I own mine outright currently.
This is my problem with this article. Yes it’s general good advice to not splurge on a car to take you from point A to point B. The problem is when you buy a $4000 car for example you may not be getting a reliable vehicle. Of course you can pay $30,000 right out of the dealership and your car can be a lemon but at least there is some sort of warranty backing that up. Though most of the time you’re in a fresh car, you chose what you like and you’re happy with it. That’s just one example.
I think the problem lies with where people spend their money overall. Going out to eat food whether it’s fast food junk or a fancy restaurant is not wise but people do it and do enjoy it. Some people like expensive sports like skiing or snowboarding. Some people like attending sporting events that are also expensive.
If you have the budget and you do like cars, I don’t see how buying a car you like that is reasonable is a problem. I think the 1/10th rule is awful. The initial problem lies with the person and how they spend/save their money in the first place. Sure you can drive a shi*t box if that’s ok with you, but some people enjoy what they drive. While others may live in a downtown condo with no car but enjoy $200 dinners every weekend.
The Mr Samurai, think you need to commit Seppuku !! You show no connection to reality! A $4000 – $6000 used car today will have from 120,000 to 200,000 miles, and will need everything from tires to a new transmission. Not to mention the lost days from work when it leaves your ass on the side of road, or won’t crank in the morning. And forget about driving anything over 40 miles one way! (uh oh, want be taking it on vacation!) Unless you are mechanically inclined and do most of the work yourself as a “shade tree” mechanic, I would advise your readers to “get real” and go to the auto parts store and check prices.
What crack pot advise!
Bro, have you been living under a rock? Cars with 120,000-200,000 miles are barely broken in these days. If you’re car isn’t going to 200,000 miles with relatively low repairs you’re doing something wrong.
A $2,000 Civic for 150,000 miles on it will be pretty trouble free.
And tires?! You can’t count consumables as a negative on a used vehicle. ALL cars go through tires even new cars believe it or not. My Focus goes through a set of tires every 20,000 miles, I’d have to be buying a new car every 15,000 miles if I didn’t replace the tires!!
Really liked the article! I have a question as this is something I may do in the near future:
Car I want: Porsche 911 (7 year old) goes for about $70,000.
Resale Value after 5 years of ownership will be about $45,000-$50,000.
Cost of owning the car: $5,000 a year, Gas will be a little more than I currently spend, Insurance will be similar. Maintenance may average out to about $150 extra a month. Porsche are known to be reliable.
All other expenses aside, wouldn’t you agree that someone making around $100,000 a year can afford a car like this. (Your chart says $1,000,000 which would make this nearly impossible for the average Joe).
Looking forward to your thoughts!
Don’t worry man. If the car only cost $70,000, you only need to make $700,000 and not $1 million.
Goal of this article is to help younger folks especially think about the ridiculousness of buying such an expensive vehicle when public transportation is cheap, and ridesharing options for cheap and easy to use.
The people who disregarded my advice years ago are in much worse financial shape today because they could’ve use the money to invest and watch their money double or triple. And in a bear market, those who have expensive toys they don’t need will feel the weight of 1000 boulders on their shoulders because their jobs may be at risk.
By what you can afford folks! And if you need the thrill of a fancy car, just rent one for a day or two.
this is an old thread but still very interesting in 2017
i only make 32k a year while my wife makes 50k
my wife pay the house , electric/tv/internet bill and the food
i pay the car and most tools/hardware/appliances that we need for living.
i bought a fully equiped subaru 2017 at the price of 35k . (60 months payments.).
as of today i have 18 months left to pay… buying a new car means no repair and most of everything can be done under warranty.
i have not missed any payment.. it is tough, difficult and stressful.. but i have 18 months left… im sure i can do it. i have zero debt on my credit card.
i simply do not see myself taking the bus. and my needs also include my image, my pride, my ego.. drinving an old rusty car look dumb in some situations and i don’t want too look poor..
we also travels alot and driving a brand new car is qlso much more safer.
i fully agree with the article but the 10% thing does not fit my needs
“the things you own end up owning you” Tyler Durden
I read your 1/10th rule a while ago and thought how unfortunate that I didn’t have that advice when I purchased my brand new dream car, a 2008 Toyota Prius. I am now faced with the decision of buying a car because Hurricane Irma flooded my car and totaled it. I’ve had 3 weeks to decide what to do about a replacement car and as much as I want to be a devout Financial Samurai, a car costing 1/10th my income would not work for me because I’m afraid of the mechanical issues I’ll have to deal with having an older car. In the long run, it would make more sense for me to get a $15,000 Prius that’s about 3 years old. I thought long and hard about how to follow the 1/10th rule and this is what I came up with. Because I don’t want to take any money out of investments/savings for the replacement car, I’m going to ride 5 miles to and from work for the next 5 months to save on car loan payments/insurance/parking/gas. These savings in addition to the insurance payout would be 1/10th of my income, $8,300. Then I would take the $8,300 and invest it to earn enough money over the next 4 years so that the investment would pay for the car. The plan is to take out a 2.64% car loan in 5 months and have the investment income pay for the loan. The benefit to doing this is that after the car loan is paid off in 4 years, the $8,300 will still be available and earning me more money!
Since the most recent post mentioned the 1/10th rule I thought I’d return to my comment here to provide an update on my car situation. The $8,300 I invested returned $2,100 during the last 7 months so that was good but I didn’t use the earnings like I thought I would. I did ride my bike to work for a good 5 months and was loving how fit I got and the money I was saving. Unfortunately, I had to stop riding the bike when I got hit by a car on the way to work. Fortunately, I was able to fully recover after 5 weeks. I couldn’t get myself to continuing biking to work after I got better though. Although the physical benefits were great it wouldn’t have been worth it if I was ever seriously hurt or dead because of another accident. It’s funny how a person can get used to whatever becomes the norm. I got used to riding my bike so I thought I didn’t need a car. While I was healing, I was driving a beat up loaner car, a 2005 Mitsubishi Lancer. As first, I thought the car was the crappiest thing I had ever seen because this car really needs a new paint job, the glovebox hangs open due to a broken latch, the plastic part of the gear shift floats on tops of the metal part, the driver’s side window no longer rolls down, and there’s a large yellow paint stain on the back seat. However, the car has been reliable despite its looks and that’s the most important thing to me in a car. So, I’m now the owner of that $800 vehicle. Even when I got promoted with a 10% pay raise a month ago I didn’t even consider getting a new car!
Glad your accident wasn’t even more serious! Stay safe and good job saving money.
Can you create a rule-of-thumb like this for CELLPHONES!
I made this mistake in 2013. I bought a brand new car as I thought that it’d save me trouble with warranty and maintenance. I paid off my loan in 2 years instead of the required 5 so I ended up paying less. But it was still a lot of money. Even though looking back, I would have bought a used cheap car; my car has served me very nicely giving me absolutely no issues and has a great 35+MPG! I get the point though, a car is really just a liability.
This is a great article, I have always been a proponent of buying with cash, and driving your car until the increased maintenance costs out way the benefits of buying another car. Vehicles are the worst investment (although necessary) you will ever buy. Where else do you spend thousands of dollars only to have it consistently depreciate overtime.
Baced on your theory of 10% of your income on a cheap , unreliable car would be foolish if your jeopardizing getting to work on time & your livelihood. The title should be , buy the best car you can within your budget. Spending a little extra on a better quality or more reliable car is the better option in the long run as repairing an old car could cost more than you think. Pick a 3-5 year old car as most of the depreciation is within the first few years, and is still in good working order & condition with in your budget ,is my recommendation.
I had a laugh at this. 1/10th your yearly earnings buys you nothing but stress and headaches. If you have to drive that car any meaningful distance you will break down, miss appointments, etc. A car with that price tag is certainly beyond its warranty date and you are buying a mystery 100k + miles. Even for 7-10k that’s certainly the poorest investment of the poor. Many a used car salesman has a lemon for 7-10k. At least with a new car you know every mile on it because you’ve driven them!
Better advice for the financial samurais would be to sick to the urban sprawl and skip the car altogether. For everyone else who travels many miles a day back and forth to work the dependability of a warranty and a reliable ride cannot be underestimated. It’s worth more than 1/10th your yearly earnings.
There are other options, too. Carpool with coworkers or quit your long distance job for a closer job.
It’s not the end of the world if you have a long commute. Bottom line is a car is too valuable to price at 1/10th your yearly earnings. If you don’t need a car you’re probably making up the difference in your rent (urban life usually is more expensive). For example my home loan in the sticks is $400 dollars /month. This is the benefit the car loan brings me. I would have to add both my home loan and the car loan together to match the price of these urban rentals my so-called financial samurai friends rent. The difference is I wind up owning both and they own nothing. Go figure.
By the way I think you can still save 30% of your yearly earnings and afford a car and a place to live. Maybe a more practical approach to buying a car would be to not spend more than 1/10th your earnings annually on a car loan over 5 years.