Car buying and financial ratios - what do Bogleheads do?

[edge]

Well, you might actually pay more for the car if you pay cash at a dealer. A chunk of the dealer's profits comes from kick backs from the bank they use. Sometimes you can split the difference with them for not using cash and then just pay off the loan ASAP to avoid much if any interest.

[JupiterJones]

I'm not a fancy car guy. There's no way in hell I would pay that much for a car, no matter how much money I made. I simply don't derive enough value from them.

But you seem to be a fancy car guy, so I'll just have to mentally convert your potential purchase item into one that is emotionally equivalent for me.

So... if I made your income and had your debt load, would I buy a $35,000 used grand piano?

In a heartbeat. 8)

JJ

[Valuethinker]

I'm not a fancy car guy. There's no way in hell I would pay that much for a car, no matter how much money I made. I simply don't derive enough value from them.

But you seem to be a fancy car guy, so I'll just have to mentally convert your potential purchase item into one that is emotionally equivalent for me.

So... if I made your income and had your debt load, would I buy a $35,000 used grand piano?

In a heartbeat. 8)

JJ

Ahhh... now this is really interesting.

Which brand? Steinway? Yamaha? There's a business school case about Steinway.

Does 35k buy you a good piano?

I don't own one, and I don't play. But what I'd really love is to have the space (and not share a wall with a neighbour) and have some aging musician come over some days and teach aspiring young musicians.

To be a part of that, to somehow advance that cause.

There is an Austrian film Pianomania about a tuner for the Vienna Philharmonic

http://www.imdb.com/title/tt1331115/

brought tears to my eyes. Not quite as good as 'Cool and Crazy' (Norwegian men's choir) but a better film than 'Young at Heart' although that latter subject is very moving (choir aged over 75, singing pop songs).

If you have not see Pianomania you really should.

[edge]

35k buys you a good piano. The top end grand piano prices are above 100k and some are well above 100k. These are new prices.

You can find good deals on used ones.

[HomerJ]

Greetings everyone. Long time reader, first time poster here. This site is the best source of unbiased investment information anywhere as far as I'm concerned. Keep up the great work, folks. I searched the archives and couldn't find what I was looking for, so here goes:

My daily driver is a very reliable Toyota sedan with 120K miles worth $6K , and I've got the itch to "upgrade" to a used Lexus for about $35K.

I'm 43, household income $300K+/yr. Debt: -$300K mortgage. Besides my daily driver we have two cars (wife's used Lexus and a classic sports car I rarely drive) so would have $85K tied up in vehicles if I buy the LS460.

While I realize that on paper our income/car (22.3%) and net worth/car (5.7%) ratios probably look okay, I've never spent this much on a car that I was going to drive every day (and depreciate in the process), so it just seems like a lot of money to be spending on some wheels. I've always followed Dave Ramsey's rule on cars (less than 50% of income) and/or tried to keep vehicles to less than 4% of net worth. I'm a saver and my wife says I need to relax a bit. I don't know.

I'd like to hear what folks on this board think are some good rules of thumb on car purchases, and also some limits. It seems like regardless of one's income or net worth there's a limit to what's reasonable to spend on something that goes DOWN in value faster than a rock. I look forward to your responses. Thanks!

You already have a sports car... I think it's nuts to waste $35k on a commute car...

But you can certainly afford it...

I admit, my "next" car (in 7 years) might be something fancy... maybe...

I keep thinking I'd rather retire a year earlier than have a luxury car right now.

Heck, what defines luxury anyway?? My current 2008 Honda Civic (that cost $15k) has heated seats.. A car that warms my butt seems pretty luxurious to me!

[HomerJ]

This forum may be unbiased when it comes to investing, but it has an extreme bias against nice cars.

Heh, that's true...

But cars are probably the biggest financial drain of any household... If you can train someone to be smart when purchasing cars, you've won half the battle...

That said, the OP has the means to afford this car...

[C319]

He's owned two Ferraris in the past and wants to know of he can drop $35K on a used Lexus?

Chris

Chris: For fun I have always bought old sportscars for cash at nearly fully depreciated value. Of course I take the hit on opportunity cost, maintenance and insurance, but usually get my original outlay back when I sell. For example, my old Porsche is worth about what I paid for it six years ago. It is in mint condition and besides, turning wrenches is my hobby.

It's a big extravagance but after buying the first toy 16 years ago I've had almost no additional out-of-pocket costs to acquire the next ones. Certain models of classic cars tend to hold their value if well-maintained, so I try to buy those. I know that cars are not an investment, but still like knowing that I could liquidate and not take too big a hit if my life suddenly turned and I needed the money.

However...by buying and driving a Lexus every day I would knowingly be turning $35K into $5K (even worse if you consider opportunity cost) over a decade, after which I would have to come up with more money to buy another car for work. Given my income & net worth that distinction might seem silly to some folks, but makes a huge difference to me - which is why I'm thinking so hard about it. I grew up dirt poor and have always felt that every dollar we earn is precious and should be spent thoughtfully. My daily drivers have always been $4K-$8K used cars that were dirt cheap to operate (regular gas, no need for collision coverage etc) and that I could fix. I like nice stuff but am a natural saver, not a spender. Luckily I married somebody who balances me, so I do have a life.

[Bulldawg]

He's owned two Ferraris in the past and wants to know of he can drop $35K on a used Lexus?

Chris

Chris: For fun I have always bought old sportscars for cash at nearly fully depreciated value. Of course I take the hit on opportunity cost, maintenance and insurance, but usually get my original outlay back when I sell. For example, my old Porsche is worth about what I paid for it six years ago. It is in mint condition and besides, turning wrenches is my hobby.

It's a big extravagance but after buying the first toy 16 years ago I've had almost no additional out-of-pocket costs to acquire the next ones. Certain models of classic cars tend to hold their value if well-maintained, so I try to buy those. I know that cars are not an investment, but still like knowing that I could liquidate and not take too big a hit if my life suddenly turned and I needed the money.

However...by buying and driving a Lexus every day I would knowingly be turning $35K into $5K (even worse if you consider opportunity cost) over a decade, after which I would have to come up with more money to buy another car for work. Given my income & net worth that distinction might seem silly to some folks, but makes a huge difference to me - which is why I'm thinking so hard about it. I grew up dirt poor and have always felt that every dollar we earn is precious and should be spent thoughtfully. My daily drivers have always been $4K-$8K used cars that were dirt cheap to operate (regular gas, no need for collision coverage etc) and that I could fix. I like nice stuff but am a natural saver, not a spender. Luckily I married somebody who balances me, so I do have a life.

c319: Put me in the frugal camp ...your Toyota has plenty of life left with 120k on the odometer. You and I have a simliar net worth, but your earnings are much greater and you're a few years younger so factor that in.

The fact that you're struggling so much over a relatively small expense tells me you're not ready.....yet

[wellmoneyed]

I posted a similar question in a car forum several years ago asking about a car in the 100-200K range. On the car board I would say roughly half did not appear to be in serious debt, but they did have a disproportionate amount of their income/wealth spend on cars. The rest were a mix of completely in debt and maybe 20-30%, in my opinion, could surely afford it.

The Dave Ramsey rule of thumb works just fine, but I would use after tax dollars instead of pre-tax. At 300K you should be taking home (depending on your state) in the 200K area. That would make the upper side of the equation 100K in vehicles. Based on that you are not "out of bounds". If you think of this as a new expense with a 10-15% depreciation+cost, you are signing up for a total of 8-12K a year cost or roughly 5% of your income. This seems perfectly reasonable to me if this is the luxury you really want, as opposed to travel, art, etc.

I would add that as a person earns more, doing the math with 30xspend=retirement goal is a good practice. If you don't do the math, you may find yourself double the annual spend thus doubling your savings requirements.

Congratulations on earning so much money!

[Valuethinker]

I posted a similar question in a car forum several years ago asking about a car in the 100-200K range. On the car board I would say roughly half did not appear to be in serious debt, but they did have a disproportionate amount of their income/wealth spend on cars. The rest were a mix of completely in debt and maybe 20-30%, in my opinion, could surely afford it.

The Dave Ramsey rule of thumb works just fine, but I would use after tax dollars instead of pre-tax. At 300K you should be taking home (depending on your state) in the 200K area. That would make the upper side of the equation 100K in vehicles. Based on that you are not "out of bounds". If you think of this as a new expense with a 10-15% depreciation+cost, you are signing up for a total of 8-12K a year cost or roughly 5% of your income. This seems perfectly reasonable to me if this is the luxury you really want, as opposed to travel, art, etc.

I would add that as a person earns more, doing the math with 30xspend=retirement goal is a good practice. If you don't do the math, you may find yourself double the annual spend thus doubling your savings requirements.

Congratulations on earning so much money!

You cannot, generally 'have your wealth in cars'.

A car is consumption, pure and simple.

Possible exception: classic cars which appreciate in value.

The problem then is that AFAIK the classic car market is very volatile and closely connected to the stock market. Which makes sense, because the people who buy classic cars (and art) have a lot of wealth in financial markets, which goes up and down.

I am sceptical of indices which show art, stamps etc. are good diversifiers, because

1. things come in and out of fashion - bad luck if your type of art falls out of fashion

2. there are large transaction and storage and insurance costs which can wipe out the profits

I suspect classic cars fall into the same category.

Own a classic car because it's a form of consumption that you can afford. Do not own one as an 'investment'.

It's almost axiomatic with an investment that you can turn it into cash over some period-- liquidity and with at least some visibility of final value: for example an income stream from that investment like dividends or interest. Even trees have that inherent return of about 4% pa arising from growth.

Classic cars, like all collectibles, seem to me to be something one should take pleasure in the owning and collection of, but NOT count towards one's total wealth.

Exception of course if one owns a classic car business- then it's like any business you value it on what you think you can make from it.

[Valuethinker]

I posted a similar question in a car forum several years ago asking about a car in the 100-200K range. On the car board I would say roughly half did not appear to be in serious debt, but they did have a disproportionate amount of their income/wealth spend on cars. The rest were a mix of completely in debt and maybe 20-30%, in my opinion, could surely afford it.

The Dave Ramsey rule of thumb works just fine, but I would use after tax dollars instead of pre-tax. At 300K you should be taking home (depending on your state) in the 200K area. That would make the upper side of the equation 100K in vehicles. Based on that you are not "out of bounds". If you think of this as a new expense with a 10-15% depreciation+cost, you are signing up for a total of 8-12K a year cost or roughly 5% of your income. This seems perfectly reasonable to me if this is the luxury you really want, as opposed to travel, art, etc.

I would add that as a person earns more, doing the math with 30xspend=retirement goal is a good practice. If you don't do the math, you may find yourself double the annual spend thus doubling your savings requirements.

Congratulations on earning so much money!

Rules of thumb about 'how much' car to have seem to me to be silly. If you fancy a nice car, fine, but it's consumption-- pure and simple. Any investment in a car over and above a car that fits your needs in terms of size, transport and reliability/ quality is pure consumption.

There is nothing wrong with consumption but it's generally not wise to confuse that with investment. I live in a larger house than I need, because we wanted more space and the neighbourhood suits us. We only look frugal compared to some others that I know (London is on a ridiculous housing binge).

To me, it seems an absolute, that if you have debt, then owning something like a car, where you can buy an excellent vehicle for $30k, owning 1 for $200-300k just counts as silly.

Now OP is looking at 25k to 35k, so as pointed out to me, at the margin, that's probably irrelevant.

The value of any asset, virtually, can fall. The value of debt does not fall-- you have to repay what you borrow

[wellmoneyed]

Rules of thumb about 'how much' car to have seem to me to be silly.

This maybe hard for people to wrap their heads around, but at some point you no longer have clear and understandable money restrictions. Imagine you can comfortably live on $100K/year, you have 5Mil invested and your making 1M/year. Can you buy a 500K car? Is it reasonable? Is it crazy? Will it make you happy or will you regret it?

It is a lot easier IMHO to make these types of decisions when your disposable income is a small percentage of your income, as your disposable income becomes bigger and bigger it really is difficult. I am not sure this can be fully appreciated until you are there.

If you fancy a nice car, fine, but it's consumption-- pure and simple.

Was someone saying different? Consumption as a percentage of wealth seems like a good way to look at your consumption. It doesn't mean wealth=consumption.

To me, it seems an absolute, that if you have debt, then owning something like a car, where you can buy an excellent vehicle for $30k, owning 1 for $200-300k just counts as silly.

While I don't have debt, I think once again your not taking a step back and considering someone with "lots" of money. Most of the people I know with money have their money managed and have a line of credit in the 7 digit range to deal with special events. They always have debt.

[edge]

Yes, I am not sure what the big problem is with having debt. Especially as a way to maintain flexibility and respond to events. Look at most healthy corporations - they have lines of credit and loans and whatnot all of which cost them money.

Having unmanageable debt and behaving irresponsibly is something else. Balancing liabilities, assets, cash flow, and income is what is important.

[inv321]

You make a good enough income to pay cash for the car. You have a nice, enviable amount of savings. What does that mean?

Buy that Lexus and murder it out! You only live once.

Honestly though, you are already living well within your means (even after a 35k purchase). You have already made the smartest decision which is not to blow the 75k or whatever it costs on a new model. If I had no debt other than mortgage and your income I would probably only think about it for 10-15 minutes.

I consider myself middle of road cheap too.

[Valuethinker]

Rules of thumb about 'how much' car to have seem to me to be silly.

This maybe hard for people to wrap their heads around, but at some point you no longer have clear and understandable money restrictions. Imagine you can comfortably live on $100K/year, you have 5Mil invested and your making 1M/year. Can you buy a 500K car? Is it reasonable? Is it crazy? Will it make you happy or will you regret it?

It is a lot easier IMHO to make these types of decisions when your disposable income is a small percentage of your income, as your disposable income becomes bigger and bigger it really is difficult. I am not sure this can be fully appreciated until you are there.

We're not in this situation here. Gross family income= debt.

That's nice, but not that nice.

If you fancy a nice car, fine, but it's consumption-- pure and simple.

Was someone saying different? Consumption as a percentage of wealth seems like a good way to look at your consumption. It doesn't mean wealth=consumption.

It seemed to me, perhaps incorrectly, that there was an undercurrent that there's an assumption that some formula tells you what you 'ought' to consume?

That might be true of necessities (food, housing, transport). The rest one works out on the basis of what one has to save, the difference can be consumed.

To me, it seems an absolute, that if you have debt, then owning something like a car, where you can buy an excellent vehicle for $30k, owning 1 for $200-300k just counts as silly.

While I don't have debt, I think once again your not taking a step back and considering someone with "lots" of money. Most of the people I know with money have their money managed and have a line of credit in the 7 digit range to deal with special events. They always have debt.

[/quote]

OP is not in that comfortable world. 300k is nice, but in investment banking that's a 4 year post graduation remuneration. In hedge funds, it's not even a portfolio manager. Law firms, it's at best a very junior partner. And that's a combined income.

I am well aware there are lots of PWC partners on say £500k, with £1.5m houses in Surrey (that doesn't buy you that much), £1m mortgages, 3 kids in private school (say £60k pa with ancillaries more if boarding). £5k for a first class seasons ticket. A Mercedes and a Land Rover and an old Golf for the run to the train station in the morning. etc. etc.

As long as they stay in that lucrative line of work (and that's more than the CFO of all but a very big company) and PWC doesn't shed partners (I believe it did, last year, but don't know) then it will all work out.

7 figure lines of credit for people on £10m a year, is one thing.

$300k mortgage, $300k pa. That's somewhat different. That's doing well. It only looks good compared to the average US family. It's not in the rich land.

Growing up, the area, which had some quite nice houses, affluent middle class neighbourhood, was littered with well paid men in their 50s, who had lost their jobs as CFOs or VPs, and were scratching around-- it's quite common in finance to lose your best job in your mid 40s and early 50s, and never make that kind of money again. I should say in those days stockbrokers made $300k pa, not $5m. But we had good public schools, and people tended to pay off their mortgages. They survived.

I agree, btw, that on a car even on OP's numbers, $10k is neither here nor there.

But on my calculations, roughly speaking, aimed at the mortgage, would save $500 pa. Or $1500 over 3 years (plus of course compound interest, with amortisation say another $37.50 ie half of 5%?).

[Valuethinker]

Yes, I am not sure what the big problem is with having debt. Especially as a way to maintain flexibility and respond to events. Look at most healthy corporations - they have lines of credit and loans and whatnot all of which cost them money.

Having unmanageable debt and behaving irresponsibly is something else. Balancing liabilities, assets, cash flow, and income is what is important.

Humans are not limited liability corporations. The consequences of financial distress are a lot larger.

We are not talking about LOC here-- short term liquidity. We are talking about a secured claim against principle residence.

If you don't need to have debt, why have it? Only if you can earn a superior rate of return (adjusting correctly for tax). Since on a risk adjusted basis it is impossible to do so unless there are particular tax issues (generally, an ability to make investments in tax deferred or tax exempt vehicles where such is given on an annual basis-- use it or lose it) it's not usually worth doing.

None of us I presume runs a credit card balance over the end of the month. Why pay 18% to someone else? Same principle.

I did leverage up to buy into private equity situations where you can pull off double digit returns. That worked out quasi-OK (some disastrously badly though). In retrospect I realize I was running a lot bigger risks than I thought.

I know people who have been slaughtered in 2008/09 doing that. 10 millionaires down to 1 millionaires. Ouch.

I agree btw that my original post may have been an overreaction, 10k neither here nor there as you correctly point out.

But 300k pa. On the old formula of 1/3rd taxes, 1/3rd living, 1/3rd investing, and a 300k mortgage debt, one could be debt free in 3 years, potentially (subject to above re other forms of savings). At which point, why not?

[Valuethinker]

While I don't have debt, I think once again your not taking a step back and considering someone with "lots" of money. Most of the people I know with money have their money managed and have a line of credit in the 7 digit range to deal with special events. They always have debt.

If we are talking debt free guys with a few million net worth, who own classic cars then fine.

A £100k overdraft that you tap occasionally, if you make £1m is not a big issue.

But they should not put those classic cars on their balance sheet. Or at a hugely marked down value if they do. They are not assets, they are consumption.

(better case for classic cars as an investment, perhaps, than a 250k sports car. The latter, they are incredibly sensitive to the well being of property entrepreneurs, hedge fund managers, Hollywood people etc. When the market is torpedoed by something like Madoff, it is really torpedoed. Classic cars there is a scarcity value and collectors so wealthy they are not directly affected by market conditions.

Watch the modern art market though: I suspect, if plotted, it has a near perfect correlation with hedge fund fees.

I have some experience in the antiques world. Lloyds insurance debacle. Family selling off Chippendale furniture for $100k a set. It really is a market where the fees wrack up, and where the 'value' and what you get can be hugely different.

I can also tell you about grand houses in the country. They are a money pit. More than 5/6 bedrooms, 3 bathrooms, 3,500 square feet and you are in the land of constantly shelling out. Consumption not investment).

[edge]

I already gave several reasons why not:

1) Being liquid now is better than being not liquid and the house might be a money trap where he cannot pull out money in a HELOC.

2) Why transfer risk from the bank to yourself?

Both of these make your suggestion to pay off the mortgage a bad idea.

[Valuethinker]

I already gave several reasons why not:

1) Being liquid now is better than being not liquid and the house might be a money trap where he cannot pull out money in a HELOC.

2) Why transfer risk from the bank to yourself?

Both of these make your suggestion to pay off the mortgage a bad idea.

On 1 it's a fair argument if you take your assumptions vs. mine (some of the difference is differences in tax and banking systems).

On 2 I'd have to think about it. Not sure I really see that by repaying a mortgage, you are transferring risk from bank to yourself.

Again the difference may be legal. There's no such thing as a non-recourse own residence mortgage here (you could set up a 'buy to let' mortgage with a company in Jersey say that owns your house, and you pay it rent, but the bank would only lend you 60% or less of the value of the property. Also the tax authorities will investigate anything that smacks of avoidance).

If on the sale of your property here, you are 'short' then the bank has the legal right to chase you for the difference. And it will-- unto bankruptcy. A consequence which could destroy your professional prospects as well as causing untold grief on the way.

Chance of being debt free in 3 years though-- Gawd I'd go for that. Life's a very different place when you are debt free.

[wellmoneyed]

Rules of thumb about 'how much' car to have seem to me to be silly.

This maybe hard for people to wrap their heads around, but at some point you no longer have clear and understandable money restrictions. Imagine you can comfortably live on $100K/year, you have 5Mil invested and your making 1M/year. Can you buy a 500K car? Is it reasonable? Is it crazy? Will it make you happy or will you regret it?

It is a lot easier IMHO to make these types of decisions when your disposable income is a small percentage of your income, as your disposable income becomes bigger and bigger it really is difficult. I am not sure this can be fully appreciated until you are there.

We're not in this situation here. Gross family income= debt.

That's nice, but not that nice.

The point of a rule of thumb is to give you a point not to exceed if you can afford it. If your net worth is negative, you can't afford it. My example, which apparently didn't hit the mark, was to show how at some point it is hard to figure out what spend is ok. Rules of thumb help keep you from being too crazy. I look at these as upper limits. In my example the take home pay after taxes is ~600K. Based on the rule of thumb the total vehicles could only be 300K. Can the person in my example afford a 500K car? Absolutely. It is not a question of affordability for the OP is one of "reasonableness". That is why I think easy rules of thumb that are LIMITS not targets or goals to spend can be very helpful. There is no problem spending less. I assumed that was understood.

To me, it seems an absolute, that if you have debt, then owning something like a car, where you can buy an excellent vehicle for $30k, owning 1 for $200-300k just counts as silly.

While I don't have debt, I think once again your not taking a step back and considering someone with "lots" of money. Most of the people I know with money have their money managed and have a line of credit in the 7 digit range to deal with special events. They always have debt.

OP is not in that comfortable world. 300k is nice, but in investment banking that's a 4 year post graduation remuneration. In hedge funds, it's not even a portfolio manager. Law firms, it's at best a very junior partner. And that's a combined income.

I am a fan of no debt, but I believe it is easily "proven" that paying off cheap long term, tax deductible debt is not financially a smart move on average in the long term. I do not have a mortgage, because I like the feel of no debt and frankly I didn't really care about the arbitrage of portfolio return - borrowed money. The OP can pay off the debt tomorrow. He chooses not to I assume for the arbitrage/liquidity reasons which I don't find compelling, but I understand that others do.

[Valuethinker]

The point of a rule of thumb is to give you a point not to exceed if you can afford it. If your net worth is negative, you can't afford it. My example, which apparently didn't hit the mark, was to show how at some point it is hard to figure out what spend is ok. Rules of thumb help keep you from being too crazy. I look at these as upper limits. In my example the take home pay after taxes is ~600K. Based on the rule of thumb the total vehicles could only be 300K. Can the person in my example afford a 500K car? Absolutely. It is not a question of affordability for the OP is one of "reasonableness". That is why I think easy rules of thumb that are LIMITS not targets or goals to spend can be very helpful. There is no problem spending less. I assumed that was understood.

Hmmm....

There are rules of thumb like max 30% gross income in housing costs (that's not a bad one).

Car? I could see at the bottom end (try to keep it within 10% of household total expenditure: gas + insurance + depreciation).

On that level of income it would seem to me since the whole thing is entirely discretionary (you can afford almost any car) you should simply look at it at what you want, as a tradeoff against other things.

I am a fan of no debt, but I believe it is easily "proven" that paying off cheap long term, tax deductible debt is not financially a smart move on average in the long term. I do not have a mortgage, because I like the feel of no debt and frankly I didn't really care about the arbitrage of portfolio return - borrowed money. The OP can pay off the debt tomorrow. He chooses not to I assume for the arbitrage/liquidity reasons which I don't find compelling, but I understand that others do.

You've nailed the problem with debt. It is an irrevocable claim which encumbers you. Individuals are not limited liability corporations. UK it's worse than that: residential RE is not non-recourse, you are personally liable for any shortfall.

Debt interest also has a significant liquidity cost as you note above-- don't pay, you are bust. Now if someone is about to be made redundant I encourage them not to pay down debt (low interest rate) but, generally, that's not a good strategy for personal debt.

'proven'. One difference is the US ability to deduct mortgage debt (but I suspect that is something of a behavioural trap embedded in that-- you've got to be damned sure you are not spending any of that borrowing on consumption).

Setting that aside, markets are pretty efficient. You cannot borrow for less than you can earn *without* taking on significant risk.

Equities are risky. Houses are risky. Classic cars are risky (assets). Hedge Funds and Private Equity are risky. Etc. Etc.

In the case of rental property you can structure the investment with no recourse to you, and you can leverage your returns via mortgage debt. It's a good way to get rich slowly (if you put the work into it-- ie it's a business more than an investment).

Leveraging against equities is best done by remote control (hedge funds and PE). Then you can only lose your initial investment.

So really I only think there is an arbitrage if there is a tax arbitrage: the ability to invest in tax free/ tax deferred situations, where the amount you can do so p.a. is fixed (no carry forward).

The other possibility of course might be if your expectations of inflation are significantly higher than current market expectations, and you can fix your interest rate, long term.

This happened to a lot of people in the 70s but I don't think most of them planned that, it just happened.

[afan]

The wisdom of replacing a well-functioning car at this time depends on how good a car one will get. Right now I have a great car. It has 183,000 miles, and runs well. Bought for cash, "worth" little for resale, but goes where I point it and stops when told. In other words, does everything a car can do. Spouse's car is much newer (125,000 mi), otherwise same comments.

Cars/networth= 10 basis points
cars/income= 1.1%

Both treading down

Money saved on automobiles goes into a portfolio of index funds and individual stocks. Not available from cars, we derive deep personal satisfaction from the portfolio. Also not available from cars- no one sees our portfolio but us. Thus, we cannot impress our neighbors with the portfolio. We are hoping to continue to impress merchants by paying our bills.

[guitarguy]

Before you buy the used Lexus, check out a new Camry XLE. You can get a fairly high level of luxury, a new car (rather than a 2008), and save 10K besides. IMO, the performance of the 4 cyl is so good, you don't need the 6 cyl. You have to test drive one to appreciate it.

Jeff

Um, the Lexus LS has a 4.6 liter V8.

Um, point being? He's buying a daily driver. I certainly hope he's not looking at a Lexus to drive as a sports car...and the LS is nowhere near a 'fast' car. Plus, I think he was comparing the 4cyl to the 6cyl Camry...not to the Lexus.

To the OP: just my opinion...but dude you're making $300k+ a year...you can afford a $35k car!!! lol. Get what you like. I drive a 2001 Grand Prix 3.8L V6 and love it. But what do I know I'm young and stupid!!!

To you car guys: I just sold my 550+hp 1995 Ford Mustang with a bored out 383 Windsor stroker motor to my brother in law. Now THAT...was a fast car.

[Cheap_rookie]

FWIIIW: While we are near your neighborhood in income (only 240-250K), we are older, but no debt and will be in similar situation.
[In my case, exisiting 10yr old car at 150K-160K mi, but will need new tires, new battery, etc --- and need vehicle to maintain ability to continue working (as ability/viability of mass transit is low) considering where I work (in "challenged" area of the US' "highest crime area" (per US News, etal)... so I am planning NEW vehicle (for reliablities sake).]

As OP mentioned south Texas, reliability may also be an issue, depending where he may need to go. Say if OP is in San Antonio and needs to get to Laredo regularly, well, lets just say that stretch of highway is kind of long and lonely and I wouldn't want to be stranded out there in the summer. If, however, he only needs to go to say New Branfeuls... then it's not as bad as the tow would be expensive but he wouldn't be standed in the middle of nowhere. Now I used SA as example (OP didn't say exactly where in South Texas), but clearly reliability of the vehicle will depend on where it is needed.
AFA paying off existing debt, I'm sure the OP is doing so in a prudent way (as he mentioned only 43), and I assumed he had enough emergency fund relative to his burn-rate.... so I vote (again assuming vehicle is good shape (likely in the south Texas area) to go ahead ... but mindful that the vehicle may have been salvaged from another area (FL or LA ?) where it may have been exposed to serious problems in electrical systems, etc. (Carfax anyone?)

[blevine]

To my wife and I, a car is just a way to get from point A to point B.

Priority is

1) Safety (air bags, traction control)
2) Comfort (comfy seats, heated seats etc)
3) Convenience (doesn't break down and leave us stranded)
4) Economy (pay no more than necessary to get the above 3)

Lexus/Toyota certainly has had the safety ratings historically.

Comfort is a matter of opinion, I am pretty flexible on short trips,
but on long trips like my captains chair in the minivan

Convenience - tougher call, Toyota is no longer the bullet proof reliable
car it once was, is Lexus any better ? Still probably above average.

Economy - certainly Toyota over lexus, unless there are safety/comfort
features only available on the Lexus and of importance to you.

Personally never found the need for any luxury brand, and I am in a similar financial situation to the OP.
But was never tempted to buy the Yugo when it sold years ago, nor a smartcar today.
Feel no need to "reward" myself for following common sense,
nor punish myself with a SmarCar.

I have other priorities, but to each his own, no disrepect at all.

[guitarguy]

Priority is

1) Safety (air bags, traction control)
2) Comfort (comfy seats, heated seats etc)
3) Convenience (doesn't break down and leave us stranded)
4) Economy (pay no more than necessary to get the above 3)

Higher priority in comfy seats than not breaking down and leaving you stranded!? I'd call that 'reliability' not 'convenience'!!! Just busting your stones.

[edge]

My apologies. The point is that these cars you mentioned in your post are not comparable.

I don't suggest he is going to race the LS. However, large luxury car with a 4.6 liter V8 with large amounts of torque, especially torque delivered at the lower ranges of the RPM is a far more enjoyable daily driver for most people than say, a high revving ricer that delivers power when you hit 5500 rpm.

I have a Cayman S as my daily so I myself am not particularly interested in the comfort/luxury segment.

Before you buy the used Lexus, check out a new Camry XLE. You can get a fairly high level of luxury, a new car (rather than a 2008), and save 10K besides. IMO, the performance of the 4 cyl is so good, you don't need the 6 cyl. You have to test drive one to appreciate it.

Jeff

Um, the Lexus LS has a 4.6 liter V8.

Um, point being? He's buying a daily driver. I certainly hope he's not looking at a Lexus to drive as a sports car...and the LS is nowhere near a 'fast' car. Plus, I think he was comparing the 4cyl to the 6cyl Camry...not to the Lexus.

To the OP: just my opinion...but dude you're making $300k+ a year...you can afford a $35k car!!! lol. Get what you like. I drive a 2001 Grand Prix 3.8L V6 and love it. But what do I know I'm young and stupid!!!

To you car guys: I just sold my 550+hp 1995 Ford Mustang with a bored out 383 Windsor stroker motor to my brother in law. Now THAT...was a fast car.

[tadamsmar]

To my wife and I, a car is just a way to get from point A to point B.

Priority is

1) Safety (air bags, traction control)
2) Comfort (comfy seats, heated seats etc)
3) Convenience (doesn't break down and leave us stranded)
4) Economy (pay no more than necessary to get the above 3)

Lexus/Toyota certainly has had the safety ratings historically.

Comfort is a matter of opinion, I am pretty flexible on short trips,
but on long trips like my captains chair in the minivan

Convenience - tougher call, Toyota is no longer the bullet proof reliable
car it once was, is Lexus any better ? Still probably above average.

Economy - certainly Toyota over lexus, unless there are safety/comfort
features only available on the Lexus and of importance to you.

Personally never found the need for any luxury brand, and I am in a similar financial situation to the OP.
But was never tempted to buy the Yugo when it sold years ago, nor a smartcar today.
Feel no need to "reward" myself for following common sense,
nor punish myself with a SmarCar.

I have other priorities, but to each his own, no disrepect at all.

Electronic stability control (ESC) is more important to safety than air bags or traction control.

Historically, brands like Mercedes and BMW have been somewhat ahead of Toyota and some Lexus trims in terms of making important safety features standard.

[Go Blue 99]

I'm really surprised the Dave Ramsey car value to income ratio is so high (50%).

[edge]

Its pretty simple why it is 50%. Its because the average income in this country is ~40-something k/year.

[epilnk]

$300k mortgage, $300k pa. That's somewhat different. That's doing well. It only looks good compared to the average US family. It's not in the rich land.

Doing well? Of course he's rich. When did we redefine rich to mean obscenely wealthy? With that salary and a net worth of over 1.5 million the OP is easily in the top 1-2% of society - why shouldn't we consider that rich? He may not be fully-staffed-yacht rich, but he's easily used Lexus rich. If he's prudent - and he does sound prudent - he should be able to stay that way, though he's not rich enough to immunize himself from reversals of fortune.

I can't help but think of Nellie Olson, the little rich girl from Little House on the Prairie. Her parents owned the town store and she always had nice clean dresses and fresh ribbons in her hair - a degree of wealth that Laura Ingalls could only dream of.

[EmergDoc]

I'm really surprised the Dave Ramsey car value to income ratio is so high (50%).

I think that's a maximum, and I think it is for all the cars in the household. But I agree, I think it's too high. I'd say 10-25%.

[C319]

I'm really surprised the Dave Ramsey car value to income ratio is so high (50%).

I think that's a maximum, and I think it is for all the cars in the household. But I agree, I think it's too high. I'd say 10-25%.

EmergDoc: I agree 50% seems too high. I've always liked the "all vehicles less than 4% net worth" guideline.

I appreciate the variety and thoughtfulness of the responses on this topic. I've been thinking a lot about it, and realize that my hesitation to spend means I probably shouldn't buy right now. My old car drives just fine, but I want something a little newer & nicer. But... it is simply a want, not a need.

My wife and I save 30% of gross income and have just five years left on the mortgage (10-year fixed at 4.5%) on a home worth $700K. As some have pointed out, we are certainly not super-wealthy, but I believe we are very fortunate and in a good place in life. That said, my conscience is telling me I'd be better off putting any extra money into wealth-buidling investments or paying off the mortgage instead of another car.

It also occurred to me that if my house were paid off I probably wouldn't be questioning a $35K purchase, so I'll keep my current car and revisit the idea after the last mortgage payment is made. Who knows...maybe I'll even consider buying a new Lexus at that point? We'll see.

Thanks again for sharing your perspectives.

[tractorguy]

Buy the thing.

You're description of your situation indicates that you can afford it and you're not going to have to significantly change your financial plans or retirement plans if you buy it.

How many hours/day, week, or month are you going to spend in that car? If you're like me when I was commuting to work, I spent more time in the car then I did pursuing any of my hobbies. So, I was willing to spend a bit more money to have a car that I enjoyed driving. I bought a 2 year old BMW at 50% of the new price and have never looked back.

[JupiterJones]

If you have not see Pianomania you really should.

Sounds good! But hmmm... Netflix doesn't seem to have it. (Might have to employ other means. )

You might like Note by Note. It follows the making of a single Steinway grand from beginning to end. I found it fascinating.

JJ

[C319]

Greetings Bogleheads. As the OP, I just wanted to update my post to fill in "the rest of the story" as hopefully it helps someone else.

In June 2011 I pulled the trigger and sold my Toyota Avalon and paid cash for a gently used Lexus LS460. Beautiful car, but felt like too much (to me) to drive every day so I sold it and bought a used Prius which I'm very happy with. Paid off the mortgage in November 2011 and took my family on a really nice Caribbean vacation for Christmas. At 45, a net worth of $2.1M, two homes paid for and no debt feels good to me. I really enjoy my job and plan to keep working until age 62 (mandatory military retirement age).

In the interim we've saved more aggressively and begun taking more frequent family vacations. I still like nice cars and might pull the trigger again someday - The funny thing is, that now that I can truly afford it I no longer have as much of an "urge to splurge". I guess what I really wanted all along was simply the freedom to make financial choices more than the actual accumulation of stuff itself.

Thanks Bogleheads!
C319

[AustenNut]

Thanks for the update. Just a quick question of clarification. I understand Dave Ramsey's position about not having cars be worth more than 50% of one's annual income. But is there some caveat about the 4% of net worth? I suspect the average American doesn't have a net worth of more than $100,000. So their families' vehicles shouldn't amount to more than $4000? Just curious as to how these ratios are supposed to work out for people who don't have 7-figure net worths.

[C319]

Greetings AustenNut.
Cars roughly 4% of net worth was simply what I interpolated from Thomas Stanley's book "The Millionaire Next Door" where he discusses household spending patterns and car buying habits. It's remained part of my IPS since I read the book and have always used this figure when considering car purchases. I agree it may not fit all situations, but has been a good guide for me over the years.

[Watty]

I'm 43, household income $300K+/yr. Debt: -$300K mortgage.

I would guess that your disposable income after you have paid all your bills and taxes is somewhere in the neighborhood of $150K so you are looking at using maybe three or four months disposable income on something you want. As long as you are not spending most of your disposable income on stuff like this then I don't see any issues with buying the car.


Depending on your line of work you might even consider buying an even newer and presumably more reliable car. The problem is that at your level of income having to take time off work to deal with a car breaking down can be very expensive. Murphy’s law will likely have the car break down and cause you to miss a key meeting or flight so trying to keep a less dependable car could be pennywise and pound foolish.

[nhdblfan]

This forum may be unbiased when it comes to investing, but it has an extreme bias against nice cars. :lol:

and nice watches

[stoptothink]

Greetings AustenNut.
Cars roughly 4% of net worth was simply what I interpolated from Thomas Stanley's book "The Millionaire Next Door" where he discusses household spending patterns and car buying habits. It's remained part of my IPS since I read the book and have always used this figure when considering car purchases. I agree it may not fit all situations, but has been a good guide for me over the years.

Exactly, that is in regards to MILLIONAIRES, it has little relevance for the average Joe. Highly unlikely you'd find any of my peers (I am 31) in my income bracket who drive a cheaper vehicle, yet my new (to me) vehicle represents about 2.5 months of my take home pay and ~8% of my net worth. Unfortunately most people are not worth in excess of $500k.

[travellight]

You can certainly afford to buy the car and if you really want it, you should.

If you just want to gauge how other Bogleheads would behave, I have not spent that much on a car yet. My last car purchase was a used 2008 Cadillac STS with 59K miles on it for 23K. I love it; works fine for me. And my income/net worth is higher than yours. I almost splurged on getting the Tesla S sedan, 75K$, but just backed out and am waiting to get my 5K deposit money back. I would rather wait 3 years and try to buy it used if prices come down.

[dickenjb]

I drive an LS460. It is a great car. Many people on this board are just plain cheap. You have to enjoy life a little.

I guess in Texas you don't worry about snow. The AWD is a must have in the Northeast. My old LS400 with rear wheel drive was terrible in the snow.

[umfundi]

My financial ratio for two new cars? $400/month / net worth. About the same ER as my Vanguard funds. A fraction of a percent.

Lookit: You can go to your Chevy dealer and lease a new Malibu for $200/month (total payment including tax) for 2-3 years with no money down. Oil changes every year (10,000 miles) are the only other cost and the first one is free. Otherwise, $43.

I cannot understand why anyone sinks any money into owning a daily driver car, used or not.

My mid-life car is a 2003 Subaru WRX, 40,000 miles. Bright yellow, perfect original condition. Cost me $9,000. It is a blast to drive.

Keith

[nhdblfan]

I drive an LS460. It is a great car. Many people on this board are just plain cheap. You have to enjoy life a little.

I guess in Texas you don't worry about snow. The AWD is a must have in the Northeast. My old LS400 with rear wheel drive was terrible in the snow.

"Many people on this board are just plain cheap"
Ya think ?

BTW,thats fine with me drive whatever you like,its the way they treat anyone that would like to enjoy life a little that gets me !

Like you I drive a Lexus-as does my wife, GX470 for me and RX350 for her,and we both love them,great cars,excellent fit finish and ride

[leonard]

Figure out an excellent quality, dependable car model that meets your needs. Probably a Honda or Toyota. Track craigslist until a very low mileage example of that model shows up. get it inspected by a mechanic and pay cash.

Shoudn't set you back more than $15k or so.

IMO expensive cars are just an impediment to financial independance.

[cjackson0]

Original poster pulled the trigger on the Lexus, promptly sold it, and bought another car in the meantime. No need to continue dispensing advice to him.

However, I think he's looking for tips on good tropical vacation spots

[nhdblfan]

Lexus just got the top spot again in dependability ,note 3 of other 4 Porsche, Lincoln, Toyota and Mercedes-Benz are also consider luxury brands.

Lexus tops car dependability survey

http://blogs.marketwatch.com/encore/201 ... ty-survey/

[DonDraper]

I just attended a large national auto show. I was surprised at how expensive non luxury brand cars were selling for.

Bottom line $35k for an automobile is NOT an outrageous amount anymore. A loaded up Camry will cost you $30k. You make $300k a year with a net worth in the millions. I would buy that car in a heartbeat and don't give it a second thought.

[johncunningham]

OP,

I just joined the forum in order to respond. Long time reader...

In any event, I think you are right on. I just bought a "play" car. Long story short, you only live once. In an effort to let everyone judge:

I am 36. Married, three small kids. Make a decent income $500k+ But, I have only been making this the last 2 years. Many years of school, sacrifice... No significant income at all until 27, minimal income 27-31, and pretty decent income 31-33. 34 and 35 have been good years for me.

My wife and I, I think are on the right track, we have 401k balances at ~675k, Cash at ~100k, and taxable accounts at ~100k. We also have 529's at ~125k.
Add Home equity of ~400k and the fact that we saved around 150k each of the last 2 years (plus everything else to get us to this place) and we are feeling pretty good.

So long story short, my daily driver is a 5 year old subaru and my wife has a 6 year old chevy. We decided that we would get a Jeep wrangler four door to take the top off and drive on nice days. $32k with better uses I'm sure (at least to some), but for me, I can't wait to put the car seats in that thing for the first trip to the beach this Spring.

I didn't bother to calculate the ratios for us, but honestly, It's less than a month's Gross Earnings, and I just feel you can't save it all...

Good Times

John