Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
tim1999
Posts: 3907
Joined: Tue Dec 16, 2008 7:16 am

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by tim1999 »

These "rules" are really silly.
Normchad
Posts: 2725
Joined: Thu Mar 03, 2011 7:20 am

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by Normchad »

It’s silly to arbitrary tie one of life’s common expenses to your networth.

We wouldn’t suggest doing that for clothes, would we? Or a laptop?

Except at the extremes, they cost what they cost. And if you need one, you get one.

A better rule of thumb would be “don’t buy more car than you need”.
Lee_WSP
Posts: 5329
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by Lee_WSP »

Barring the extreme frugality of the FIRE movement, when Dave Ramsey says you can own a car worth 50% of your income (forget if it’s gross or take home), I have a hard time arguing for anything stricter.
afan
Posts: 6011
Joined: Sun Jul 25, 2010 4:01 pm

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by afan »

I don't know who Dave Ramsey is, but I wonder what assumptions he is making about these car buyers. As many have noted, buying a car for a very much smaller part of one's income than half can seem irresponsible.

For someone for whom the car really is an investment expense to support a profitable business, one might stretch it more than if it is simply a convenience or luxury item.
A tradesperson who has a pickup truck may need that truck to do their job.
If all one needs is a commuter vehicle, then the pickup truck might be too expensive to justify.

How much one should spend depends on their overall financial picture. Cannot get there just from networth or annual income.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
afan
Posts: 6011
Joined: Sun Jul 25, 2010 4:01 pm

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by afan »

teuton33 wrote: Wed Jun 23, 2021 8:02 am Lot of threads about this with people nervous with how much to spend on a car. I know this has bugged me too over the years. I am posting because I believe I have found the perfect rule: 5% of net worth. If you can stay at or under that you are good. It also lets you get some nice cars once your NW is in the millions :)

Here’s my buying history

I bought a brand new car for 22k in 2006 after graduation with a net worth of 500 bucks. It stung quite a bit and the loan bothered me. My income was 70k

I bought a new Honda in 2013 for 31k. After taxes and trade I paid 24 out the door. My net worth at the time was 230k. I actually regretted this purchase as I felt it was a bit too pricy. But it turned into a very reliable car it retained value well. I was well over 5% of net worth :( Income was about 125k

I purchased a car for my wife in 2017 (a brand new touring trim honda) out the door cost was a little less than 5% of net worth at that time after trading in her old Honda. Net worth was in the low 500k range with HHI ~250k This purchase didn’t sting at all. I was under the 5% threshold.

I just bought a brand new 2021 bmw 330xi pretty much fully loaded. Sticker was 51.5k but got it for 45k after discount and incentive. I think sedan buyers have much more leverage than suv in this market. Traded the old Honda for 12k so out the door cost after taxes is about 36k.

Net worth is about 2 million so I’m less than 2.5%. HHI is ~ 550k Purchase didn’t sting at all and honestly I kinda of wish I spent more and went with the m340xi :) oh well next car.
Wow. Three new cars in 15 years! We are still driving our 2007 car, bought used, with no plans to replace it in the foreseeable future.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
Topic Author
teuton33
Posts: 43
Joined: Fri Jun 04, 2021 9:24 am

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by teuton33 »

afan wrote: Wed Jun 23, 2021 11:42 am
teuton33 wrote: Wed Jun 23, 2021 8:02 am Lot of threads about this with people nervous with how much to spend on a car. I know this has bugged me too over the years. I am posting because I believe I have found the perfect rule: 5% of net worth. If you can stay at or under that you are good. It also lets you get some nice cars once your NW is in the millions :)

Here’s my buying history

I bought a brand new car for 22k in 2006 after graduation with a net worth of 500 bucks. It stung quite a bit and the loan bothered me. My income was 70k

I bought a new Honda in 2013 for 31k. After taxes and trade I paid 24 out the door. My net worth at the time was 230k. I actually regretted this purchase as I felt it was a bit too pricy. But it turned into a very reliable car it retained value well. I was well over 5% of net worth :( Income was about 125k

I purchased a car for my wife in 2017 (a brand new touring trim honda) out the door cost was a little less than 5% of net worth at that time after trading in her old Honda. Net worth was in the low 500k range with HHI ~250k This purchase didn’t sting at all. I was under the 5% threshold.

I just bought a brand new 2021 bmw 330xi pretty much fully loaded. Sticker was 51.5k but got it for 45k after discount and incentive. I think sedan buyers have much more leverage than suv in this market. Traded the old Honda for 12k so out the door cost after taxes is about 36k.

Net worth is about 2 million so I’m less than 2.5%. HHI is ~ 550k Purchase didn’t sting at all and honestly I kinda of wish I spent more and went with the m340xi :) oh well next car.
Wow. Three new cars in 15 years! We are still driving our 2007 car, bought used, with no plans to replace it in the foreseeable future.
7.5 years average duration of ownership before getting rid of a car.
Triple digit golfer
Posts: 7911
Joined: Mon May 18, 2009 5:57 pm

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by Triple digit golfer »

How does this work for families with one income and two cars? Cut the numbers in half?

If I make $200k with a wife and daughter at home, can I really only "afford" a $10k car for each of us?

Let's say the formula says I can afford a $10k car. If that car would last for 8 years, would I be able to get a $20k car if I can make it last for 16 years?

True cost of ownership needs to be considered, not just the initial cost of the vehicle.
fyre4ce
Posts: 1514
Joined: Sun Aug 06, 2017 11:29 am

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by fyre4ce »

I get the point of trying to factor in net worth somehow, but every attempt I’ve found (including this one) doesn’t seem to handle some cases well. The comparison to spending x% if net wroth on groceries is apt. I still like my rule, which is no more than 25% of gross household income in value of household cars. True costs of ownership (eg. gas/charging, depreciation) can vary between cars, but it’s close enough for this to still be useful.
Coachrhino11
Posts: 226
Joined: Mon Aug 28, 2017 12:02 pm

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by Coachrhino11 »

spdoublebass wrote: Wed Jun 23, 2021 10:21 am So your first car you had for 7 years and the second car 8 years. Why can’t you hit the 10 year mark?

My personal rule of thumb is I look for a new car at 10 years or 300K miles, whichever comes first.

I have a 2011 Ford Escape with 255K on it. So I know that one will be needing replacement soon. My other car is a 2015 Ford Explorer with 150K on it. So that should be good for another few years.
I wasn't aware there was a rule everyone had to keep the same car for 10 years or 300k miles because you do. You do you. If it makes him/her happy and they can afford it which according to income and net worth they obviously can what's the problem? You not liking or agreeing with it. OK.
Coachrhino11
Posts: 226
Joined: Mon Aug 28, 2017 12:02 pm

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by Coachrhino11 »

afan wrote: Wed Jun 23, 2021 11:42 am
teuton33 wrote: Wed Jun 23, 2021 8:02 am Lot of threads about this with people nervous with how much to spend on a car. I know this has bugged me too over the years. I am posting because I believe I have found the perfect rule: 5% of net worth. If you can stay at or under that you are good. It also lets you get some nice cars once your NW is in the millions :)

Here’s my buying history

I bought a brand new car for 22k in 2006 after graduation with a net worth of 500 bucks. It stung quite a bit and the loan bothered me. My income was 70k

I bought a new Honda in 2013 for 31k. After taxes and trade I paid 24 out the door. My net worth at the time was 230k. I actually regretted this purchase as I felt it was a bit too pricy. But it turned into a very reliable car it retained value well. I was well over 5% of net worth :( Income was about 125k

I purchased a car for my wife in 2017 (a brand new touring trim honda) out the door cost was a little less than 5% of net worth at that time after trading in her old Honda. Net worth was in the low 500k range with HHI ~250k This purchase didn’t sting at all. I was under the 5% threshold.

I just bought a brand new 2021 bmw 330xi pretty much fully loaded. Sticker was 51.5k but got it for 45k after discount and incentive. I think sedan buyers have much more leverage than suv in this market. Traded the old Honda for 12k so out the door cost after taxes is about 36k.

Net worth is about 2 million so I’m less than 2.5%. HHI is ~ 550k Purchase didn’t sting at all and honestly I kinda of wish I spent more and went with the m340xi :) oh well next car.
Wow. Three new cars in 15 years! We are still driving our 2007 car, bought used, with no plans to replace it in the foreseeable future.
Again, not everyone wants to drive the same car for 15 years. I was messing with OP earlier about me buying a new car because my house continues to appreciate and I've bought more new cars than anyone here and have learned some lessons but honestly it did not kill me. I think people are unfairly criticizing OP and piling on here. If you don't agree with the 5% then you do whatever makes you feel good. OP was just trying to reason with folks struggling making a decision and not all agree and that's ok.
Coachrhino11
Posts: 226
Joined: Mon Aug 28, 2017 12:02 pm

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by Coachrhino11 »

I will add, many here spend thousands per year on vacations and that never appears to be an issue but OH BOY! Call the police! CARS!!!! BAD CARS!!!!
stoptothink
Posts: 9730
Joined: Fri Dec 31, 2010 9:53 am

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by stoptothink »

Coachrhino11 wrote: Wed Jun 23, 2021 12:56 pm I will add, many here spend thousands per year on vacations and that never appears to be an issue but OH BOY! Call the police! CARS!!!! BAD CARS!!!!
Completely agree and wife and I share a single small sedan we bought new for like 3 weeks of gross income. The idea that driving a nicer car can't be an "experience" just like a vacation makes no sense. We've done both and honestly would choose the car over the expensive exotic vacation if a gun was put to our head. It's kind of become a moral thing: "spend on 'experiences"...blah blah blah".

I've concluded that driving my brother's Porsche turbo vs. my VW jetta daily on public roads, doesn't really increase my QOL at all and we prefer to use our extra funds in other ways, but it is "an experience" (one I enjoyed more than most of my expensive travel).
Californiastate
Posts: 225
Joined: Thu Feb 04, 2021 11:52 am

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by Californiastate »

teuton33 wrote: Wed Jun 23, 2021 10:31 am
Californiastate wrote: Wed Jun 23, 2021 10:29 am
teuton33 wrote: Wed Jun 23, 2021 9:56 am
Californiastate wrote: Wed Jun 23, 2021 9:51 am
teuton33 wrote: Wed Jun 23, 2021 9:41 am

You have a 3m net worth. In all seriousness if you went out and bought a 150k car today and kept it for 7 or 8 years it would not impact your financial situation much at all. Many years the car cost would be < 1 year of gains in the market.

It doesn't mean you have to spend the full 5% though. My bmw was roughly 2.5% of net worth. If you spent 2.5% then that would get you a much more reasonable (but still extremely nice) 75k car. That wouldn't make a dent in your financial picture as long as you kept it for a reasonable period and didn't get a new one each year.
How much are you willing to spend on the roundel? How much does the public's perception of your financial position sway your purchase? I could see it being important if future business demands you look the part. Then the roundel has it's value. Otherwise you're just a slave to fashion and pay the required charge.
Don't kid yourself. The difference in driving a bmw vs a accord/camry is much different than just the badge. Much stiffer/sportier handling, better acceleration, in general more fun to drive. Technology is also way better in the newer models.

Its a 10k delta compared to a top trim accord, but IMHO it is worth it. Better tech and a much better ride. The accord has gotten too big and floaty for my liking, and as someone coming from a top trim accord, a 250HP FWD car is an absolute waste. When i first got my v6 accord i was spinning the tires constantly and had to adapt to the car. It also torque steered under heavy acceleration and body rolled when cornering hard. The bimmer has AWD so no wheel spin and handling is much more fun!
I don't take my street vehicles to the track.
I don't either, but i definitely like the feel of the BMW when driving at street legal speeds. This car is especially good around town and in the city at < 40MPH. 300+ torque and fun handling around turns! Night and day difference compared to the accord really.
It’s your money. Justify the internet expenditure it any way you like. Just don’t pretend it’s the wise financial move. This is the BH forum. It’s not Bimmer world.
User avatar
anon_investor
Posts: 7503
Joined: Mon Jun 03, 2019 1:43 pm

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by anon_investor »

snackdog wrote: Wed Jun 23, 2021 11:15 am I would love to see Bezos or Musk spend 5% of net worth on a car.
They do but on rocket ships! :twisted:
User avatar
spdoublebass
Posts: 783
Joined: Thu Apr 27, 2017 10:04 pm
Location: NY

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by spdoublebass »

Coachrhino11 wrote: Wed Jun 23, 2021 12:48 pm
spdoublebass wrote: Wed Jun 23, 2021 10:21 am So your first car you had for 7 years and the second car 8 years. Why can’t you hit the 10 year mark?

My personal rule of thumb is I look for a new car at 10 years or 300K miles, whichever comes first.

I have a 2011 Ford Escape with 255K on it. So I know that one will be needing replacement soon. My other car is a 2015 Ford Explorer with 150K on it. So that should be good for another few years.
I wasn't aware there was a rule everyone had to keep the same car for 10 years or 300k miles because you do. You do you. If it makes him/her happy and they can afford it which according to income and net worth they obviously can what's the problem? You not liking or agreeing with it. OK.
You are reading too much into what I wrote and didn't look at my reply. My point is exactly what you wrote.

He can afford it. He can buy a new car every year, it doesn't matter if you can afford it. My only point is why develop a method based off of your income and ask for advice on a forum? Why does it matter what % of his net worth his new car represents? It doesn't.
I'm trying to think, but nothing happens
User avatar
bligh
Posts: 1412
Joined: Wed Jul 27, 2016 9:13 pm

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by bligh »

teuton33 wrote: Wed Jun 23, 2021 11:21 am
So I can buy at 125k car at 500k income? Yeah right.
Why not? Like all rules of thumb they start to break down at the extremes (500K income would put you above the top 1% in household income in the US).

Again, based on that rule of thumb.. you can spend up to 125K on a car, but you do not have to. It gets even crazier as the number goes higher, but the basic fact remains that you spent approximately 3 months of pre tax income on an asset that depreciates over 10 years. Assuming the car depreciates to 0 at the end of the 10 years (and ignoring maintenance, insurance, etc. for simplicity) you basically spent ~2.5% of what you earned over that period on a car. (3 months income / 120 month of income over 10 years = 2.5%). Double that for the sake of arriving at an after tax number, and you still get 5% of your income over 10 years.

So yes, if a person making 500K was into cars and wanted to splurge 125K on a car that they intended to keep for 10 years, it wouldn't be madness at all.
teuton33 wrote: Wed Jun 23, 2021 11:21 am I agree 2% NW is better. I spent about 2.5% next car I will surely be <=2%
But realistically 2% is pretty strict so I went with *up to* 5%
This has the same problem as the income percentage. For high numbers the thing breaks down.

So if I can spend 5% of my net worth on a car, and I have a $3 million NW, does that mean I can spend $150,000 on a car? This number is higher than the $125K number you dismissed earlier.

In the end these are rules of thumb. Which means they ignore your other expenses (single vs married w/kids, huge mortgage, Low cost of living vs VHCOL, and so on), they ignore the maintenance costs/insurance etc. of running the vehicle, they ignore how much you use the vehicle (It would be logical for someone who drives 5K/year to spend less on a car than someone who commutes and does 20K/year), they ignore how much you care about cars, they ignore the stability of your income, they ignore the availability of good public transportation in your area, and they ignore your age and the makeup of your net worth.

They just serve to give you a ball park to give you an idea that you aren't way off the mark. It is a guidance for people who don't already know how much they want to spend. More specifically they do not recommend you target to spend that amount, instead they serve to give you a conservative maximum.
Last edited by bligh on Wed Jun 23, 2021 1:57 pm, edited 2 times in total.
randomguy
Posts: 9353
Joined: Wed Sep 17, 2014 9:00 am

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by randomguy »

teuton33 wrote: Wed Jun 23, 2021 11:50 am 7.5 years average duration of ownership before getting rid of a car.
Barely broken in. Probably didn't even have 150k miles on them:)

And yes car expenditures are something that gets frowned a lot on bogleheads while at the same time people talk about spending 3k for a bigger seat to sit in for a couple hours. Bogleheads investment advice is great. The lifestyle stuff is all over the place...
PVW
Posts: 709
Joined: Mon Dec 29, 2014 11:01 am

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by PVW »

In retirement, my yearly spending will be 2%-3% of my net worth. There's no way I'm spending more than a year's budget on a car.
afan
Posts: 6011
Joined: Sun Jul 25, 2010 4:01 pm

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by afan »

teuton33 wrote: Wed Jun 23, 2021 11:50 am
afan wrote: Wed Jun 23, 2021 11:42 am
teuton33 wrote: Wed Jun 23, 2021 8:02 am Lot of threads about this with people nervous with how much to spend on a car. I know this has bugged me too over the years. I am posting because I believe I have found the perfect rule: 5% of net worth. If you can stay at or under that you are good. It also lets you get some nice cars once your NW is in the millions :)

Here’s my buying history

I bought a brand new car for 22k in 2006 after graduation with a net worth of 500 bucks. It stung quite a bit and the loan bothered me. My income was 70k

I bought a new Honda in 2013 for 31k. After taxes and trade I paid 24 out the door. My net worth at the time was 230k. I actually regretted this purchase as I felt it was a bit too pricy. But it turned into a very reliable car it retained value well. I was well over 5% of net worth :( Income was about 125k

I purchased a car for my wife in 2017 (a brand new touring trim honda) out the door cost was a little less than 5% of net worth at that time after trading in her old Honda. Net worth was in the low 500k range with HHI ~250k This purchase didn’t sting at all. I was under the 5% threshold.

I just bought a brand new 2021 bmw 330xi pretty much fully loaded. Sticker was 51.5k but got it for 45k after discount and incentive. I think sedan buyers have much more leverage than suv in this market. Traded the old Honda for 12k so out the door cost after taxes is about 36k.

Net worth is about 2 million so I’m less than 2.5%. HHI is ~ 550k Purchase didn’t sting at all and honestly I kinda of wish I spent more and went with the m340xi :) oh well next car.
Wow. Three new cars in 15 years! We are still driving our 2007 car, bought used, with no plans to replace it in the foreseeable future.
7.5 years average duration of ownership before getting rid of a car.
I agree with your math. For us the figure is about 18.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
JackoC
Posts: 2431
Joined: Sun Aug 12, 2018 11:14 am

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by JackoC »

bligh wrote: Wed Jun 23, 2021 11:16 am
teuton33 wrote: Wed Jun 23, 2021 8:02 am Lot of threads about this with people nervous with how much to spend on a car. I know this has bugged me too over the years. I am posting because I believe I have found the perfect rule: 5% of net worth. If you can stay at or under that you are good. It also lets you get some nice cars once your NW is in the millions :)
Personally, the rule I would suggest to someone would be 2% of net worth or 25% of annual gross pay, which ever is greater, for a car you would keep 10 years or more. With exceptions to the rule super late or very early in life, or for exceptionally large portfolios.
I agree with the general direction you're going there relative to 5% NW or 10% of income, which is too high and too low, respectively, for a greater proportion of people than your suggestion, IMO. Although as you agree there are still exceptions. And besides the ones you mentioned, as other people have mentioned, it also matters if you typically have 1 or >1 car and how long you keep them. PS wrt to later exchange seems like people often on these threads substitute 'should buy' for 'can buy' sort of at random halfway through, ie. I see nothing strange about a rule implying a $500k income person *can* buy a $125k car if they highly value fine cars. The counter argument is that such a person, even if the $500k is reasonably secure 'cannot afford' a $125k car, ever: I don't see that. Nobody is saying anyone has to buy cars they aren't interested in.

But *if* we needed a general rule about car purchase, I don't think anybody is saying it's literally necessary to have one, or possible to have one that applies to close to 100% of people, the 'X% of NW or Y% of income, whichever greater' formula can address the basic problem that some people have little to negative NW but high and relatively secure labor income so a % of NW makes no sense for them, whereas some people are finished working and their 'income' is mainly a deemed % of their assets so whatever they say in '% of income' is really % of assets anyway. And those people generally have fewer years left, so the assumption that whatever car you buy now you'll buy and over and over many times is less applicable as well.

In general I believe counting 'NW' minus house is a construct of the investment management industry that has strangely carried over to BH-ism, also via some personal finance guru's who appeal to naive people in bad financial shape (who actually think the way to get rich is buying too big a house). Retail investment professionals don't care what your house is worth because they can't make fees managing your house. :happy What your house is worth OTOH definitely matters to you, in case for example you live in an area where house prices have gone up a lot, if they go back down a lot. Believe me you will care if that happens, even if you now claim 'I assume my house is worth zero' (and the people who actually don't care won't because their house is a small % of NW, IOW the whole argument whether to include it was largely irrelevant to them to begin with). That said, an owner occupied house is a hybrid of investment (possible appreciation) and discretionary consumption (of the owner imputed rent plus the cash expenses you commit to pay by living there). So if a person would justify consumption of a more expensive car because they made the discretionary purchase of a more expensive house, yeah that would be dicey reasoning. However this case seems mainly a hypothetical concern about 'the average person'. I don't remember any post here seeking to justify an expensive car purchase *because* the person was already house-poor.
TheLaughingCow
Posts: 236
Joined: Tue Jul 01, 2014 9:41 pm

Re: Best rule of thumb for car purchase: 5% of net worth

Post by TheLaughingCow »

Kagord wrote: Wed Jun 23, 2021 8:57 am IMHO, a vehicle purchase (functional purpose, point A to point B) should be 0.5% to 1.0% of net worth (before house equity), this is a depreciating asset we are talking about here.
Bogleheads approaching parody.
afan
Posts: 6011
Joined: Sun Jul 25, 2010 4:01 pm

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by afan »

Coachrhino11 wrote: Wed Jun 23, 2021 12:56 pm I will add, many here spend thousands per year on vacations and that never appears to be an issue but OH BOY! Call the police! CARS!!!! BAD CARS!!!!
I agree. Expensive cars are a waste of money but expensive vacations are a worse waste.

A new car may depreciate drastically when you drive it off the lot, but at least it is still worth something. An expensive vacation goes to zero as soon as you get home.

One can simply avoid going on expensive vacations. In many areas it is impractical go without a car.

Absent the tradesperson who needs a pickup truck, one get get near perfect performance for safety, reliability and transportation from a used Camry. Drive for 15-20 years until its reliability goes down, then replace with another used Camry. Invest the difference in VTI.

If in addition to a transportation device you also want a toy, buy a water pistol. Don't spend 5% of your networth on the toy.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
Tingting1013
Posts: 1594
Joined: Mon Aug 24, 2020 5:44 pm

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by Tingting1013 »

afan wrote: Wed Jun 23, 2021 2:29 pm
Coachrhino11 wrote: Wed Jun 23, 2021 12:56 pm I will add, many here spend thousands per year on vacations and that never appears to be an issue but OH BOY! Call the police! CARS!!!! BAD CARS!!!!
I agree. Expensive cars are a waste of money but expensive vacations are a worse waste.

A new car may depreciate drastically when you drive it off the lot, but at least it is still worth something. An expensive vacation goes to zero as soon as you get home.

One can simply avoid going on expensive vacations. In many areas it is impractical go without a car.

Absent the tradesperson who needs a pickup truck, one get get near perfect performance for safety, reliability and transportation from a used Camry. Drive for 15-20 years until its reliability goes down, then replace with another used Camry. Invest the difference in VTI.

If in addition to a transportation device you also want a toy, buy a water pistol. Don't spend 5% of your networth on the toy.
Why leave the house at all? Transportation costs go to zero
User avatar
anon_investor
Posts: 7503
Joined: Mon Jun 03, 2019 1:43 pm

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by anon_investor »

afan wrote: Wed Jun 23, 2021 2:29 pm
Coachrhino11 wrote: Wed Jun 23, 2021 12:56 pm I will add, many here spend thousands per year on vacations and that never appears to be an issue but OH BOY! Call the police! CARS!!!! BAD CARS!!!!
I agree. Expensive cars are a waste of money but expensive vacations are a worse waste.

A new car may depreciate drastically when you drive it off the lot, but at least it is still worth something. An expensive vacation goes to zero as soon as you get home.

One can simply avoid going on expensive vacations. In many areas it is impractical go without a car.

Absent the tradesperson who needs a pickup truck, one get get near perfect performance for safety, reliability and transportation from a used Camry. Drive for 15-20 years until its reliability goes down, then replace with another used Camry. Invest the difference in VTI.

If in addition to a transportation device you also want a toy, buy a water pistol. Don't spend 5% of your networth on the toy.
Some people don't buy expensive cars or go on expensive vacations. But I do invest the difference into VTSAX! :mrgreen:
afan
Posts: 6011
Joined: Sun Jul 25, 2010 4:01 pm

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by afan »

Tingting1013 wrote: Wed Jun 23, 2021 2:31 pm
afan wrote: Wed Jun 23, 2021 2:29 pm
Coachrhino11 wrote: Wed Jun 23, 2021 12:56 pm I will add, many here spend thousands per year on vacations and that never appears to be an issue but OH BOY! Call the police! CARS!!!! BAD CARS!!!!
I agree. Expensive cars are a waste of money but expensive vacations are a worse waste.

A new car may depreciate drastically when you drive it off the lot, but at least it is still worth something. An expensive vacation goes to zero as soon as you get home.

One can simply avoid going on expensive vacations. In many areas it is impractical go without a car.

Absent the tradesperson who needs a pickup truck, one get get near perfect performance for safety, reliability and transportation from a used Camry. Drive for 15-20 years until its reliability goes down, then replace with another used Camry. Invest the difference in VTI.

If in addition to a transportation device you also want a toy, buy a water pistol. Don't spend 5% of your networth on the toy.
Why leave the house at all? Transportation costs go to zero
My boss would stop paying me if I did not come to work. My job has been quite inflexible on this point.
One may need a car to go to the grocery store- yes maybe they will deliver but some want to pick out their own produce. Same for a pharmacy, supplies for the home...

If you rely on delivery your transportation costs do not go to zero. Instead, they are included in the prices you pay for things.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
phxjcc
Posts: 925
Joined: Thu Aug 23, 2018 3:47 pm

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by phxjcc »

teuton33 wrote: Wed Jun 23, 2021 8:02 am Lot of threads about this with people nervous with how much to spend on a car. I know this has bugged me too over the years. I am posting because I believe I have found the perfect rule: 5% of net worth. If you can stay at or under that you are good. It also lets you get some nice cars once your NW is in the millions :)

Here’s my buying history

I bought a brand new car for 22k in 2006 after graduation with a net worth of 500 bucks. It stung quite a bit and the loan bothered me. My income was 70k

I bought a new Honda in 2013 for 31k. After taxes and trade I paid 24 out the door. My net worth at the time was 230k. I actually regretted this purchase as I felt it was a bit too pricy. But it turned into a very reliable car it retained value well. I was well over 5% of net worth :( Income was about 125k

I purchased a car for my wife in 2017 (a brand new touring trim honda) out the door cost was a little less than 5% of net worth at that time after trading in her old Honda. Net worth was in the low 500k range with HHI ~250k This purchase didn’t sting at all. I was under the 5% threshold.

I just bought a brand new 2021 bmw 330xi pretty much fully loaded. Sticker was 51.5k but got it for 45k after discount and incentive. I think sedan buyers have much more leverage than suv in this market. Traded the old Honda for 12k so out the door cost after taxes is about 36k.

Net worth is about 2 million so I’m less than 2.5%. HHI is ~ 550k Purchase didn’t sting at all and honestly I kinda of wish I spent more and went with the m340xi :) oh well next car.
The bias on this board is truly astounding.

So, you want to MAKE A RULE that applies to everyone?

Or just everyone making $70,000/yr upon graduation from college? or the preceding and having a net worth of $2,000,000 before they hit 40 years old with a HHI of $550,000?

Fine, I just came here to say "fine".

Fine,

Good rule.
Topic Author
teuton33
Posts: 43
Joined: Fri Jun 04, 2021 9:24 am

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by teuton33 »

afan wrote: Wed Jun 23, 2021 2:29 pm
Coachrhino11 wrote: Wed Jun 23, 2021 12:56 pm I will add, many here spend thousands per year on vacations and that never appears to be an issue but OH BOY! Call the police! CARS!!!! BAD CARS!!!!
I agree. Expensive cars are a waste of money but expensive vacations are a worse waste.

A new car may depreciate drastically when you drive it off the lot, but at least it is still worth something. An expensive vacation goes to zero as soon as you get home.

One can simply avoid going on expensive vacations. In many areas it is impractical go without a car.

Absent the tradesperson who needs a pickup truck, one get get near perfect performance for safety, reliability and transportation from a used Camry. Drive for 15-20 years until its reliability goes down, then replace with another used Camry. Invest the difference in VTI.

If in addition to a transportation device you also want a toy, buy a water pistol. Don't spend 5% of your networth on the toy.
The top trim Camry is 35k brand new.

How many years/miles used do you recommend on the Camry? Also, what trim level?
mnnice
Posts: 554
Joined: Sat Aug 11, 2012 5:48 pm

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by mnnice »

As a semi retired person both rules are silly.

The next worth rule yields me an Italian super car. The income rule yields me clunker. I would rather buy a regular mid priced car every 10-12 years or better yet succeed in living somewhere less car dependent and not having one.
JackoC
Posts: 2431
Joined: Sun Aug 12, 2018 11:14 am

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by JackoC »

afan wrote: Wed Jun 23, 2021 2:42 pm
Tingting1013 wrote: Wed Jun 23, 2021 2:31 pm
afan wrote: Wed Jun 23, 2021 2:29 pm
Coachrhino11 wrote: Wed Jun 23, 2021 12:56 pm I will add, many here spend thousands per year on vacations and that never appears to be an issue but OH BOY! Call the police! CARS!!!! BAD CARS!!!!
I agree. Expensive cars are a waste of money but expensive vacations are a worse waste.

A new car may depreciate drastically when you drive it off the lot, but at least it is still worth something. An expensive vacation goes to zero as soon as you get home.

One can simply avoid going on expensive vacations. In many areas it is impractical go without a car.

Absent the tradesperson who needs a pickup truck, one get get near perfect performance for safety, reliability and transportation from a used Camry. Drive for 15-20 years until its reliability goes down, then replace with another used Camry. Invest the difference in VTI.

If in addition to a transportation device you also want a toy, buy a water pistol. Don't spend 5% of your networth on the toy.
Why leave the house at all? Transportation costs go to zero
My boss would stop paying me if I did not come to work. My job has been quite inflexible on this point.
One may need a car to go to the grocery store- yes maybe they will deliver but some want to pick out their own produce. Same for a pharmacy, supplies for the home...

If you rely on delivery your transportation costs do not go to zero. Instead, they are included in the prices you pay for things.
True as far as it goes, about transport that is: it's has an element of true necessity (at least in many job/public transport situations, though I've never commuted in my own car, public transport in NY and LA, company car/driver overseas) whether you DIY it or farm it out.

But it's hard to see sometimes on this forum where the serious posts end and parody begins. If a person has pretty low income, they need to get used to not ever having nice cars or vacations. High investment returns from here are unlikely to change that IMO at a plausible level of savings for an income not well above median, especially if it's subjecting other people (especially children) to low or even unsafe standard of living in the meantime. This is a basic reality for a large % of people, and we're supposedly talking about 'general rule' (though I'm not assuming it's true of any particular person here). Buying expensive major stuff will probably get them in financial trouble. It's a bit unclear IMO though to term that situation 'is a waste of money' as if in absolute terms. Neither expensive cars nor expensive vacations are affordable, except as maybe true 'once/very few in a lifetime's', (for cars/trips respectively) to many people, true.

OTOH assuming a person has the income where they could afford nice things at least in moderation (though again I assume savings now will have a future real after tax value only moderately more than the total saved, if that's too pessimistic, great! :happy ), they must have some idea of what, or why are they saving to fund things beyond absolute necessities. If cars are a 'waste of money', vacations are a 'waste of money', the reader naturally wonders what's not. Especially since I also doubt the idea of accumulating money for decades just to disburse it to others: disburse it as you receive it is the simpler solution there. There could be good answers to what's not a waste of money for people of not very modest means if nice vacations and cars both are, but I think it was possible at least on the first of your posts to wonder if you were were kidding.
stoptothink
Posts: 9730
Joined: Fri Dec 31, 2010 9:53 am

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by stoptothink »

phxjcc wrote: Wed Jun 23, 2021 2:55 pm
teuton33 wrote: Wed Jun 23, 2021 8:02 am Lot of threads about this with people nervous with how much to spend on a car. I know this has bugged me too over the years. I am posting because I believe I have found the perfect rule: 5% of net worth. If you can stay at or under that you are good. It also lets you get some nice cars once your NW is in the millions :)

Here’s my buying history

I bought a brand new car for 22k in 2006 after graduation with a net worth of 500 bucks. It stung quite a bit and the loan bothered me. My income was 70k

I bought a new Honda in 2013 for 31k. After taxes and trade I paid 24 out the door. My net worth at the time was 230k. I actually regretted this purchase as I felt it was a bit too pricy. But it turned into a very reliable car it retained value well. I was well over 5% of net worth :( Income was about 125k

I purchased a car for my wife in 2017 (a brand new touring trim honda) out the door cost was a little less than 5% of net worth at that time after trading in her old Honda. Net worth was in the low 500k range with HHI ~250k This purchase didn’t sting at all. I was under the 5% threshold.

I just bought a brand new 2021 bmw 330xi pretty much fully loaded. Sticker was 51.5k but got it for 45k after discount and incentive. I think sedan buyers have much more leverage than suv in this market. Traded the old Honda for 12k so out the door cost after taxes is about 36k.

Net worth is about 2 million so I’m less than 2.5%. HHI is ~ 550k Purchase didn’t sting at all and honestly I kinda of wish I spent more and went with the m340xi :) oh well next car.
The bias on this board is truly astounding.

So, you want to MAKE A RULE that applies to everyone?

Or just everyone making $70,000/yr upon graduation from college? or the preceding and having a net worth of $2,000,000 before they hit 40 years old with a HHI of $550,000?

Fine, I just came here to say "fine".

Fine,

Good rule.
It's better to just avoid any thread with "rule of thumb" in the title, but it's like a car accident that you just can't look away from. These threads are almost always just a way for people to pass judgement on others.
JackoC
Posts: 2431
Joined: Sun Aug 12, 2018 11:14 am

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by JackoC »

mnnice wrote: Wed Jun 23, 2021 3:04 pm As a semi retired person both rules are silly.

The next worth rule yields me an Italian super car. The income rule yields me clunker. I would rather buy a regular mid priced car every 10-12 years or better yet succeed in living somewhere less car dependent and not having one.
Although no simple rule is going to be accurate for everyone, I thought Bligh's suggestion of 2% NW or 25% income *whichever is greater* would be relatively more widely applicable than OP's 5% NW/10% income, though note the thread title also said 'whichever is greater'. It did not suppose the answers would come out similar by the two measures, and the very reason you'd have two alternative measures is that some people are asset heavy, which also tends to happen later in life where it's less relevant to tut tut about how 'you're going to end buying a bunch of Ferrari's and ruin yourself' (fortunately/unfortunately there isn't as much time to do that once retired), and some people are income heavy, which tends to be earlier in life.

But again should be obvious IMO any such rule would be about what's *affordable*, as imperfect as any such rule will still be. A rule saying what car you should *want* based on NW or income would be inherently ridiculous, I don't think that's the idea. Every day all of us decline to buy all kinds of stuff we can afford, because we don't want it. That should be understood I think.
Topic Author
teuton33
Posts: 43
Joined: Fri Jun 04, 2021 9:24 am

ADVANCED Rule of thumb for car purchase price based on taxable assets.

Post by teuton33 »

Disclaimer: this is only a rule of thumb and you do not have to choose to follow it. If it is followed, however, i believe you will have a framework for car purchases that will provide motivation for growing your net worth but also never get in the way of your financial goals. Read the rules carefully as there are checks and balances built in to account for edge cases like retirement.

Requirements to use this rule:
1. You must own your own home with at least 20% equity in it
2. You must have a job OR own your home outright with 100% equity.
3. You must have 0 personal debt outside of a mortgage on your primary residence.
4. You must agree to not purchase another car for 5 years. You also agree to use this rule again when purchasing said car.
5. You may only consider TAXABLE assets as part of this calculation. Home equity, 401k or roth assets can not be considered.
6. These numbers are in June, 2021 dollars. Any future usage of this rule you must inflation adjust.

Use the following table that increases in step functions for each million that you have in taxable. You very generously start off with a 35k car for 500k in taxable. That will give you a fully loaded Camry or Accord. You get a 50k car for your first 1m in taxable. For the next million you get another 25k in car for a total of 75k. For each million after that your car cost only goes up by 12.5k to account for diminishing returns.

500k 35k (You worked hard to get here. You start with a fully loaded 35k Camry or Accord)
1m 50 (3 series or a4)
2m 75
3m 87.5
4m 100k
5m 112.5 (you are rich - bmw 7 series)
invest4
Posts: 443
Joined: Wed Apr 24, 2019 2:19 am

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by invest4 »

I haven't yet seen a reliable "rule of thumb" I would utilize for a car.

I only buy used, typically Honda or Toyota, and no less than 3 years old. The only change over the years is when we started out as a family, I had to finance it, whereas now we are in a position to pay cash. Cars for our young drivers are quite a bit older (10 years or more).

Like many things, some people will place a higher or lower level of value, importance, or minimum requirements for their vehicle purchase.

To each their own.
pseudoiterative
Posts: 258
Joined: Tue Sep 24, 2019 6:11 am
Location: australia

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by pseudoiterative »

alfaspider wrote: Wed Jun 23, 2021 8:39 am I don't think there is any clear rule of thumb with car purchases. How much car you should buy depends on what your personal situation is (single, married, kids, working retired), your car needs (have to get your 5 kids to school every morning or only use the car on weekends?), your car wants (car indifferent or dyed in the wool petrolhead)
Complete agreement. A vehicle can do a lot of different jobs: transport for moving people in the family around for work / education / obtaining supplies ; as a hobby ; as a key piece of machinery essential to one's business ; as part of occasional vacation logistics.

There's often a trade you can make between housing cost and transportation costs -- move closer to the places you often need to travel to and replace some or all of car usage with walk/bike/public transport, perhaps at cost of higher housing cost due to land value being higher. If you're not a big fan of having a car maybe this trade saves you money and increases quality of life.
firebirdparts wrote: Wed Jun 23, 2021 9:30 amCar ownership is a daily cost. You cash flow it. This is like asking how much of your net worth you should spend on groceries, deodorant, and toothpaste.
I agree, I'd frame it as transportation services being a daily cost, and a car as one of potentially many options to provide transportation services (depending on where you're willing to live & your particular situation).

One exception could be where the vehicle is a key piece of machinery essential to your business. E.g. if you need a vehicle to lock up and carry around your tools to ply your trade. In that case it might be a very sound business decision to use financing to fund a vehicle that helps your business generate cash.

I'm not into cars as a hobby, and don't need one for my trade, so for me a car reduces to providing "transportation services". I'd benchmark it against cheaper ways of providing transportation services. In many places (esp larger cities set up to be more walkable) there are alternatives: public transport, cycling or walking. When I did 100% public transport, 0% car it would cost me something like USD 1400 / year. Switching to commuting by bike and occasional public transport reduced costs to around USD 500 / year (a fair chunk of that cost is self-insuring for events like "some fool stole my rear wheel".).

In this last exceptional year due to office work being delocalised by covid lockdown eliminating the need to commute to office, I think I have spent less than USD 50 / year on transport ( caught the train half a dozen times ), then I just walk to the shops, which is free. Maybe should round it up for USD 100 / year to consider depreciation on a pair of shoes. I won't estimate depreciation on my knees, that'll make me sad.

to each their own!
stuper1
Posts: 323
Joined: Tue Apr 03, 2018 9:30 am

Re: ADVANCED Rule of thumb for car purchase price based on taxable assets.

Post by stuper1 »

Let me say first of all that I like your rules in general. They seem pretty reasonable.

Having said that, though, let me ask you about my case. I meet all your rules and have over $1M in investable assets, plus about $300k in home equity (about 76% equity). However, I only have about $20k in taxable assets. Everything else is in 401k, IRA, and Roth accounts.

So, what kind of a car do I get to buy?
26% US large cap, 26% US small-cap value, 15% long-term Treasuries, 15% short-term Treasuries, 18% gold
Californiastate
Posts: 225
Joined: Thu Feb 04, 2021 11:52 am

Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by Californiastate »

afan wrote: Wed Jun 23, 2021 11:42 am
teuton33 wrote: Wed Jun 23, 2021 8:02 am Lot of threads about this with people nervous with how much to spend on a car. I know this has bugged me too over the years. I am posting because I believe I have found the perfect rule: 5% of net worth. If you can stay at or under that you are good. It also lets you get some nice cars once your NW is in the millions :)

Here’s my buying history

I bought a brand new car for 22k in 2006 after graduation with a net worth of 500 bucks. It stung quite a bit and the loan bothered me. My income was 70k

I bought a new Honda in 2013 for 31k. After taxes and trade I paid 24 out the door. My net worth at the time was 230k. I actually regretted this purchase as I felt it was a bit too pricy. But it turned into a very reliable car it retained value well. I was well over 5% of net worth :( Income was about 125k

I purchased a car for my wife in 2017 (a brand new touring trim honda) out the door cost was a little less than 5% of net worth at that time after trading in her old Honda. Net worth was in the low 500k range with HHI ~250k This purchase didn’t sting at all. I was under the 5% threshold.

I just bought a brand new 2021 bmw 330xi pretty much fully loaded. Sticker was 51.5k but got it for 45k after discount and incentive. I think sedan buyers have much more leverage than suv in this market. Traded the old Honda for 12k so out the door cost after taxes is about 36k.

Net worth is about 2 million so I’m less than 2.5%. HHI is ~ 550k Purchase didn’t sting at all and honestly I kinda of wish I spent more and went with the m340xi :) oh well next car.
Wow. Three new cars in 15 years! We are still driving our 2007 car, bought used, with no plans to replace it in the foreseeable future.
I have a minimum trust level for vehicles. I need to trust that it won't leave me stranded in the Sierras during a snow storm. I need to trust that it won't be a problem on a cross country road trip. I commuted in a 08 base level Civic for a few years. It was great, reliable and was easy on fuel. I wouldn't take it to Denver in the summer let alone the winter. I considered the upgrade to a newer vehicle the cost of insurance. I regret selling it but it didn't have a place in our motor pool.
Topic Author
teuton33
Posts: 43
Joined: Fri Jun 04, 2021 9:24 am

Re: ADVANCED Rule of thumb for car purchase price based on taxable assets.

Post by teuton33 »

stuper1 wrote: Wed Jun 23, 2021 4:14 pm Let me say first of all that I like your rules in general. They seem pretty reasonable.

Having said that, though, let me ask you about my case. I meet all your rules and have over $1M in investable assets, plus about $300k in home equity (about 76% equity). However, I only have about $20k in taxable assets. Everything else is in 401k, IRA, and Roth accounts.

So, what kind of a car do I get to buy?
you use a different rule :) Seriously though, i think your case is a bit unusual? WHy is your taxable so low?

I reflected on 401k and potentially adding to this rule. Im not sure how it would be added but certainly it would need to be discounted heavily. In most cases with a high % of retirement account assets and low % taxable the incomes are modest, the ages older, or the person is earlier in their career and would have to pay fees on taking money out of a 401k.

You can't really rely on those assets to base splurges on.
Last edited by teuton33 on Wed Jun 23, 2021 4:31 pm, edited 3 times in total.
Tingting1013
Posts: 1594
Joined: Mon Aug 24, 2020 5:44 pm

Re: ADVANCED Rule of thumb for car purchase price based on taxable assets.

Post by Tingting1013 »

Clearly I am too much of a novice to have reached these ADVANCED levels of car buying. Hope I can level up soon.
runner3081
Posts: 4321
Joined: Mon Aug 22, 2016 3:22 pm

Re: ADVANCED Rule of thumb for car purchase price based on taxable assets.

Post by runner3081 »

These "rules of thumb" are kind of silly an basically say that if you are young or starting out, just walk 20 miles to work, because you can't afford a car :)

Also, if you don't own a house, you can't own a car!?
runner3081
Posts: 4321
Joined: Mon Aug 22, 2016 3:22 pm

Re: ADVANCED Rule of thumb for car purchase price based on taxable assets.

Post by runner3081 »

stuper1 wrote: Wed Jun 23, 2021 4:14 pm So, what kind of a car do I get to buy?
A Huffy bike from Walmart :)
Topic Author
teuton33
Posts: 43
Joined: Fri Jun 04, 2021 9:24 am

Re: ADVANCED Rule of thumb for car purchase price based on taxable assets.

Post by teuton33 »

runner3081 wrote: Wed Jun 23, 2021 4:22 pm These "rules of thumb" are kind of silly an basically say that if you are young or starting out, just walk 20 miles to work, because you can't afford a car :)

Also, if you don't own a house, you can't own a car!?
I did not say that. I said you can not follow this rule if you don't meet the conditions. You must follow some other rule of thumb.
stuper1
Posts: 323
Joined: Tue Apr 03, 2018 9:30 am

Re: ADVANCED Rule of thumb for car purchase price based on taxable assets.

Post by stuper1 »

The best rule of thumb is to make sure that you can afford whatever car you buy.

Here are my rules of thumb:

1. Put at least 20% down. This rule is flexible actually; more of a guideline to keep myself from acting impulsively.

2. Don't take a loan for more than 5 years, preferably no more than 3 years.

3. Make sure you're still saving at least 15% of total income for retirement while paying off the loan.


If you're already retired, then you need a different rule #3.
26% US large cap, 26% US small-cap value, 15% long-term Treasuries, 15% short-term Treasuries, 18% gold
AlohaJoe
Posts: 6025
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: ADVANCED Rule of thumb for car purchase price based on taxable assets.

Post by AlohaJoe »

runner3081 wrote: Wed Jun 23, 2021 4:22 pm These "rules of thumb" are kind of silly an basically say that if you are young or starting out, just walk 20 miles to work, because you can't afford a car :)

Also, if you don't own a house, you can't own a car!?
These rules of thumb are posted by rich people who are humble bragging/virtue signalling online about how frugal and virtuous they are. They have no connection to reality.

I can't wait to see someone post a Boglehead rule of thumb for when you can afford to buy meat versus just eating beans and rice.
Da5id
Posts: 3391
Joined: Fri Feb 26, 2016 8:20 am

Re: ADVANCED Rule of thumb for car purchase price based on taxable assets.

Post by Da5id »

teuton33 wrote: Wed Jun 23, 2021 3:44 pm Disclaimer: this is only a rule of thumb and you do not have to choose to follow it. If it is followed, however, i believe you will have a framework for car purchases that will provide motivation for growing your net worth but also never get in the way of your financial goals. Read the rules carefully as there are checks and balances built in to account for edge cases like retirement.
Meh. I had plenty of motivation to grow my net worth so that I could retire early. Shiny really expensive cars aren't my thing, so while I could now afford such a shiny object I'm actually content with mid-range Hondas or Toyotas and such. Maybe shiny cars are an incentive for some people, but I find expensive experiences like travel bring me more joy than expensive possessions...
Jags4186
Posts: 5939
Joined: Wed Jun 18, 2014 7:12 pm

Re: ADVANCED Rule of thumb for car purchase price based on taxable assets.

Post by Jags4186 »

How many more of these stupid posts are we going to get?
Da5id
Posts: 3391
Joined: Fri Feb 26, 2016 8:20 am

Re: ADVANCED Rule of thumb for car purchase price based on taxable assets.

Post by Da5id »

Jags4186 wrote: Wed Jun 23, 2021 4:56 pm How many more of these stupid posts are we going to get?
Maybe it is better than yet another International Stock or Dividend thread though?
Jags4186
Posts: 5939
Joined: Wed Jun 18, 2014 7:12 pm

Re: ADVANCED Rule of thumb for car purchase price based on taxable assets.

Post by Jags4186 »

Da5id wrote: Wed Jun 23, 2021 5:00 pm
Jags4186 wrote: Wed Jun 23, 2021 4:56 pm How many more of these stupid posts are we going to get?
Maybe it is better than yet another International Stock or Dividend thread though?
I’m thinking of starting a thread…

Double Secret Pro Rules of thumb for starting a rule of thumb on car purchase price thread based on bull excrement…
FeesR-BullNotBullish
Posts: 255
Joined: Sat May 28, 2016 11:22 am

Re: ADVANCED Rule of thumb for car purchase price based on taxable assets.

Post by FeesR-BullNotBullish »

runner3081 wrote: Wed Jun 23, 2021 4:23 pm
stuper1 wrote: Wed Jun 23, 2021 4:14 pm So, what kind of a car do I get to buy?
A Huffy bike from Walmart :)
Hol' up...You'll get killed on maintenance costs and resale!
jebmke
Posts: 13149
Joined: Thu Apr 05, 2007 2:44 pm
Location: Delmarva Peninsula

Re: ADVANCED Rule of thumb for car purchase price based on taxable assets.

Post by jebmke »

Jags4186 wrote: Wed Jun 23, 2021 4:56 pm How many more of these stupid posts are we going to get?
Waiting for the linear programming model.
When you discover that you are riding a dead horse, the best strategy is to dismount.
furikake
Posts: 331
Joined: Tue Sep 08, 2015 10:13 am

Re: ADVANCED Rule of thumb for car purchase price based on taxable assets.

Post by furikake »

OP is funny! :mrgreen:
Locked