Car price ratio to NW

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Whakamole
Posts: 1095
Joined: Wed Jan 13, 2016 9:59 pm

Re: Car price ratio to NW

Post by Whakamole » Wed Oct 02, 2019 8:05 am

Spending too low can be penny wise and pound foolish, such as driving a car without side air bags or has a terrible IIHS rating. The plus side is that you won't need as much if you injured enough in an accident. That's not including the issues with owning an unreliable car.

I don't think there is a rule here, my first car was nearly all of my net worth because I had very little; my most recent car cost more, but I'm making much more money and have been investing for 20+ years. I don't think you can even compare the situations. That's not including being older, having different interests, or living in a different part of the country. Kind of like how a college student may be able to find a couch to sleep on while traveling or even nap in their car but that becomes more difficult if you have a CPAP and your back isn't what it used to be.

I'd look at other financials first. If you aren't maxing out your 401(k)/IRA, that's the bigger problem than spending too much on a car.

mptfan
Posts: 5643
Joined: Mon Mar 05, 2007 9:58 am

Re: Car price ratio to NW

Post by mptfan » Wed Oct 02, 2019 10:20 am

JoeRetire wrote:
Thu Aug 02, 2018 1:35 pm
Never pay more than 100% of your net worth for a car. Less is better.
When I started working after school, I had a negative net worth because of student loans. Does that mean I could not afford a car?

H-Town
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Joined: Sun Feb 26, 2017 2:08 pm

Re: Car price ratio to NW

Post by H-Town » Wed Oct 02, 2019 10:42 am

x76apple wrote:
Tue Oct 01, 2019 4:42 pm
I know this kind of post is just the mentality of how this forum operates but wow that is pretty sad you've been dreaming for 20 years to spend 1% of your net worth on a car but could never pull the trigger...

I hope that post was tongue in cheek.

Although this is about in line with people who strive to live off a 2% or less SWR... To each his own, I guess over saving is better than over spending - I just get the feeling many people on finance forums love to brag about being the richest person in the graveyard. It almost turns into a game of how little people can spend on their house, their car, or any other activities.

Not trying to judge, just wanted to voice a contrarian point of view thats usually absent from this forum. There are many responsible people that feel guilty about spending any of their hard earned money and fear of eating dog food during retirement turns them into extreme financial hoarders that count every penny.

Moderation is key in every aspect of life....
Good point. But it has a caveat: we all see value differently. You may see a BMW is a rewarding purchase, but others may prefer traveling.

cshell2
Posts: 210
Joined: Thu May 09, 2019 10:29 am

Re: Car price ratio to NW

Post by cshell2 » Wed Oct 02, 2019 10:57 am

All three of my vehicles combined come up to about 1% of net worth and 16% of annual gross. Of course, all three combined are worth maybe 8K.

I spent a lot more on vehicles when I was younger. These days as long as it gets me reliably from point A to point B, I don't care anymore. I have other priorities right now, so old Hondas and Toyotas fill my garage. My son's 97 Camry I bought for $500 and 200 bales of hay. :P We're halfway through year 2 and outside of oil changes, all we've had to do is buy a set of snow tires and replace the brakes. It runs like a champ.

StandingRock
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Re: Car price ratio to NW

Post by StandingRock » Wed Oct 02, 2019 11:10 am

What difference does it make, buy what you need.

H-Town
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Joined: Sun Feb 26, 2017 2:08 pm

Re: Car price ratio to NW

Post by H-Town » Wed Oct 02, 2019 11:23 am

StandingRock wrote:
Wed Oct 02, 2019 11:10 am
What difference does it make, buy what you need.
Less than 5% of the population actually buy a vehicle that they need. It's all about wants in the car industry.

Even in the subset of people who are fans of Toyota/Honda, they would pay premium for new cars that has newest technologies and safety features. Those are not needs, those are wants.

So I would say: buy what you want, as long as you can afford it.

CnC
Posts: 840
Joined: Thu May 11, 2017 12:41 pm

Re: Car price ratio to NW

Post by CnC » Wed Oct 02, 2019 1:35 pm

bloom2708 wrote:
Thu Aug 02, 2018 1:45 pm

If they offer you 0% and $2,500 to finance, finance and pay it off after 3 payments.
This is terrible advise. I can think of no situations that giving someone $30,000 in three months is a better idea than giving someone $500 a month for 60 months. At the very least you can put $25,000 in CD's and make ±$1,000 over the course of the loan.

bloom2708
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Location: Fargo, ND

Re: Car price ratio to NW

Post by bloom2708 » Wed Oct 02, 2019 1:42 pm

CnC wrote:
Wed Oct 02, 2019 1:35 pm
bloom2708 wrote:
Thu Aug 02, 2018 1:45 pm

If they offer you 0% and $2,500 to finance, finance and pay it off after 3 payments.
This is terrible advise. I can think of no situations that giving someone $30,000 in three months is a better idea than giving someone $500 a month for 60 months. At the very least you can put $25,000 in CD's and make ±$1,000 over the course of the loan.
Thanks for your opinion on my opinion. Some people save up and pay cash for things. 48 or 60 or 72 payments. Not for everyone.
"People want confirmation, not advice" Unknown | "We are here to provoke thoughtfulness, not agree with you" Unknown | Four words. Whole food, plant based. Bing it.

mhalley
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Re: Car price ratio to NW

Post by mhalley » Wed Oct 02, 2019 2:56 pm

A couple of rules found on the net;
Dave Ramsey; no new car till 1 million be
No more than 50% if income in things with motors
No loans
Clark Howard: if you MUST finance, no longer than 48 mis.

rich126
Posts: 946
Joined: Thu Mar 01, 2018 4:56 pm

Re: Car price ratio to NW

Post by rich126 » Wed Oct 02, 2019 3:15 pm

With cars people often lose common sense but it all depends. Personally I think cars are the biggest mistake people make. Housing people may buy more than they need but, at least for me, the house usually doesn't lose money in the long run. Cars largely end up worthless at some point.

And my biggest issue with spending $$$ on cars is the fact they go places and you can't control what others do to them. I do usually buy new but keep them for a good 10 years. Unfortunately sometimes you can't, as in my last car after 5 years got crunched in the middle of a 3 car accident (guy behind didn't stop and pushed my car into the car in front of me) and it was totaled. Pretty annoying since the money you get won't get you a new car so you have to either buy used or put more money into it.

I'm not a fan of long term loans but if someone is giving you 0% it could be hard to say no as long as you don't use the 0% as a reason to buy a more expensive car.

I'm guessing the last few cars I've bought have been about 15-20% of my yearly income. The most expensive based on networth/income would have been one of my first cars, a Toyota MR2. Certainly an impulsive decision and not wise although it did last 10 years, reliable and 150K+ miles before I had to get rid of it (lots of electrical problems, A/C not working). The only car I've missed so I can see why people sometimes splurge on them.

I'm just trying to figure out how some neighbors afford expensive cars, have kids and an expensive house while my income is probably at least equal to theirs (at least in many cases) and I have no kids, ex-wives or other debt. I'm guessing they ain't saving much for retirement.

The only thing I would say is that it is pretty stupid to have a car price ratio to NW to tell people what to buy. Total debt to income would be another story.

researcher
Posts: 1166
Joined: Thu Mar 12, 2015 7:05 pm

Re: Car price ratio to NW

Post by researcher » Wed Oct 02, 2019 3:27 pm

mhalley wrote:
Wed Oct 02, 2019 2:56 pm
A couple of rules found on the net;
Dave Ramsey; no new car till 1 million be
No more than 50% if income in things with motors
These rules make no sense...

It's OK to purchase 4 or 5 used cars, for $4K - $5K each, over the course of 15 years.
But it is NOT OK to purchase 1 new car, for $20K, and drive it for 15 years?

H-Town
Posts: 2123
Joined: Sun Feb 26, 2017 2:08 pm

Re: Car price ratio to NW

Post by H-Town » Wed Oct 02, 2019 3:28 pm

CnC wrote:
Wed Oct 02, 2019 1:35 pm
bloom2708 wrote:
Thu Aug 02, 2018 1:45 pm

If they offer you 0% and $2,500 to finance, finance and pay it off after 3 payments.
This is terrible advise. I can think of no situations that giving someone $30,000 in three months is a better idea than giving someone $500 a month for 60 months. At the very least you can put $25,000 in CD's and make ±$1,000 over the course of the loan.
Nah - maybe you haven't thought of everything yet.

- Difference in premium between full coverage insurance and liability + no-fault insurance.
- Taxes paid on the interest income.
- Monthly cash flow management. Having no car payment is better than $500/month.
- Avoid the possibilities that you're upside down on the car loan.
- Debts can add up: mortgage, car, furniture, home equity, student loan, credit cards, etc. It's much easier just to manage only one debt, i.e. mortgage.
- In order to obtain 0% financing, you probably need to buy new car. That decision by itself already set you back financially compared to buying an used car.

And many more...

cshell2
Posts: 210
Joined: Thu May 09, 2019 10:29 am

Re: Car price ratio to NW

Post by cshell2 » Wed Oct 02, 2019 4:01 pm

researcher wrote:
Wed Oct 02, 2019 3:27 pm
mhalley wrote:
Wed Oct 02, 2019 2:56 pm
A couple of rules found on the net;
Dave Ramsey; no new car till 1 million be
No more than 50% if income in things with motors
These rules make no sense...

It's OK to purchase 4 or 5 used cars, for $4K - $5K each, over the course of 15 years.
But it is NOT OK to purchase 1 new car, for $20K, and drive it for 15 years?
We buy 4-5K cars, but they last us a lot longer than 2-3 years.

There are other costs associated with a new car as well. You usually have to carry full coverage insurance, and in our state the annual tabs are based on the value of the vehicle with anything over 10 years old being a flat $35. A 20K new car (not many that cheap anymore) could cost you $400 a year in tabs. I pay $60/month for insurance for a teen driver with only liability on an old car. When we were shopping we consider a 7K car but would have wanted to carry full coverage at that price. It was going to be $190/month, so an extra $1560/year to get him from point A to point B. No thanks.

JackoC
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Joined: Sun Aug 12, 2018 11:14 am

Re: Car price ratio to NW

Post by JackoC » Wed Oct 02, 2019 5:18 pm

H-Town wrote:
Wed Oct 02, 2019 10:42 am
x76apple wrote:
Tue Oct 01, 2019 4:42 pm
I know this kind of post is just the mentality of how this forum operates but wow that is pretty sad you've been dreaming for 20 years to spend 1% of your net worth on a car but could never pull the trigger...

I hope that post was tongue in cheek.

Although this is about in line with people who strive to live off a 2% or less SWR... To each his own, I guess over saving is better than over spending - I just get the feeling many people on finance forums love to brag about being the richest person in the graveyard. It almost turns into a game of how little people can spend on their house, their car, or any other activities.
...
Moderation is key in every aspect of life....
Good point. But it has a caveat: we all see value differently. You may see a BMW is a rewarding purchase, but others may prefer traveling.
I prefer travelling in a BMW. :happy Our recent 5k mile road trip in our M2 was fantastic. It would not have been without the company (my wife), and we did and saw many interesting things besides just driving. But that car on classic Western coastal cliff side, mountain and desert roads was really something else, I'm looking forward to putting it through its paces on many more classic driving roads. And some of that thrill comes back to me whenever I'm sitting in it, even in lousy local NY area traffic. The car *is* an experience. We travel overseas sometimes because my wife likes to, but it's not really my thing. But obviously such tastes differ.

But as to 'sad' I could see somebody still buying cars for <<1% NW because 1% NW cars would be just be stressful (worrying about them getting damaged, developing problems, attracting too much attention, etc), because a 1% NW car might be a $250k entry level exotic, or more, and the person is still 'anchored' to thinking of that as a truckload of money, not 'just 1%'. Whereas if somebody has built up $5mil, still a relatively unusual achievement, and they really can't pull the trigger on buying a $50k car they *want* (nobody is saying they have to want it), then yeah, I would find that a bit sad. What are they accumulating wealth for? Whereas if it's somebody with a couple $mil saying they can't bring themselves to buy a $20k car that's not sad but ridiculous and perhaps a joke.

One tends to spend more as % of income or NW on basic things, which cars are or to some degree anyway, when you have relatively less. There's no law saying you can't drive $500 beaters as a billionaire, but in general reasonable %'s are going to tend to be higher when there's less money, all else equal. Judging things by % implies linearity, but car needs/wants, among other things, aren't really linear by amount of money.

User avatar
JoeRetire
Posts: 3942
Joined: Tue Jan 16, 2018 2:44 pm

Re: Car price ratio to NW

Post by JoeRetire » Wed Oct 02, 2019 5:39 pm

mptfan wrote:
Wed Oct 02, 2019 10:20 am
JoeRetire wrote:
Thu Aug 02, 2018 1:35 pm
Never pay more than 100% of your net worth for a car. Less is better.
When I started working after school, I had a negative net worth because of student loans. Does that mean I could not afford a car?
Yes!
Don't be a lemming.

stuper1
Posts: 182
Joined: Tue Apr 03, 2018 9:30 am

Re: Car price ratio to NW

Post by stuper1 » Wed Oct 02, 2019 5:49 pm

cshell2 wrote:
Wed Oct 02, 2019 4:01 pm
researcher wrote:
Wed Oct 02, 2019 3:27 pm
mhalley wrote:
Wed Oct 02, 2019 2:56 pm
A couple of rules found on the net;
Dave Ramsey; no new car till 1 million be
No more than 50% if income in things with motors
These rules make no sense...

It's OK to purchase 4 or 5 used cars, for $4K - $5K each, over the course of 15 years.
But it is NOT OK to purchase 1 new car, for $20K, and drive it for 15 years?
We buy 4-5K cars, but they last us a lot longer than 2-3 years.

There are other costs associated with a new car as well. You usually have to carry full coverage insurance, and in our state the annual tabs are based on the value of the vehicle with anything over 10 years old being a flat $35. A 20K new car (not many that cheap anymore) could cost you $400 a year in tabs. I pay $60/month for insurance for a teen driver with only liability on an old car. When we were shopping we consider a 7K car but would have wanted to carry full coverage at that price. It was going to be $190/month, so an extra $1560/year to get him from point A to point B. No thanks.
cshell2,

Sorry for off-topic post, but what is your insurance company and car model for your teen driver? I just called ours (USAA) to get a quote for my 19-year old son, first-time driver with good grades and full driver training course, including behind the wheel. They quoted me $219/month using a hypothetical 2004 Camry as his vehicle with only liability insurance.

cshell2
Posts: 210
Joined: Thu May 09, 2019 10:29 am

Re: Car price ratio to NW

Post by cshell2 » Wed Oct 02, 2019 6:05 pm

stuper1 wrote:
Wed Oct 02, 2019 5:49 pm
cshell2 wrote:
Wed Oct 02, 2019 4:01 pm
researcher wrote:
Wed Oct 02, 2019 3:27 pm
mhalley wrote:
Wed Oct 02, 2019 2:56 pm
A couple of rules found on the net;
Dave Ramsey; no new car till 1 million be
No more than 50% if income in things with motors
These rules make no sense...

It's OK to purchase 4 or 5 used cars, for $4K - $5K each, over the course of 15 years.
But it is NOT OK to purchase 1 new car, for $20K, and drive it for 15 years?
We buy 4-5K cars, but they last us a lot longer than 2-3 years.

There are other costs associated with a new car as well. You usually have to carry full coverage insurance, and in our state the annual tabs are based on the value of the vehicle with anything over 10 years old being a flat $35. A 20K new car (not many that cheap anymore) could cost you $400 a year in tabs. I pay $60/month for insurance for a teen driver with only liability on an old car. When we were shopping we consider a 7K car but would have wanted to carry full coverage at that price. It was going to be $190/month, so an extra $1560/year to get him from point A to point B. No thanks.
cshell2,

Sorry for off-topic post, but what is your insurance company and car model for your teen driver? I just called ours (USAA) to get a quote for my 19-year old son, first-time driver with good grades and full driver training course, including behind the wheel. They quoted me $219/month using a hypothetical 2004 Camry as his vehicle with only liability insurance.
State Farm on a 97 Camry. Discounts are good student, multiple vehicle and Steer Clear (a program they have where you watch some videos and log driving hours).

ndpage
Posts: 40
Joined: Tue Jan 11, 2011 7:02 pm

Re: Car price ratio to NW

Post by ndpage » Wed Oct 02, 2019 6:30 pm

I think about it on a cents per mile basis. I spent 34k new on my last SUV after taxes and registration. I need to get 4x that many miles out of it, so 136k. The residual value balances out repairs, scheduled maintenance, and a new set of tires along the way. I like safety and connectivity improvements, so I don't run cars totally into the grave.

My SUV turns 7 years old in February and hits 90k in a couple of weeks. My commute went from 55 miles RT 3-4x/week to zero starting this summer, but my leisure driving is going up. So I figure I have 4 years left. My next SUV will probably be a used 2020, so I am starting to try out different SUV/CUV when I rent on travel with a focus on 5 seaters that go for 35k+tax or less fully loaded, so it will depreciate down to my price point.

StandingRock
Posts: 344
Joined: Sat Feb 02, 2019 6:54 pm

Re: Car price ratio to NW

Post by StandingRock » Thu Oct 03, 2019 12:32 pm

H-Town wrote:
Wed Oct 02, 2019 11:23 am
StandingRock wrote:
Wed Oct 02, 2019 11:10 am
What difference does it make, buy what you need.
Less than 5% of the population actually buy a vehicle that they need. It's all about wants in the car industry.

Even in the subset of people who are fans of Toyota/Honda, they would pay premium for new cars that has newest technologies and safety features. Those are not needs, those are wants.

So I would say: buy what you want, as long as you can afford it.
Right, buy what you need I says.

researcher
Posts: 1166
Joined: Thu Mar 12, 2015 7:05 pm

Re: Car price ratio to NW

Post by researcher » Thu Oct 03, 2019 1:19 pm

cshell2 wrote:
Wed Oct 02, 2019 4:01 pm
There are other costs associated with a new car as well. You usually have to carry full coverage insurance, and in our state the annual tabs are based on the value of the vehicle with anything over 10 years old being a flat $35. A 20K new car (not many that cheap anymore) could cost you $400 a year in tabs. I pay $60/month for insurance for a teen driver...
We aren't talking about what type of vehicle you should purchase for a new teenage driver.
We are discussing these "rules" that were posted...
1) you should not purchase new unless you have $1M saved, and 2) no more than 50% of income in vehicles

CnC
Posts: 840
Joined: Thu May 11, 2017 12:41 pm

Re: Car price ratio to NW

Post by CnC » Thu Oct 03, 2019 2:30 pm

H-Town wrote:
Wed Oct 02, 2019 3:28 pm
CnC wrote:
Wed Oct 02, 2019 1:35 pm
bloom2708 wrote:
Thu Aug 02, 2018 1:45 pm

If they offer you 0% and $2,500 to finance, finance and pay it off after 3 payments.
This is terrible advise. I can think of no situations that giving someone $30,000 in three months is a better idea than giving someone $500 a month for 60 months. At the very least you can put $25,000 in CD's and make ±$1,000 over the course of the loan.
Nah - maybe you haven't thought of everything yet.

- Difference in premium between full coverage insurance and liability + no-fault insurance.
- Taxes paid on the interest income.
- Monthly cash flow management. Having no car payment is better than $500/month.
- Avoid the possibilities that you're upside down on the car loan.
- Debts can add up: mortgage, car, furniture, home equity, student loan, credit cards, etc. It's much easier just to manage only one debt, i.e. mortgage.
- In order to obtain 0% financing, you probably need to buy new car. That decision by itself already set you back financially compared to buying an used car.

And many more...

Well in that case, I will be happy to take a check for $30,000 at your earliest convenience. I will then pay you back in 60 monthly installments of $500.

You're welcome.

H-Town
Posts: 2123
Joined: Sun Feb 26, 2017 2:08 pm

Re: Car price ratio to NW

Post by H-Town » Thu Oct 03, 2019 2:35 pm

CnC wrote:
Thu Oct 03, 2019 2:30 pm
H-Town wrote:
Wed Oct 02, 2019 3:28 pm
CnC wrote:
Wed Oct 02, 2019 1:35 pm
bloom2708 wrote:
Thu Aug 02, 2018 1:45 pm

If they offer you 0% and $2,500 to finance, finance and pay it off after 3 payments.
This is terrible advise. I can think of no situations that giving someone $30,000 in three months is a better idea than giving someone $500 a month for 60 months. At the very least you can put $25,000 in CD's and make ±$1,000 over the course of the loan.
Nah - maybe you haven't thought of everything yet.

- Difference in premium between full coverage insurance and liability + no-fault insurance.
- Taxes paid on the interest income.
- Monthly cash flow management. Having no car payment is better than $500/month.
- Avoid the possibilities that you're upside down on the car loan.
- Debts can add up: mortgage, car, furniture, home equity, student loan, credit cards, etc. It's much easier just to manage only one debt, i.e. mortgage.
- In order to obtain 0% financing, you probably need to buy new car. That decision by itself already set you back financially compared to buying an used car.

And many more...

Well in that case, I will be happy to take a check for $30,000 at your earliest convenience. I will then pay you back in 60 monthly installments of $500.

You're welcome.
While you're pony up $30k with 0% interest loan (plus tax, full coverage insurance), I just need to pay $15k, if that, for a reasonable and reliable used car. I also save on car insurance and pay less tax.

Who win?

The 0% interest free has a gotcha. No free lunch for you.

cshell2
Posts: 210
Joined: Thu May 09, 2019 10:29 am

Re: Car price ratio to NW

Post by cshell2 » Thu Oct 03, 2019 2:37 pm

researcher wrote:
Thu Oct 03, 2019 1:19 pm
cshell2 wrote:
Wed Oct 02, 2019 4:01 pm
There are other costs associated with a new car as well. You usually have to carry full coverage insurance, and in our state the annual tabs are based on the value of the vehicle with anything over 10 years old being a flat $35. A 20K new car (not many that cheap anymore) could cost you $400 a year in tabs. I pay $60/month for insurance for a teen driver...
We aren't talking about what type of vehicle you should purchase for a new teenage driver.
We are discussing these "rules" that were posted...
1) you should not purchase new unless you have $1M saved, and 2) no more than 50% of income in vehicles
Yes, I understand that the thread drifted off topic. My insurance comment was in response to the comment that one 20K vehicle every 15 years was the same financially as five 4K vehicles in that time frame.

CnC
Posts: 840
Joined: Thu May 11, 2017 12:41 pm

Re: Car price ratio to NW

Post by CnC » Thu Oct 03, 2019 2:41 pm

H-Town wrote:
Thu Oct 03, 2019 2:35 pm
CnC wrote:
Thu Oct 03, 2019 2:30 pm
H-Town wrote:
Wed Oct 02, 2019 3:28 pm
CnC wrote:
Wed Oct 02, 2019 1:35 pm
bloom2708 wrote:
Thu Aug 02, 2018 1:45 pm

If they offer you 0% and $2,500 to finance, finance and pay it off after 3 payments.
This is terrible advise. I can think of no situations that giving someone $30,000 in three months is a better idea than giving someone $500 a month for 60 months. At the very least you can put $25,000 in CD's and make ±$1,000 over the course of the loan.
Nah - maybe you haven't thought of everything yet.

- Difference in premium between full coverage insurance and liability + no-fault insurance.
- Taxes paid on the interest income.
- Monthly cash flow management. Having no car payment is better than $500/month.
- Avoid the possibilities that you're upside down on the car loan.
- Debts can add up: mortgage, car, furniture, home equity, student loan, credit cards, etc. It's much easier just to manage only one debt, i.e. mortgage.
- In order to obtain 0% financing, you probably need to buy new car. That decision by itself already set you back financially compared to buying an used car.

And many more...

Well in that case, I will be happy to take a check for $30,000 at your earliest convenience. I will then pay you back in 60 monthly installments of $500.

You're welcome.
While you're pony up $30k with 0% interest loan (plus tax, full coverage insurance), I just need to pay $15k, if that, for a reasonable and reliable used car. I also save on car insurance and pay less tax.

Who win?

The 0% interest free has a gotcha. No free lunch for you.

You are arguing a completely different point. You are arguing that someone should be spending $15k on a car not $30k

That is a completely valid argument. But it has nothing at all to do with my post.

H-Town
Posts: 2123
Joined: Sun Feb 26, 2017 2:08 pm

Re: Car price ratio to NW

Post by H-Town » Thu Oct 03, 2019 2:59 pm

CnC wrote:
Thu Oct 03, 2019 2:41 pm
H-Town wrote:
Thu Oct 03, 2019 2:35 pm
CnC wrote:
Thu Oct 03, 2019 2:30 pm
H-Town wrote:
Wed Oct 02, 2019 3:28 pm
CnC wrote:
Wed Oct 02, 2019 1:35 pm


This is terrible advise. I can think of no situations that giving someone $30,000 in three months is a better idea than giving someone $500 a month for 60 months. At the very least you can put $25,000 in CD's and make ±$1,000 over the course of the loan.
Nah - maybe you haven't thought of everything yet.

- Difference in premium between full coverage insurance and liability + no-fault insurance.
- Taxes paid on the interest income.
- Monthly cash flow management. Having no car payment is better than $500/month.
- Avoid the possibilities that you're upside down on the car loan.
- Debts can add up: mortgage, car, furniture, home equity, student loan, credit cards, etc. It's much easier just to manage only one debt, i.e. mortgage.
- In order to obtain 0% financing, you probably need to buy new car. That decision by itself already set you back financially compared to buying an used car.

And many more...

Well in that case, I will be happy to take a check for $30,000 at your earliest convenience. I will then pay you back in 60 monthly installments of $500.

You're welcome.
While you're pony up $30k with 0% interest loan (plus tax, full coverage insurance), I just need to pay $15k, if that, for a reasonable and reliable used car. I also save on car insurance and pay less tax.

Who win?

The 0% interest free has a gotcha. No free lunch for you.

You are arguing a completely different point. You are arguing that someone should be spending $15k on a car not $30k

That is a completely valid argument. But it has nothing at all to do with my post.
I don't disagree your argument of taking 0% interest free loan. IF someone would give me free money, I would take it in a heartbeat. But what's the catch? What do you have to pay in order to get that 0% interest free loan?

When it's too good to be true, it ain't.

CnC
Posts: 840
Joined: Thu May 11, 2017 12:41 pm

Re: Car price ratio to NW

Post by CnC » Thu Oct 03, 2019 3:33 pm

H-Town wrote:
Thu Oct 03, 2019 2:59 pm

I don't disagree your argument of taking 0% interest free loan. IF someone would give me free money, I would take it in a heartbeat. But what's the catch? What do you have to pay in order to get that 0% interest free loan?

When it's too good to be true, it ain't.
I mostly agree. But I will use myself as an example.

We recently purchased a new Pacifica. We looked at used Pacifica and you saved about $6,000 by purchasing one a few years old and 30-40k miles.


Because of that price difference we felt that the better warranty bells and whistles and piece of mind that we were the first owners of the car justified the purchase of a new vs used. This can be debated of course but based off the criteria we had we felt that the new Pacifica was what we wanted.

When it came time to buy we had cash set aside to more than cover the purchase. After shopping several dealers and some time passed the best price we found involved 0% financing for 5 years. We had never dreamt of taking out a 5 year car loan. But it just made no sense to pay them a lump sum rather than keep our money and pay them the same amount slowly over 5 years.


Now I went into this with my eyes wide open. I realize this 0% financing was just another ±$1500 rebate. But the car was already well below MSRP and I'm sure they wanted to protect resale value by limiting the amount of visible rebates.

smitcat
Posts: 4379
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Re: Car price ratio to NW

Post by smitcat » Thu Oct 03, 2019 3:38 pm

H-Town wrote:
Thu Oct 03, 2019 2:35 pm
CnC wrote:
Thu Oct 03, 2019 2:30 pm
H-Town wrote:
Wed Oct 02, 2019 3:28 pm
CnC wrote:
Wed Oct 02, 2019 1:35 pm
bloom2708 wrote:
Thu Aug 02, 2018 1:45 pm

If they offer you 0% and $2,500 to finance, finance and pay it off after 3 payments.
This is terrible advise. I can think of no situations that giving someone $30,000 in three months is a better idea than giving someone $500 a month for 60 months. At the very least you can put $25,000 in CD's and make ±$1,000 over the course of the loan.
Nah - maybe you haven't thought of everything yet.

- Difference in premium between full coverage insurance and liability + no-fault insurance.
- Taxes paid on the interest income.
- Monthly cash flow management. Having no car payment is better than $500/month.
- Avoid the possibilities that you're upside down on the car loan.
- Debts can add up: mortgage, car, furniture, home equity, student loan, credit cards, etc. It's much easier just to manage only one debt, i.e. mortgage.
- In order to obtain 0% financing, you probably need to buy new car. That decision by itself already set you back financially compared to buying an used car.

And many more...

Well in that case, I will be happy to take a check for $30,000 at your earliest convenience. I will then pay you back in 60 monthly installments of $500.

You're welcome.
While you're pony up $30k with 0% interest loan (plus tax, full coverage insurance), I just need to pay $15k, if that, for a reasonable and reliable used car. I also save on car insurance and pay less tax.

Who win?

The 0% interest free has a gotcha. No free lunch for you.
"While you're pony up $30k with 0% interest loan (plus tax, full coverage insurance), I just need to pay $15k, if that, for a reasonable and reliable used car. I also save on car insurance and pay less tax."
When you have the money and prefer to have newer cars then the loans are very appealing and should always be taken at 0%.

HawkeyePierce
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Location: Colorado

Re: Car price ratio to NW

Post by HawkeyePierce » Thu Oct 03, 2019 3:58 pm

If anyone wants an eye-opener on how badly car debt affects people, just peruse the car loan threads on /r/personalfinance over on Reddit. Not uncommon to see people who have 30+% of their monthly cash flow going towards their car. :shock:

tesuzuki2002
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Re: Car price ratio to NW

Post by tesuzuki2002 » Thu Oct 03, 2019 6:16 pm

My last vehicle purchase was less than 1% of my NW... That being said. I love the vehicle and it is what I wanted!! I've had that vehicle for 5 years and 40K miles later... Still rolling!

I'd probably spend no more than 5% on any single vehicle... they just depreciate.

mountain-lion
Posts: 71
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Re: Car price ratio to NW

Post by mountain-lion » Thu Oct 03, 2019 6:27 pm

HawkeyePierce wrote:
Thu Oct 03, 2019 3:58 pm
If anyone wants an eye-opener on how badly car debt affects people, just peruse the car loan threads on /r/personalfinance over on Reddit. Not uncommon to see people who have 30+% of their monthly cash flow going towards their car. :shock:
Which means they got in over their heads. The problem is that the loan allowed them to get in over their heads.

It doesn't follow that a loan always gets you in over your head. It just does if you spend more than you can afford. Loans make that easier, but they don't have to do so.

JackoC
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Re: Car price ratio to NW

Post by JackoC » Fri Oct 04, 2019 9:31 am

CnC wrote:
Thu Oct 03, 2019 2:30 pm
H-Town wrote:
Wed Oct 02, 2019 3:28 pm
CnC wrote:
Wed Oct 02, 2019 1:35 pm
bloom2708 wrote:
Thu Aug 02, 2018 1:45 pm
If they offer you 0% and $2,500 to finance, finance and pay it off after 3 payments.
This is terrible advise. I can think of no situations that giving someone $30,000 in three months is a better idea than giving someone $500 a month for 60 months. At the very least you can put $25,000 in CD's and make ±$1,000 over the course of the loan.
Nah - maybe you haven't thought of everything yet.
- Difference in premium between full coverage insurance and liability + no-fault insurance.
- Taxes paid on the interest income.
- Monthly cash flow management. Having no car payment is better than $500/month.
- Avoid the possibilities that you're upside down on the car loan.
- Debts can add up: mortgage, car, furniture, home equity, student loan, credit cards, etc. It's much easier just to manage only one debt, i.e. mortgage.
- In order to obtain 0% financing, you probably need to buy new car. That decision by itself already set you back financially compared to buying an used car.

And many more...
Well in that case, I will be happy to take a check for $30,000 at your earliest convenience. I will then pay you back in 60 monthly installments of $500.
A 0% loan as a complete standalone is a good deal. A 0% loan which requires you to keep full collision coverage on a car where you otherwise wouldn't is not as clear cut. And you have to consider the after tax proceeds on investment. Also under key assumption the loan offer has zero effect on getting the lowest price on the car.

Otherwise I question some of H-town's specific list. I just manage cash flow according to what it is :happy . Faster than anticipated car depreciation is an equal problem, loan or not. I assume I'm rational managing debts and the evidence says I am. And the last one assumes you buy a nicer car because of the financing which again is not rational and I assume rationality for my own purposes except specific personal exceptions and that would not be one.

But as to 'and many more', again the big one IMO is whether the financing affects the price. In some cases a dealer will explicitly trade the low rate financing for a particular further discount in price, in which case it's clearly invalid to count the whole amount of below market rate as a benefit. And even if not it's muddy and may depend on the assumption that I, not that bad a negotiator IMO but I only buy cars every few years, can negotiate with a car dealer, who does that exact type of negotiation *every day, all day*, so I can walk out with the absolute bottom price regardless of the finance offer, plus the special finance offer, and be sure that's what's happened.

In past I've just found the 'arbitrage' of low car financing rates v CD's etc, after tax and extra insurance, to be too little to bother with for the hassle, and given the uncertainty how financing affected price. I don't go along necessarily with 'it looks like a good deal so it must not be'. I just think making money off car dealers via finance has serious uncertainty. It's a lot muddier and more effort than whether I really make a few $100 (which is all you're talking about generally on car loan v CD 'arb') on a sign up bonus on a credit card.

jharkin
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Location: Boston suburbs

Re: Car price ratio to NW

Post by jharkin » Fri Oct 04, 2019 10:14 am

HawkeyePierce wrote:
Thu Oct 03, 2019 3:58 pm
If anyone wants an eye-opener on how badly car debt affects people, just peruse the car loan threads on /r/personalfinance over on Reddit. Not uncommon to see people who have 30+% of their monthly cash flow going towards their car. :shock:
Ive seen those, thats absolutely terrifying. I wouldnt even feel comfortable with that percentage on housing.


There was a clickbait jalopnik atricle on the problem of auto debt lately and their recommendation to avoid overspending was to stay under a 60 month loan that cost 10% of gross. Even that feels uncomfortably high to me, Ive had mortgage PI payments lower than that.....

Ron Ronnerson
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Location: Bay Area

Re: Car price ratio to NW

Post by Ron Ronnerson » Sat Oct 05, 2019 9:16 pm

Jags4186 wrote:
Tue Oct 01, 2019 6:34 pm
Ron Ronnerson wrote:
Fri Aug 03, 2018 1:32 pm
KlangFool wrote:
Thu Aug 02, 2018 3:07 pm
magicrat wrote:
Thu Aug 02, 2018 1:52 pm
My car is 0.7% of my net worth.
magicrat,

I am overspending on my car. It is 2% of my net worth.

KlangFool
You are extremists. My car is 1.4% of my net worth.
Our cars are 1.8% of our net worth. :sharebeer
:sharebeer Very nice! My post was from over a year ago. My car has depreciated a little bit since that time while net worth increased. The car is now worth 1.1% of my net worth.

smitcat
Posts: 4379
Joined: Mon Nov 07, 2016 10:51 am

Re: Car price ratio to NW

Post by smitcat » Sun Oct 06, 2019 7:02 am

If you have your own business your may find that most of your depreciation is covered by deductibles.
Check with your accountant to get the expected numbers before you purchase.

grettman
Posts: 466
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Re: Car price ratio to NW

Post by grettman » Sun Oct 06, 2019 7:21 am

I'll join the fun! The current value of our two cars combined are 2.4% of our net worth.

I paid cash for both.

Their value represents 24% of our total gross pay.

I don't know if any of that is "good" or "bad" but couldn't resist having some fun with this thread this morning!

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snackdog
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Re: Car price ratio to NW

Post by snackdog » Sun Oct 06, 2019 7:38 am

Net worth makes no sense at all. What should Elon Musk drive?

Cash flow or net income is the metric you want. Given all the additional costs associated with a vehicle (gas, tires, insurance, maintenance), I would limit it to 5% of cash flow this way with extras it all stays well under 10%. The 5% can be the annual lease or finance charge or depreciation rate for the forecast life of the vehicle.

We paid cash for a 9 year old GS350. $10,000. It should last at least five years, so $2000/yr. assuming it is worth nothing at the end (not far off since it will be nearly 15 years old). If our annual CF (the money entering our checking account) were $100K, that would be 2%. We need two cars, so that leaves 3% for the other ($3000/yr or $250/mo).

Valuethinker
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Re: Car price ratio to NW

Post by Valuethinker » Mon Oct 07, 2019 5:24 am

JackoC wrote:
Fri Oct 04, 2019 9:31 am
I just think making money off car dealers via finance has serious uncertainty. It's a lot muddier and more effort than whether I really make a few $100 (which is all you're talking about generally on car loan v CD 'arb') on a sign up bonus on a credit card.
I think it's a fair bet that if you take finance associated with the purchase of a major consumer durable like a car, that the combination of the finance company (often captive to the automaker?) & the manufacturer & the dealer finds some way to make sure they come out ahead.

There are anomalies in capital markets - just as the demand for CDOs drove excessive mortgage lending in the USA (a feedback loop running back to origination of mortgages was created) so too something similar might be happening in the Asset Backed Security (ABS) space that US car finance fits into? In other words it might be possible to borrow "too cheaply" (on a risk-adjusted basis) due to the automotive manufacturer desire to push cars out the door and financial market appetite for higher yielding paper?

But it's an asymmetric information problem. I wouldn't trust that the car dealer did not have a way of winning at my expense. Paying cash (if one can) reduces that risk.

Hillview
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Re: Car price ratio to NW

Post by Hillview » Mon Oct 07, 2019 5:43 am

about .03% both paid off. That said I am annoyed by the cost of routine maintenance on one of them and should have considered that more carefully. I can afford it but it annoys me a lot.

Leemiller
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Re: Car price ratio to NW

Post by Leemiller » Mon Oct 07, 2019 7:03 am

I think we were too cheap for too long. We went from a 20 year-old or so Honda to a newer Mercedes. Shortly afterwards, we had a close call on the highway. My husband later told me we would have been in a wreck with the Honda. There is really no comparison in how the two vehicles drive, let alone the safety features. While it was a net worth boost to have a paid off car for so long, I wouldn’t do things that way again.

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Tamarind
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Re: Car price ratio to NW

Post by Tamarind » Mon Oct 07, 2019 7:13 am

Mjar wrote:
Thu Aug 02, 2018 1:59 pm
adamthesmythe wrote:
Thu Aug 02, 2018 1:41 pm
Wrong question. First question is what do you need. Then think about affordability. Affordability has a lot more to do with cash flow than net worth.
agreed 100% but I wanted to look at it from a different angle, but true motive in asking what i did is my household income and my net worth would IMHO afford a luxury car easily but I am not a person who needs to keep up with the Jones and I was wondering if there was a ceiling of what others have done. I was wondering if there was a guideline if not to net worth than income.

right now I am leaning towards mazda3 (mid $20's) which meets my needs, The only thing I see gaining by spending more is more hp and a couple bells and whistles.

I have a friend that makes half my income but he feels compelled to buy flashy sports cars that make up near half his income in monthly payments which to me is stupid because he lives check to check and complains about not having money to do other things...but to each his own.

I have always bought on needs hence the mazda3 and was thinking can I or should I buy more and that got me thinking what would be the upper limit without it be a stupid price % for my income/nw.
I don't know if it's very helpful. You should buy the car you need and can afford. Net worth and total income not very helpful for defining "afford". Perhaps base it on disposable income and say not more than 100% of your yearly excess after tax income?

Anyway the Mazda3 is a fine car. I have no "taste" in cars and to me it's at least as comfortable as cars costing 2-3x as much. Personally I have not yet spent more than $20k on a new car and intend to keep it that way until an affordable electric comes along, no matter my net worth.

iamlucky13
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Location: Western Washington

Re: Car price ratio to NW

Post by iamlucky13 » Mon Oct 07, 2019 3:02 pm

I'd say somewhere between 1% and 100% of net worth, depending on the circumstances, but with some exceptions I can envision outside that range.

One of the reasons cash flow is an easier metric to consider than net worth is that net worth changes radically over most people's lives. How do you make a reasonably simple rule of thumb to capture that?

I've spent as much as 150% of my net worth when I was recently out of college, had steady income, but needed to replace a car that had been hit and totaled. I planned to to keep it long term (and did - currently at 14 years). That was on of those exceptional circumstances.

I am once again shopping, and would be comfortable spending 10% of my net worth. However, my wants and needs are honestly only pointing me to about 5%.

When I bought my first car, 10% of my net worth would barely have bought a car that runs at all, and having an unreliable vehicle would have been a major career risk with implications that could last for years.

On the other hand, if I were nearing retirement, given what I hope to have saved at that time, 10% would be quite excessive. I think the Dave Ramsey rule is a reasonably conservative starting point there (all vehicles combined purchase price < 50% of income). If we adapt it to a 2 car household with a 50/50 stock+bond portfolio, it suggests spending about 2% of net worth on each car.

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