How does one determine how much car, condo rent, and discretionary spending they can afford?

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GrayS26
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How does one determine how much car, condo rent, and discretionary spending they can afford?

Post by GrayS26 » Mon Feb 11, 2019 4:35 pm

I recently read online this guy with 4 million dollars net worth drives a 100K car. So that would be 2.5% of his net worth. And the car should last for several years at least.

He also rents a 10K per month house. That would be 3% of his net worth annually for housing.

Is this a good way to think about one’s spending and are there any general rules?

For example, “never spend more than X% of your net worth on discretionary items. And never spend X% of your net worth on cars” and so on.

Thanks!

barnaclebob
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Re: How does one determine how much car, condo rent, and discretionary spending they can afford?

Post by barnaclebob » Mon Feb 11, 2019 4:46 pm

More important is your cash flow and the stability of that cash flow.

Topic Author
GrayS26
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Re: How does one determine how much car, condo rent, and discretionary spending they can afford?

Post by GrayS26 » Mon Feb 11, 2019 5:18 pm

For arguments sake, if income after taxes is only 12,000 a month, then one would probably say he can’t afford anything too luxurious. Like he should get a Honda, a moderate condo, and so on. So he can save the rest.

But then what about the millions? Does it make sense to drive a Honda just bc income is low but there’s millions in the bank?

Quirkz
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Re: How does one determine how much car, condo rent, and discretionary spending they can afford?

Post by Quirkz » Mon Feb 11, 2019 5:33 pm

The monthly budget does most of the work for us, making sure we can meet savings/investing goals while covering all the bills, including big-ticket occasional items like cars.

There are some well-known rules of thumb for housing, the big ones being either a place shouldn't cost more than 2.5 times annual salary, or that your payment shouldn't exceed 31% of your gross income. As your biggest expense, that's an important place to start.

For retirement, I often see 15% recommended, though I've also seen a range between 10 and 20% at times. Again, it's a big chunk, so spend a lot of time making sure you're doing that right.

After that I personally just lump all the other stuff in, and make sure that number is below my income. That does include the car replacement schedule, annual vacations, and desired savings, broken up by monthly chunks. If you're still in the black, ideally still with some padding, you can probably "afford" everything. If you're in the red, you definitely can't.

Topic Author
GrayS26
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Re: How does one determine how much car, condo rent, and discretionary spending they can afford?

Post by GrayS26 » Mon Feb 11, 2019 5:47 pm

I understand it’s often said to be mostly about income. But let’s say income really isn’t that high. Let’s take this hypothetical:

6000 a month off investments.

6000 a month from income after taxes.
——————————————-
2 million liquid.

3 million in trust.


In this situation, one could argue a moderate lifestyle is all one can afford. Maybe a Honda Accord, maybe a moderate apartment, and so on. Income isn’t super high.

But at the same time it’s like if you’ve got millions set aside, what sense does it make to drive a Honda if you desire a Mercedes?

runner540
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Re: How does one determine how much car, condo rent, and discretionary spending they can afford?

Post by runner540 » Mon Feb 11, 2019 5:48 pm

Fellow BH's, please check out OP's previous threads before responding ...very "unique" situation...
viewtopic.php?f=1&t=215204

People that have jobs budget using their income minus taxes and savings. If retired, using a sustainable withdrawal rate. Are you still getting the $100k per year from parents? If so, that is the starting point for your budget.

DaufuskieNate
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Re: How does one determine how much car, condo rent, and discretionary spending they can afford?

Post by DaufuskieNate » Mon Feb 11, 2019 6:36 pm

Rules to Riches by Mark Baird is a good read. He gives some guidelines for how much is reasonable to spend in various categories. Everyone is different, but he gives you some good starting points for consideration.

michaeljc70
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Re: How does one determine how much car, condo rent, and discretionary spending they can afford?

Post by michaeljc70 » Mon Feb 11, 2019 6:58 pm

What I want to spend is always less than I can afford. If you have to think about it too much and create complicated spreadsheets you probably cannot afford it.

I've always thought the term "afford" was somewhat odd/loaded. I mean, if you give up practically everything but the necessities, you can "afford" a whole lot more. I would say I cannot afford to buy a million dollar house. In reality, I could buy one and not default on it. So can I afford it? Is affordability how comfortable you feel buying something or is it more mathematical? It seems pretty subjective in many cases.

Topic Author
GrayS26
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Re: How does one determine how much car, condo rent, and discretionary spending they can afford?

Post by GrayS26 » Mon Feb 11, 2019 7:24 pm

I think for some there’s a sense of guilt like how can I spend $100,000 on a car that’s absurd. That could be half the cost of a decent brick house in many suburbs.

But if you want it and mathematically can afford it then one shouldn’t feel worried maybe?

I think that can be issue for some. Having the money but not being used to spending at that level.

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