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These were my exact words to a dear friend of mine who thought it made sense to spend $1500 a month on a car they rarely drive.
They don’t own any property, they don’t own the six-figure car, they don’t have an emergency fund, they don’t have health insurance, and they don’t have a positive net worth.
However, for some reason, they felt inclined to feel they were in a “good enough position” to purchase a 6 figure car despite their sketchy financial situation.
It doesn’t matter how much money you earn; it’s about how you manage the money you earn.
My friend isn’t the only one in this predicament.
Another dear friend of mine had a car payment that cost the equivalent of their rent.
They ended up paying off the car, but instead of making better financial decisions after their car was paid off, they created more debt.
How Much Should Your Car Expenses Be?
My philosophy is to always purchase a car you can afford to purchase with outright cash.
Now, this doesn’t mean you have to frontload all the cash, but if you had to pay for the car upfront, you could.
By doing this, you eliminate the mistake of shifting your net worth from positive to negative or digging yourself further into a negative net worth if you haven’t reached the positive net worth status quite yet.
10% or less of your net income is a good rule to follow when it comes to car expenses; this includes car payment, insurance, maintenance, gas, or electricity.
Learn more about the 1/10 car rule here:
Do You Have Any Questionable Habits?
If you have any financial habits that are subtracting a considerable chunk of change out of your monthly income, it’s time to rethink them.
If you’re not on track with your financial goals, off track with retirement, in debt, have a negative net worth, don’t have an emergency fund, and don’t maintain a budget, you shouldn’t be spending additional dollars on anything until you get your financial situation in a healthier place.
What Do You Spend Most Of Your Money On?
The largest expense for most includes housing, transportation, and food.
If you’re similar, your largest expenses will also fall into these categories.
But don’t underestimate the other spending categories you invest in; you might find plenty of income to be recovered if you modify your budget.
If your car expenses are more than 10% of your monthly income, consider downsizing, so you can keep more income each month.
This content is for informational purposes only — not professional advice. Consult a qualified professional before making any major decisions.