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The 1/10th Rule For Car Buying Everyone Must Follow
The 1/10 Rule For Car Buying
I read an interesting article by Financial Samurai that discusses the 1/10 rule everyone should follow when buying a new car. Here it is:
The 1/10 Rule: If you’re looking for a car buying rule, the 1/10th rule will help you spend responsibly, reduce your car ownership stress, and boost your net worth over time.
The rule states that you should spend no more than 1/10th your gross annual income on the purchase price of a car. The car can be new or old. It doesn’t matter so long as the car costs 10% of your annual gross income or less.
Buying too much car is one of the easiest and biggest financial mistakes someone can make. Besides the purchase price of a car, you’ve got to also pay car insurance, maintenance, parking tickets, and traffic tickets.
– Financial Samurai
Do I agree with the philosophy? Most definitely
My Current Car is 13 Years Old
I’ve had my car for about 10 years, and the car is about 13 years old. My car is slowly approaching to 200k mile mark. However, I take pride that my car is paid off and requires low-cost maintenance about once a year.
I’m having a tough time parting with my vehicle because it’s essentially free.
I have a 17-gallon tank, and since I barely drive, I fill up my tank a couple of times a year – if that. On top of my tiny gas bill, I pay ~$90 bucks for car insurance, which might be too high. Hence, my car costs me almost nothing.
If I purchased a new vehicle, my zero transportation costs would increase significantly. At the moment, I’m not going to throw away $30,000 to $50,000 in cash on a piece of metal that depreciates as quickly as the first drop on a roller coaster. And if I don’t want to drop some cash, there’s another option: the car payment, which most Americans have included in their monthly budget. But…
Car payments are adverse realities.
Eventually, I’ll give in and purchase a new vehicle. But for now, I’m good. When the time comes, though, that will be the moment I implement the 1/10 rule.
The Wretched Truth: You Can’t Afford Your Car
If you follow the 1/10 rule and earn $60,000 a year, your car should only cost $6,000. Some might think that will only buy you a piece of junk (it might), but if you have plenty of other competing expenses along with outstanding debt, this is probably the best price range for you.
America Puts Image First Over Investing
However, most people buy cars that exceed 10% of their gross income. It’s easy to do this, too, considering most cars cost anywhere between $20,000–$40,000. And if we’re talking desirable cars by American standards, the average cost of the car will range from $30,000-$50,000, which is one more anxiety-inducing financial strain on American households. But who cares, right? As long as it all looks good, but if you haven’t pulled the trigger…
Before you buy that new car, pause and ask yourself:
Have I maxed out my 401K?
Am I in debt?
Do I have a positive net worth?
Am I on track with my financial goals – including retirement?
Have I maxed out my ROTH IRA (you thought we were done with the IRAs, didn’t you)?
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Smarter Choices = Higher Networth + Financial Freedom
If more Americans made prudent decisions with their purchases, we wouldn’t have so many people who needed stimulus checks.
But guess what? We love buying sh*t – especially sh*t we can’t afford; we’re addicted.
Here’s the thing though, if we keep buying stuff that exceeds our incomes, we will never experience financial freedom because we will always be itching for that next paycheck and stay strapped to jobs we may not like to pay the bills.
The 1/10 rule is a humbling rule to follow; it helps you consider that you’re probably buying more car than you can afford.
3 Reminders
Never compromise a positive net worth to buy a car; it’s not worth it.
You shouldn’t have to make it work for a car; this means you spent too much.
If you handle your money right, you will eventually afford a great car.
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This content is for informational purposes only — not professional advice. Consult a qualified professional before making any major decisions.