If you’re looking for a car buying rule, you’ve come to the right place. I’ve come up with a car buying rule that will help you spend responsibly, reduce your car ownership stress, and boost your net worth over time.

In 2009, I watched in horror as a total of 690,000 new vehicles averaging $24,000 each were sold under the Cash For Clunkers program.

The government’s $4,000 rebate for trading in your car ended up hurting hundred of thousands of people’s finances instead. With a median household income of only around $50,221 at the time, spending $24,000 on a new car was clearly too much.

Instead of buying a $24,000 car in 2009, if you had invested the $24,000 in the S&P 500, you would now have roughly $70,000 in 2020. That’s quite an opportunity cost for buying a new car!

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.

When you add everything up, I’m pretty sure you’ll be shocked at how much it really costs to own a car and hurl.

The Car Buying Rule To Follow: The 1/10th Rule

The #1 car buying rule to follow is my 1/10th Rule For Car Buying. The rule states that you should spend no more than 1/10th your gross annual income on the purchase price of a car.

If you make the median per capita income of ~$42,000 a year, limit your vehicle purchase price to $4,200. If your family earns the median household income of $65,000 a year, then limit your car purchase price to $6,500. Absolutely do not go and spend $36,000, the absurdly high median car price today!

If you absolutely want to buy a car that costs $36,000, then shoot to make at least $360,000 a year in household income. You might scoff at the necessity to make such a high amount. However, it takes at least $300,000 a year to live a middle class lifestyle with a family in a big city today.

If you actually want to save for college, save for retirement, take care of your parents, buy a home, and not stress out about money when you’re old, please keep your car purchase to at most 10% of your annual gross income.

Once you buy a car following my 1/10th rule, your goal should be to own your car for at least five years, if not 10+ years. Don’t go selling your car every 2-3 years like most Americans do. If you do, you don’t experience the full value of the car. Further, you end up paying wasteful sales taxes each time you buy a new or new used car.

Buying a car you cannot afford is the #1 way to financial mediocrity. Since Financial Samurai was founded in 2009, my goal is to help readers achieve financial freedom sooner, rather than later. Ideally, I’d like every reader to achieve an above average net worth for their age.

Financial independence is worth it. A car you cannot comfortably afford is a great headwind.

Why You Shouldn’t Spend More Than 10% Gross On A Car

Let’s go through specific reasons why you should follow my car buying rule.

1) Maintenance costs: The more you drive, the more you will pay to maintain your vehicle. With thousands of parts per car, something will inevitably break or need upgrading. Not only do you have to pay for maintenance costs, you’ve also got to pay for insurance, parking tickets, and traffic tickets. Furthermore, the thrill of owning a new or new used car lasts for only several months, but the pain of paying the same car payment lasts for years.

2) Opportunity cost. When you buy a car you lose the opportunity of investing your money in assets that will likely grow and pay you dividends in the future. Everybody knows to save early and often to allow for the effects of compounding. Buying too much car is like negative compounding! Imagine how much money you would have accumulated if you invested $300-$500 a month in the stock market since 2009 instead of paying for a car?

3) Stress. When you pay more than 1/10th your income for a car, you will become more stressed. You’ll feel stressed whenever you get a door ding after parking your car at the local grocery store. You’ll get stressed whenever you incur wheel rash after parallel parking too close to the curb. Sometimes when you’re driving in traffic, you’ll feel more on edge because you don’t want anybody damaging your car. If you are within 1/10th of your income, you drive and park stress free. You stop caring about door dings, bumper scrapes, even break ins. Stress kills folks.

4) Makes you want more. The nicer your car, the more you want to spend on other things. You start thinking stupid thoughts like: I’ve got to buy a matching chronometer watch, driving shoes, and outfit. You start paying $20 for valet because you want people to see you come out of your car instead of park for free.

5) Makes you feel stupid. Deep down, you know that if you can’t pay cash for your car, you can’t afford the car. Each payment you make is a reminder how foolish you are with your money. Why would you want to be reminded every single month of being dumb? The thrill of owning a nice car fades after about six months. But the payment stays the same for years.

Depreciation Chart

If You’ve Already Bought Too Much Car

Look, everybody makes dumb financial moves all the time. The important thing is to recognize your mistake, stop, and fix it! Here are some things you can do if you’ve bought too much car already.

1) Own your car until it becomes worth 10% of your income or less. This is the simplest solution if you’ve spent too much. Drive your car for as long as possible until the market value is worth less than 10% of your gross annual income.

2) Bite the bullet and sell your car. If you’ve spent anything more than 1/5th your gross annual income on a car, I’d sell it. It’s making you poor. Even if you have to take a little bit of a hit, I think it’s worth getting rid of your vehicle. Don’t trade it into the dealer because you’ll get railroaded. Instead, try negotiating via Craigslist.

3) Punish yourself. If you don’t punish yourself, then you will repeat your mistake and feel fine with what you have now. For the life of your car loan, take away a food you love to eat such as chocolate. If you are a coffee addict, swear never to drink that stuff again! Save more of your income after taxes and feel the squeeze so that you realize how ridiculous your car spending is.

Recommended Cars By Income (Tastes May Differ)

Cars built in the 1990s and beyond are so much more reliable than those built prior. If you are serious about improving your finances, consider buying a car with less options, and less electronics to deal with. The more you have loaded in your car, the more maintenance headaches you will have in the future.

Please note that there is NO SHAME in owning a car that’s worth less than $10,000. I bought a second-hand Land Rover Discovery II for $8,000 and drove it for 10 years until it was worth less than $2,000. The car was great and loads of fun. With the money saved from not buying a more expensive car, I diligently invested the money in stocks and real estate.

Put your ego aside so you can have true wealth: all the freedom in the world. Your goal should be to generate enough passive income as possible so you don’t have to work and can spend your time as you please.

The Choice For Great Wealth Is Yours

Treat the 1/10th rule of car buying like a game. You will be surprised to find how many different type of cars you can buy with 1/10th your income if you make over $25,000 a year.

If you want a $30,000 car, get motivated by the 1/10th rule to figure out a way to make $300,000 a year. One way is to start a side hustle to generate more income on the side. We’re all spending way more time at home now. Might as well try to make some side income online.

I never thought when I started Financial Samurai in 2009 that I could leave the corporate world for good in 2012 and make more than I did as an Executive Director at an investment bank, but here I am.

If you can’t get motivated, then fine. Just don’t think you can afford much more. Think about your future and the future of your family. A car is simply there to take you reliably from point A to point B.

If you’re thinking about prestige and impressing others, don’t be silly. Owning a nice property is way more impressive because at least you can potentially make some money from the asset!

One of the worst financial combos is owning a car that you purchased for much more than 1/10th your gross income and renting. You now have two of your largest expenses sucking money away from you every single month.

Think about all the wealthy people you know or the millionaires next door. Chances are high the majority of them own their homes and drive used cars that don’t come close to 50% of their gross income.

If you want to achieve financial independence and not have to worry about material things stressing you out, follow my car buying rule.

If you want to detonate your finances and end up working longer than you want for the sake of a nicer ride, then go ahead and spend more than you can comfortably afford. After all, we’ve only got one life to live.

Recommendations

Best Gas Rewards Credit Card: The Chase Freedom Unlimited is a fantastic rewards credit card that offers 1.5% unlimited cash back on all purchases. New Chase Freedom Unlimited cardholders also get $150 cash back after spending $500 on purchases within the first three months of account appointing. Finally, the Chase Freedom credit card has no annual fee.

Lower Your Auto Insurance Costs: Check out Esurance online for some of the best plans with the lowest rates around due to their lower overhead costs. It’s worth spending a moment filling out a quote to see if you can save some money. Car insurance is one of the largest ongoing expenses for car owners. Esurance has good driver discounts, and multi-product discounts as well. There is no obligation to sign up once you get a quote either. You want to leverage the internet to get the lowest rates.

Track Your Net Worth Religiously: Hopefully you are now motivated to make more money to afford the car of your dreams, instead of going into debt and buy a car you can’t comfortably afford. The easiest way to grow your wealth is to know where all your money is going.

Sign up for Personal Capital, the best free financial tool on the web. I’ve been using them for free since 2012 and have seen my income and net worth skyrocket. The app keeps me motivated to spend smartly and invest wisely. There is no rewind button in life. Best to get your financial life in order.

Updated for 2020 and beyond.