Are you looking for a car buying guideline and think my 1/10th rule is too harsh? If so, do not fret! Let me also introduce to you the net worth rule for car buying guideline to follow.
The net worth rule for car buying is generally reserved for wealthier people or retired people with a lot of assets, but not a high income.
I came up with the net worth car buying guideline because my 13-year-old Land Rover Discovery II was starting to give me fits back in 2013. His cruise control had just died and I was starting to worry about car safety, which is everything if you have a family.
I had just spent $800 that summer on a new steering pump, timing belt, and 125,000 mile tune up. So it was disappointing to see another issue come up.
Besides the cruise control not working, the brakes are mushy, the airbags haven’t been serviced at the 10 year mark, the traction control and ABS lights are on, and a couple $220 M+S tires are balding.
Oh yeah, the CD player doesn’t work either and there’s no bluetooth of course! My trusty mechanic of 12 years said Moose was operationally fine. The dashboard lights are just on due to a broken fuse lodged deep inside the control panel that makes it not worth replacing. Still, I had my doubts.
I wanted to buy a new car! But I also had just retired in 2012 and no longer earned six-figure in finance.
Based on the 1/10th rule for car buying, I can buy a new compact car. The problem is, I wanted to buy the latest Range Rover Sport that costs $90,000! Let’s see if there is a car buying guideline to help get me and you what we want.
The net worth rule for car buying states that you can spend up to 5% of your overall net worth on the purchase price of a car.
The 1/10th rule only accounts for one’s annual income when deciding on how much to spend on a car. Perhaps a greater barometer to determine car spending is your overall net worth. After all, if you can live in a 100% paid off $5 million mansion and live off $150,000 a year in disposable income you’re much better off than somebody who earns $300,000 a year with no assets to speak of.
Based on my net worth by income post, a 30 year old should have roughly 2X their salary in savings or overall net worth e.g. $60,000 annual income = $120,000 net worth. Hence, to keep consistent with the 1/10th rule for car buying and my net worth by income calculations, I think spending 5% or less of one’s net worth on a vehicle works very well (5% X $120,000 = $6,000 = 10% X $60,000).
The net worth rule for car buying covers those who’ve retired, are temporarily out of a job, are a stay at home spouse, have a medical condition and can’t work full time and so forth.
Let’s say you worked for 40 years and accumulated a $1 million net worth by the time you are 65 through diligent savings and investments. You’re now living off roughly $60,000 a year from social security, dividends, and a pension.
The 1/10th rule says you can only buy a $6,000 car which seems much too onerous for a person of your stature. It’s time to live it up a little! My net worth rule provides a guideline for the retiree to buy up to a $50,000 car instead.
Below is the net worth guideline by income chart for your review. As you can see below, a 50 year old person who makes $200,000 a year and has a $2,400,000 net worth should feel comfortable spending up to $120,000 on a sweet Porsche 911 CS instead of just $20,000 on a Honda Civic.
Whether he does or not is another matter. If I’m sporting a $2.4 million net worth and $200K income, I’m still driving a $20,000 car, because $3 million is the new $1 million thanks to inflation.
Cars are so much fun. I understand every single one of you who salivate over the latest model sports car or SUV. But cars are also the biggest money wasters. Follow my car buying guideline. Nobody really needs a car that costs over $5,000. Cars built after 2000 are so much more reliable than those building in the 70s, 80s, and even 90s.
The money we spend on cars could be invested in real estate or stocks that will super charge our net worths. The money you would have invested in the stock market or real estate market when I first wrote this post in 2013 is now worth more than triple in 2021!
I’d like every car buyer to think in terms of opportunity cost when making a decision on which vehicle to get. Every time I think about plunking down $50,000 on a new BMW, I shudder to think how it could turn into $100,000 10 years later if it grows at 7.2% a year.
In 2021 I invested $50,000 in Tesla stock while my preschool teacher friend bought a $50,000 Model 3! My Tesla stock can now buy me three Model 3s for free. This is why it can be so hard for investors to spend money.
Basing a car buying decision on one’s net worth may actually be harder than basing a decision based on income. Our net worth is a lifetime achievement whereas income is only one year at a time. Are we really comfortable spending 1/20th of our lifetime’s work on a depreciating vehicle? Maybe, but that should certainly be the max.
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