Nowadays most people only ask the car salesperson “How much down and how much per month?” They want to have it now and pay for it later. Plus interest.
Personal finance experts say that 20% of your take home pay is the maximum affordable amount that you can spend on a monthly vehicle payment.
I think that is too much. Still, people don’t even listen to that rule.
You can double that if you are married and paying on two vehicles. Not to mention the increased insurance to cover a more expensive car. If you have an inexpensive car, you won’t need to have full coverage on it.
After I decided to become financially free, I came up with my own personal rule when it comes to buying my car. I will only buy a car that costs a maximum of 10% of my gross yearly income, and I will not finance it.
Last year I made just a little under $65,000 – so any car that I buy will cost $6,500 or less. This keeps me on track to invest and grow my wealth. When you buy an expensive car, you lose a much larger chunk of your net worth every month. If the car has already been greatly depreciated your loss is much less, and sometimes even neutral or positive.
I am a bargain hunter. If I can find the diamonds out there I know other people can too.
My brother-in-law is a car gearhead. He seems to have a new car every time we go to visit. He buys cars that are special, these are not your normal day-to-day type vehicles. I can’t even remember the models since he is in Europe, but from what he tells me is that the cars have a small but fanatical following. He says that his car expenses are low since the cars hold value. He might sell one car for just a few hundred less than he paid a year earlier, or even get to drive it for months and turn a profit on the sale.
When I rented a room in Hawaii, my landlord didn’t have a job. Instead he collected the rent from the other people renting rooms and spent his time flipping cars off of Craigslist. Sometimes they needed a bit of mechanical work, other times cosmetic attention, but most of the time he just cleaned them really well and took great photos.
That’s all he did and he lives in Hawaii – one of the more expensive, but gorgeous, places to live. People will sell their car for less than the actual value.
When I purchased a car for my wife, it was already 11 years old with around 150k miles. Three years later the car has dropped in value by $1200 (about $33 a month) and the only things I have had to do to it were change the battery and replace the tires. Oil changes? I make money off of oil changes by performing secret shop jobs that reimburse the cost of the service and pay me an additional $40 for my report.
Sure, because I am an aircraft mechanic maybe I have some advantage in spotting potential problems when I am looking a vehicle over, but it doesn’t take much skill to identify leaks or if the vehicle makes a strange sound when you drive it. Worst case is that you pay for an auto mechanic to look it over. Why worry about a one-time $100 for a thorough inspection when you normally pay a recurring $500 a month?
For most households the highest monthly expense is housing, followed by transportation. Buying more than you can afford in these two categories can bankrupt you, so don’t do it! Being free from financial stress is worth having a smaller house or an older car, believe me.
If you need any more convincing, let’s plug in the numbers and see what $500 a month invested at just 7% a year for 30 years turns into. Because once you pay off a car its time for another one, right? Car payments are just a way of life.
$613,544!
Dave Ramsey says he gets a 12% average yearly return on his money. Let’s see what that looks like.
$1,764,956!
Do you think driving older cars is worth it now?
The excitement and smell of a new car wears off, the knowledge that you are securing your future does not.
I changed from being a consumer to a saver and investor. This one simple change could send you well on your way to becoming a millionaire!
Stop spending so much on cars and start buying your freedom instead. Stop making the car dealerships and bankers rich off your hard work, and instead work hard towards your freedom. Once you have enough money invested it will work harder for you than you could imagine.
Pictures: Pixabay / Bankrate.com calculator / Images by bplanet at FreeDigitalPhotos.net
@getonthetrain