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Percentage of monthly income spent on a car?
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I know a kid that bought a 30K out the door car back in 2002. This kid was grossing about $3000 / month back in '02 when he bought the car new. He financed it for 36 months, 0% interest, and had a payment of about $800/month. Well, he was 23 and still living with Mom and Dad, so he thought he could afford to do this. Then after 2 years of this $800 payment, he decided he needed to get his own place. With an $800/mo car note, and looking at a potential apartment lease of $1000/mo, he decided that he needed to get rid of the car. I think he was actually netting about $2200/mo. He ended up trading the car in, for a very nice, but more reasonable car (after making 24 months worth of payments on the previous car) - and now has a payment of about $350/month. The sad thing is that he is now 26, and will be getting married soon, and is just now beginning to save up for a down payment for a house. Looking back, if I could have lived with my parents until I was 25 (rent-free), I would have had a heck of a down payment stashed away to go towards a house. I love cars as much as the next guy, but at some point you have to realize that for the most part (there are exceptions), they are a bad investment. I often joke with my friends that if I was one of those guys making millions a year, I would be the type to have 10 high-end cars - but I would also have a really nice mansion too...
Dude, this is my philosophy exactly. It's amazing how many people forget this, and end up being a slave to their material possessions.
I have a big pet peeve with leasing. People in poor financial circumstances often lease because the payment is lower in the short run, and it allows them to buy a more expensive car than they could otherwise afford.
A relative of mine, in poor financial circumstances, leased a Jeep about 5 years ago. The lease was up two years ago, but she couldn't turn it back in because (1) she couldn't afford even to lease a new car; and (2) the car had unrepaired damage that she would have been heavily dinged for, that she couldn't afford to fix.
So she "rented" the car for another 2 years, and now it's up again. The car is now 5 years old, in about average condition for a car that age. She will keep paying on this car, and will never own it.
For people like this, leasing is a trap. Getting a car you can't really afford often comes at a high price.
I was married at 24 and had tons of debt and bad credit. We had a piece of junk that was costing us a few hundred a month in repairs, but I didn't have credit that would allow for a decent payment. The mechanic I used started a used car business and sold me a car with him financing it himself ('93 Grand Am with 10K miles for $10,000 in 1996).
Needless to say, I am now 34, my credit is golden and my family has a considerable gross income.
We currently own a 99 accord and lease a '02 subaru which is coming due. We are trying to decide what to replace it with. We would love to lease a luxury SUV like an BMW X5 or a MDX, but are hesitant to spend $450 or 500 a month on a payment, which would be equal to about 3% of our monthly gross (and we have no debt other than our mortgage, which has a 60% LTV).
It amazes me that people would spend such large portions of their income on a car.
I know what will happen, my wife and I will talk and talk about the luxury SUV and end up leasing a Honda Pilot (which is a great suv, dont get me wrong) for $350 or so because we don't want to spend the extra $100 or $150.
Just call me cheap.
That is just the fixed cost of course. Gas/repairs/maintenance, etc. are variable.
I do like not having a payment. I'll end up doing what I usually do, take out a 3 year loan, and pay it off in 1-1.5 years (probably spring 2006 on this one).
2020 Acura RDX tech SH-AWD, 2023 Maverick hybrid Lariat luxury package.
Turboshadow
2020 Acura RDX tech SH-AWD, 2023 Maverick hybrid Lariat luxury package.
I wouldn't give that advice to someone who is broke or trying to live beyond their means.
However, in your situation you state that a $450/mth payment would only be about 3% of gross monthly income & you have no debt other than a mortgage. If that's true then a payment of $450/month isn't going to make a dent in your wallet.
I also have a few comments about the Acura MDX. I wouldn't spend the extra money on the MDX over a Honda Pilot. The Pilot is almost the same car for $10,000 less or so. Unless of course you just want the Acura brand name or love the looks of it.
Nothing wrong with a Pilot if you choose to get one. We own a 2004 Pilot & it's a nice SUV w/heated leather seats, auto climate control, etc. It has all the bells & whistles.
Not sure if you're aware of this but the Pilot also has the same engine (245hp '04 Pilot/MDX put out a bit more), automatic 5-speed trans, all wheel drive system, and chassis as the MDX. The MDX can seat 7 & the Pilot can seat 8.
The Pilot also has a bit more cargo capacity, 90 cubic feet with both 2nd/3rd row folded down. Compare that cargo capacity to almost any other midsize SUV & the Pilot wins.
Honda bumped up the horsepower in the 2005 Pilot to 255hp. I'm sure Honda bumped up the power for the 2005 MDX also to keep it above the Pilot.
So it's really impossible to answer your question.
But I would say the most anyone should spend on a car is no more then they have to. Cars are not an asset or an investment, they are a liability. Your goal should be get the lowest cost of ownership per mile driven in a vehicle that meets your standards of comfort and style.
in a vehicle that meets your standards of comfort and style.
That's the loophole for most people. Otherwise, you really couldn't justify (from a purely functional standpoint) most expensive cars, higher trim lines, etc. No need for a Lexus ES when a Camry can do the job for 1/2 the price (or a Taurus, etc).
Same arguement can be made for most goods though. TVs, even food/wine.
2020 Acura RDX tech SH-AWD, 2023 Maverick hybrid Lariat luxury package.
I'd love to have alot of things and for me my line is at around the Camry/Malibu. I test drove a Cavalier ( had 2 of them when I was younger ) and it just didn't cut it anymore. I could have bought one but 6 months from now I'd be kicking myself and wanting a new one. $$$ Ouch.
These numbers are from memory, it's been quite a while since I read it, but they are definitely in the ball-park.
According to the book, "Less than 1/3 of the people they studied were driving expensive european cars less than two years old." Parse that sentence carefully.
What it means is that roughly 1/3 of the millionaires he interviewed are driving expensive European cars less than two years old. That is a very significant minority--not the dominant trend, certainly, but enough to say that plenty of the people he interviewed didn't follow the advice he's about to give and are happily millionaires just fine.
Now, read the sentence again.
"Less than 1/3 of the people they studied were driving expensive european cars less than two years old."
What would the percentage be if you expanded the time frame into three years? By limiting it to two years instead of three, he removes anyone who is in the third year of a lease, and who are essentially driving a new car in perpetuity.
What would the percentage be if you expanded the class of cars to include Japanese and American luxury brands?
I'm going to guess that if you broaden the category in just time and brand, you are well over 50%. Sure, the plurality of them may be driving F-150's. But that doesn't mean much.
Again, "Buy *much less* car than you can afford" is a good message, but I think his picture is skewed.
There are plenty of other problems with the book, but they aren't topical for here.
You mention the statistics you cite are from memory - if they are indeed correct, I agree with your interpretation completely. Please feel free to shoot an email if you care to share your thought about the book.
The point I was trying to make - which is perhaps more important to non-millionaires - is that the cost of a car as a proportion of one's next worth is a better criterion that the proportion of income. A kind of mental check - as in, "I perhaps should not be buying a car that is 10% or more of my net worth even if the bank is happy to approve the loan."
BTW, I liked the Millionaire Next Door. As I recall, the percentage of millionaires driving luxury cars was legitimately pretty small. I seem to recall numbers much lower than those cited.
-Jason
Uh oh. I recently started working as a project engineer, right out of school. No assets beyond what I've saved now that I am working, which is a smaller number than my school loans. I'm not sure I have a positive net worth at all. No car for me!
I'm not being serious about that, but I disagree that percentage of net worth is a better criterion.
It is useful to think in these terms, though. Comparing the commitment you make on a car with your income as well as your net worth is a really good idea. It gives you a sense of priorities and possibilities.
Of course, for most people with a normal workday, a car is put-near a requirement. So decent wheels become an investment, and even if your net worth is "nothing" as you start your career, if the income is there, a $15 new Corolla is not extravagant.
It'll get you around safely and comfortably, and lets you concentrate on work. At the same time, a two-year-old A4 for $25 would be a really bad idea...
-Mathias
"put-near"?!
They will never let you back into the Fatherland, now...
However, come on down to KY.. and you'll fit right in...
I thought I was back at Thanksgiving dinner out in the country, for a minute.... :surprise:
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My method of calculating cost of ownership is Depreciation Cost most importantly followed by maintenance cost, and insurance. I have never taken out a loan to buy a car as to me it is a double whammy of interest expense and depreciation. For a younger person thinking about the future may I suggest the principal of saving 10% of net income as a nest egg for the future. If you have this surplus and are meeting all your essential obligations you should spend whatever amount you need to feel satisfied with your car. If your budget is in deficit you should spend as little as you can until you are at least in balance. I currently own a 2004 Cadillac Deville which I bought in great shape, 11 months old with 15,000 miles on it. I paid a little over half what it would have cost new.
I like the idea of letting the first owner take a large part of the depreciation. I enjoy driving a nice car as long as it doesn't put to much of a strain on my wallet.
I generally finance depreciation out of capital gains in the stock market so I am less likely to buy another car if I am having a bad year with investments. Maintenance and insurance come out of my operating budget and is a very small percentage of my scheduled income.
Agreed, but if you have a job and don't have money, and you figure you need a car to get around... there aren't too many choices.
When I was in that situation, I chose the $1,000 beater route. Had fun, learned a lot, and spent not much less money over the years than if I had just bought a '93 Corolla new and kept it until yesterday... not too unreasonable, since I owned a '93 Corolla until 2.5 years ago, and AFAIK it still runs for a friend of mine.
I sure would have changed fewer water pumps and had a lot more time for other things... I'm glad for the experiene, but I'm nost sure that I saved a lot of money, if any.
-Mathias
I disagree with that statement. Two years ago I got a ~$27500 loan at 3.6% for 48 months. It was not a special rate; my FICO is excellent so I qualify for top rate. At the time money markets were paying 2%. So my total payments after 48 months will be $29760, however, $27,5 invested over 48 months at 2% is equal $29290, therefore I am breaking even. However, I have a piece of mind that if I temporarily loose my job or get sick; I have $27,5K to pay my bills with. Now money markets are paying 3.5%, so I am even better of by locking into low interest rate. Yes, if the rates are dropping, and the difference between what you are paying and what you are earning is greater than 50% you’re better of paying cash or paying off your loan if you are not willing to venture into higher risk investments like bonds and stocks.
idea of the loan on an inexpensive car makes good sense.
Low interest on small loan and low depreciation on an already depreciated car.
So there will of course be individual circumstanes such as yours that would favor a loan.
Why not? It depends on what your priorities and values are. There are a whole lot of other things in life than a STATUS sled.
There's also the debate... would I rather live a fancy-shmancy life now, or live it when I'm old or dead?
(Not that I'm going to go buy a 3-series right now.)
Or whether you retire at 55 or are working the drive-thru at age 70 ...
Plus, even with driving economy cars that are paid for, you can still buy a used toy (like a first gen Miata, used Mustang, etc...) for well under $10,000 to get some driving kicks out of.
Admitedly, it is sometimes hard to resist temptation when there are so many cars out there at the upper end of your budget to buy. When I get this way, my wife is quick to remind me of the "big picture".
For a lot of people, the difference between a car that costs $150 a month and one that costs $500 a month is largely irrelevant.
By the way, I plan to live a reasonably fancy-schmancy life now and still semi-retire at 55. It can be done.
When I see how much my friends spend on hunting gear (requires a camper or cabin, about 50 different guns including a few pistols and a four-wheeler) or fishing supplies (requires a boat, a nice 4WD full-size truck to pull it, about 50 different rods and reels, usually even a lake house), I feel pretty good about buying and selling my cars far more often than necessary.
This is the reasoning that I always try to use..
But, then she brings up the NFL tickets, etc, etc, etc..
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But aren't you glad you held onto the tickets (g) ...
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Your loan cost you 3.6%. The interest gained from a 2% money market account is taxable, so it really gives you about 1.4%.
Therefore, borrowing the money cost you 3.6% - 1.4% = 2.2%
The interest gained from a 2% money market account is taxable, so it really gives you about 1.4%.
Ok, I am busted; I would have been a few hundred off if I continued to earn only 2% in my money market account. However, money markets are paying 3.5% now, so I am would have been better off financing.
Don’t get me wrong, I am not against paying cash. I paid cash before, and paid off the loan in one lump sum before, but the interest rate spread between what I am paying and what I am earning has to be significant to justify that.
Besides, money market is a bad example for a four year investment. At that time my broker hooked me up with a four year muni bond yielding 3% (no tax consequences there). He also offered me a foreign bank CD paying 5.25%, at the time when American banks where paying 2%. There are many safe investments out there that are paying a decent return; unfortunately you need a good full service broker to find them.
Like I said before, if the spread between what I am paying and earning is less than 50%, and interest rates are rising, I prefer to finance and lock into lower rate.