10% Rule

[Cgo]

Reading through numerous financial articles after meeting with a new financial advisor, curious how many of you actually follow the 10% rule for vehicles? The rule states that you should never buy a car that is more than 10% your annual gross income.

So, if you want a $50k car, your annual income should be $500k. Same applies for multiple vehicles. The total cost of the vehicles shouldn't exceed 10% of your total household income.

Another example: If you make $200k per year and you need two vehicles, you can afford two $10k vehicles.

The 10% rule suggests buying used if you fall into that scenario.

LOL! I highly doubt most people follow that. Plenty of people I know driving $60k trucks that make nowhere near $600k. Plus, the rule doesnt consider other debt to income factors such as mortgage, how many kids, etc. My house is modest compared to what I could afford and we only have one kid who's college is paid for. Dual income plus zero college loans. Financial advisor says all good, but still stick to the 10% rule. Um, no. Sound advice and probably the right thing to do, but I like nice vehicles. I'm a car nut. Looking for a new financial advisor...

 

[joschneider]

I think cars in general are a depreciating asset, and more of an emotional purchase vs a financially sound one. That 10% rule is probably right if you wanted it to be 100% financially sound. And a financial advisor would also probably tell you to buy used. But whats the fun in that? Money isnt the end all be all. My time/convenience and sense of fun & satisfaction are all part of the equation when purchasing a car. Life is too short, spend your money and enjoy it as you best see fit

 

[Speeder]

Ha! I'm retired on SSI and recieve about 30K per year in benefits. Don't think you'll catch me in a $3000 car, I'm spending my daughter's inheritance.

 

[GarnetTy1473]

Is it maybe referring to spending 10% on car payments for the year? That is more realistic as to what people actually do.

 

[PFWiz]

Reading through numerous financial articles after meeting with a new financial advisor, curious how many of you actually follow the 10% rule for vehicles? The rule states that you should never buy a car that is more than 10% your annual gross income.

So, if you want a $50k car, your annual income should be $500k. Same applies for multiple vehicles. The total cost of the vehicles shouldn't exceed 10% of your total household income.

Another example: If you make $200k per year and you need two vehicles, you can afford two $10k vehicles.

The 10% rule suggests buying used if you fall into that scenario.

LOL! I highly doubt most people follow that. Plenty of people I know driving $60k trucks that make nowhere near $600k. Plus, the rule doesnt consider other debt to income factors such as mortgage, how many kids, etc. My house is modest compared to what I could afford and we only have one kid who's college is paid for. Dual income plus zero college loans. Financial advisor says all good, but still stick to the 10% rule. Um, no. Sound advice and probably the right thing to do, but I like nice vehicles. I'm a car nut. Looking for a new financial advisor...

This is what you call a GCE. A Gross Conceptual Error.
You totally misunderstood their intent. Pretty sure they did not mean that if you earn $100K per year that your cars should not cost more than $10K. I am sure they mean you should not be spending more than $10K / year on your vehicles. It is not your finacial advisor who is confused...
I have a 2020 G80 Sport, call it $60K and a 2019 Elantra, call it $13K and a 2018 Harley CVO Limited call it K35K. Believe me I make nowhere near 1 mil a year, but I have no problem paying my debts and saving a goodly bit on top of that.

 

[EdP]

Reading through numerous financial articles after meeting with a new financial advisor, curious how many of you actually follow the 10% rule for vehicles? The rule states that you should never buy a car that is more than 10% your annual gross income.

So, if you want a $50k car, your annual income should be $500k. Same applies for multiple vehicles. The total cost of the vehicles shouldn't exceed 10% of your total household income.

Another example: If you make $200k per year and you need two vehicles, you can afford two $10k vehicles.

The 10% rule suggests buying used if you fall into that scenario.

Reading through numerous financial articles after meeting with a new financial advisor, curious how many of you actually follow the 10% rule for vehicles? The rule states that you should never buy a car that is more than 10% your annual gross income.

So, if you want a $50k car, your annual income should be $500k. Same applies for multiple vehicles. The total cost of the vehicles shouldn't exceed 10% of your total household income.

Another example: If you make $200k per year and you need two vehicles, you can afford two $10k vehicles.

The 10% rule suggests buying used if you fall into that scenario.

LOL! I highly doubt most people follow that. Plenty of people I know driving $60k trucks that make nowhere near $600k. Plus, the rule doesnt consider other debt to income factors such as mortgage, how many kids, etc. My house is modest compared to what I could afford and we only have one kid who's college is paid for. Dual income plus zero college loans. Financial advisor says all good, but still stick to the 10% rule. Um, no. Sound advice and probably the right thing to do, but I like nice vehicles. I'm a car nut. Looking for a new financial advisor...

No, you should spend 10%of you income so if you make $50k a year you can afford to spend $5k a year or payments of $416 a month. That would be a $25,000 car with 5 year loan.

Now that is not a bad rule of thumb but it also depends on the rest of your lifestyle. Is your mortgage paid off? Have kids in college? Maybe you need a better advisor.

 

[mikemu30]

Reading through numerous financial articles after meeting with a new financial advisor, curious how many of you actually follow the 10% rule for vehicles? The rule states that you should never buy a car that is more than 10% your annual gross income.

So, if you want a $50k car, your annual income should be $500k. Same applies for multiple vehicles. The total cost of the vehicles shouldn't exceed 10% of your total household income.

Another example: If you make $200k per year and you need two vehicles, you can afford two $10k vehicles.

The 10% rule suggests buying used if you fall into that scenario.

LOL! I highly doubt most people follow that. Plenty of people I know driving $60k trucks that make nowhere near $600k. Plus, the rule doesnt consider other debt to income factors such as mortgage, how many kids, etc. My house is modest compared to what I could afford and we only have one kid who's college is paid for. Dual income plus zero college loans. Financial advisor says all good, but still stick to the 10% rule. Um, no. Sound advice and probably the right thing to do, but I like nice vehicles. I'm a car nut. Looking for a new financial advisor...

Much more important what your net worth is rather than income for this assessment. Sounds like a Dave Ramsey cult rule.

 

[canucklehead604]

this guy has some reasonable thoughts for varying approaches for some of the younger folks:

How much should you spend on a car? | Money Under 30

Getting your first "adult" car in your 20s can be exciting, which is why it's so easy to get carried away. However, the purchase price shouldn't exceed 35% of your monthly income.

www.moneyunder30.com

the "10% Rule" is far from a universal approach. lots of variables, lifestyle situations, and preferences to consider. as with most financial planning exercises it is best to budget to your individual circumstances and risk thresholds, etc

 

[petraman]

I guess I follow the 60% rule

Although somehow I manage to save enough money to pay cash for everything else in my life and manage to have a healthy investment/savings portfolio. Huh, I must be breaking the Matrix.

I will say, however, that if cars weren't as big of a part of my life, I could get behind the 10% rule. There's no real logical reason for anyone to own a 365hp sports sedan if you don't get enjoyment out of it.

 

[EdP]

I guess I follow the 60% rule

Although somehow I manage to save enough money to pay cash for everything else in my life and manage to have a healthy investment/savings portfolio. Huh, I must be breaking the Matrix.

I will say, however, that if cars weren't as big of a part of my life, I could get behind the 10% rule. There's no real logical reason for anyone to own a 365hp sports sedan if you don't get enjoyment out of it.

My rule is simply, can you afford it and still take care of other obligations?

We all have priorities and if a car is more important that a fancy vacation, fine, your choice. If a car is more important than you kids eating dinner tonight, well, not so good. (at least feed the kids every other day)

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[petraman]

I mean, the payment is less than 10% of my gross income so it's pretty damn easy to budget around, but I'm sure that debt is that authors mortal foe.

 

[surprisinguy]

I try to only buy cars a year old already.... helps my percentage immensely.

 

[CVODON]

I wonder what company the advisor works for? I worked for (And retired from) a company that had financial Advisors. I used them prior to retirement, for 20 years prior, and never heard this figure. Now retired and enjoy it immensely and don't have to worry about money which partially I can attribute to the planning and help they provided but I never drove cheap cars. Love to know who this guy works for, and what he drives.

 

[Cgo]

This is what you call a GCE. A Gross Conceptual Error.
You totally misunderstood their intent. Pretty sure they did not mean that if you earn $100K per year that your cars should not cost more than $10K. I am sure they mean you should not be spending more than $10K / year on your vehicles. It is not your finacial advisor who is confused...
I have a 2020 G80 Sport, call it $60K and a 2019 Elantra, call it $13K and a 2018 Harley CVO Limited call it K35K. Believe me I make nowhere near 1 mil a year, but I have no problem paying my debts and saving a goodly bit on top of that.

Nope, this is just one example article out there. These guys mean exactly what I said lol.

https://www.google.com/amp/s/www.cnbc.com/amp/2019/11/04/follow-this-simple-rule-for-car-buying-if-you-want-to-get-rich-says-millionaire-money-expert.html

Here is another article. This one even says that if you must have that $36k car, drive for a $360k annual income... lol

The 1/10th Rule For Car Buying Everyone Must Follow

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. It is called the 1/10th Rule For Car Buying. In 2009, I watched in horror as a...

www.financialsamurai.com

I always wondered why the top brass where I work have crap cars... lol Maybe they follow this rule.

It's actually sound advice if your number one goal is to invest a ton and retire early. For car enthusiasts, it's a different story.

 

[canucklehead604]

^ one thing i am not clear on: is that author saying to not spend more than 10% of your annual income on a vehicle per annum. as in, payments (etc) should not exceed more than 10% of your net annual income (similar to how people budget housing costs not being more than, say, 30% of your annual income). or, does he mean to not spend more than 10% of a single year's annual income on a car outright - say, if you paid cash as a lump sum one-time purchase payment?

maybe i missed it, which is highly likely, but that's a big difference. i can't quite tell what the metric is.

scenario 1: a guy takes home $100k and budgets <$10k in annual car payments (<$833/month).

scenario 2: $100k guy goes out and pays cash for a car, but limits his spend to <$10k.

my guess is scenario 2, judging by the overall flavour of the articles. also, up to $833/month does not seem prudent for $100k guy - that's a big monthly nut to carry which doesn't even account for insurance, fuel, etc. and it would be a reasonably extravagant vehicle at that payment which doesn't really fit with the theme.

but a <$10k car is a bit of a crapshoot for $100k guy. that car will be long out of warranty and will have aging parts requiring increased maintenance costs - and it will also have diminished reliability due to its age and stage. all this has to be factored in.

i'm all for buying lightly used - every previous vehicle of mine has been purchased 1.5-2 years old. but even if $100k guy was looking to buy a reliable and modest Honda Accord he'd be looking at best at a 2010/2011 model year in my area (western Canada). i just searched. so that's at least 10 years old with well over 150k kms.

going with the "20% compromise" of the article i posted allows $100k guy to get into a 2017/2018 Accord with less than 70k kms. that's a hell of a lot more car with a lot more life in it. it would also have far greater safety tech and features. even if $100k guy wasn't into cars, this is a better buy and smarter money IMO.

 

[sethsquire]

If we were all financially rational actors, we'd all be driving slightly used corollas, camrys and Rav4s.

 

[EdP]

Nope, this is just one example article out there. These guys mean exactly what I said lol.

https://www.google.com/amp/s/www.cnbc.com/amp/2019/11/04/follow-this-simple-rule-for-car-buying-if-you-want-to-get-rich-says-millionaire-money-expert.html

Here is another article. This one even says that if you must have that $36k car, drive for a $360k annual income... lol

The 1/10th Rule For Car Buying Everyone Must Follow

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. It is called the 1/10th Rule For Car Buying. In 2009, I watched in horror as a...

www.financialsamurai.com

I always wondered why the top brass where I work have crap cars... lol Maybe they follow this rule.

It's actually sound advice if your number one goal is to invest a ton and retire early. For car enthusiasts, it's a different story.

Not uncommon. I've know a few people that owned multi-million dollar businesses and drove Chevy Bel Air, Ford Fairlane, etc. For them it was just transportation to get to the office.

I wonder what would happen to the economy if everyone suddenly follow the 10% rule. The auto industry would be in big trouble and dealerships would be abandoned.

 

[CoconutRob]

One problem to this rule is since late 70s salaries maybe 5x roughly and top of the line chevy for example 8 to 10x.