Guidance on Max Car Price

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ilikeshreddingmail
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Guidance on Max Car Price

Post by ilikeshreddingmail »

I’m looking to buy a car in the next year or so (I don’t have a car now), and have been considering the Tesla Model Y (~$50k). While I know automobiles are typically poor financial investment choices, I wanted to get a sense of the guiding principles people use to determine the maximum amount they should spend on a car.

I’ve heard things like 1/3 your salary, 2% net worth, and < 41% debt-to-income ratio, etc. What guide do you use to figure out how much you should maximally spend on a car?
Last edited by ilikeshreddingmail on Sun Jun 20, 2021 2:57 am, edited 1 time in total.
Goal33
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Re: Guidance on Max Car Price

Post by Goal33 »

I think it partially depends on use. My budget was 30k OTD when we made 280k. I was commuting 80 miles a day. If I had to get a car now, I’d try to find something for 10-15k, even though we make closer to 360k. Commute is 0 miles a day. Total driving is maybe 200 a month.
khram
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Re: Guidance on Max Car Price

Post by khram »

To me, someone making 6-figures can buy something nice at $20-30k range (or at least that's what I've done) and not have it impact their finances too much. 7-figures, or even high 6-figures, you can go higher. But I wouldn't ever spend on an $80k Audi or something. For lower-income people, I'd go for something used and reliable. Even if you have $100k to burn on an awesome car, insurance/maintenance/gas/registration will add up. Maintenance more on the back end, the other things more on the front-end. I am also not a big car person, so I don't have the desire to spend too much anyway. For example, according to the internet, a Lamborghini can cost around $8k/year to insure. Of course this will depend on your personal factors, but I wouldn't want to spend $666/month on car insurance at my level of income. I would also get paranoid about it getting keyed/broken into/stolen if I drive something too nice. I already worry about that a little with my new car... which I bought for under $30k.

I don't view a car as an investment, though it could be a short-term one in the current environment I suppose.

I personally recommend having a savings bucket for a new(er) car, and paying cash, then thinking about how much you'll be spending monthly on all the associated costs once you actually own the car.

It would be normal for a car to be a large portion of your assets when you're 22, less normal when you're 65. So I wouldn't focus on those metrics.
Luckywon
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Re: Guidance on Max Car Price

Post by Luckywon »

khram wrote: Sun Jun 20, 2021 2:14 am To me, someone making 6-figures can buy something nice at $20-30k range (or at least that's what I've done) and not have it impact their finances too much. 7-figures, or even high 6-figures, you can go higher.
One should be making high six figures to spend more than$30k on a car. Only on Bogleheads :sharebeer
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RickBoglehead
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Re: Guidance on Max Car Price

Post by RickBoglehead »

Luckywon wrote: Sun Jun 20, 2021 4:29 am
khram wrote: Sun Jun 20, 2021 2:14 am To me, someone making 6-figures can buy something nice at $20-30k range (or at least that's what I've done) and not have it impact their finances too much. 7-figures, or even high 6-figures, you can go higher.
One should be making high six figures to spend more than$30k on a car. Only on Bogleheads :sharebeer
This ^^^

The Boglehead guidance on car purchases is some of the worst of any subject matter.

"Never buy a new car"
"Keep a car for 200 years"

If some on this forum had their way, people would be driving a Flintstone car or a used Cozy Coupe... My first vehicle I bought was a 1981 Chevrolet Malibu. Took out a loan. :twisted: Every car was brand new. Most kept for 8 years or so. Malibu was a lemon, dumped in 4 years. Just ordered a Mustang Mach-E. May buy a Ford Lightning F-150 next year. Anticipate bursting into flames soon from Boglehead mindwaves...

To OP - total monthly debt payments, including car loans, should not exceed 43% . That includes home insurance and taxes.

No measure for car value, just car payment. 10% of monthly income is a common guide.
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Nate7out
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Re: Guidance on Max Car Price

Post by Nate7out »

The money guy has a rule of thumb that is reasonable. 20-3-8. Put 20% down, 3 year term, household car payments < 8% of gross.

Corollary is that monthly $ invested > monthly $ for car payments.

I typically go for the used car 3-5 years old, 40-75k miles. Right now it seems like the used car market is crazy because there is a shortage of new cars. The spread between new/used has changed. I might consider a new car these days.
regularguy455
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Re: Guidance on Max Car Price

Post by regularguy455 »

I view this topic in the context of impact to savings. Presumably the cost of a car + interest is money that needs to come from your budget. You either reduce your lifestyle expenses or reduce savings. I look at the expected impact on my financial targets. Not exactly a science but this approach helped guide me to an appropriately priced vehicle.
Fogbank
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Re: Guidance on Max Car Price

Post by Fogbank »

regularguy455 wrote: Sun Jun 20, 2021 6:29 am I view this topic in the context of impact to savings. Presumably the cost of a car + interest is money that needs to come from your budget. You either reduce your lifestyle expenses or reduce savings. I look at the expected impact on my financial targets. Not exactly a science but this approach helped guide me to an appropriately priced vehicle.
This is how I have looked at it too... from the standpoint of how the purchase would affect our taxable savings goals. We want to retire early in something like 10-12 years, which will be doable but it will require a sizeable taxable account to bridge the years to when DW's pension can begin and then to 59 1/2 for me.

If a down payment/monthly payment will knock us too far off the calculated savings rate that is theoretically needed, then we "Can't afford it."

However, I will say that I discovered that I have a mental block against paying over $300/month for a car payment for some reason, even though we calculated that we could "afford" more. So that's been the ceiling so far for us. Maybe that will change.
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GMCZ71
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Re: Guidance on Max Car Price

Post by GMCZ71 »

Our rule / Clark Howard's rule is 36-40 month term, if you can't afford to pay it off in 40 or less payments you can't afford the car. Keep the car for 10 plus yrs. These days we can pay cash but still look at the monthly payment and decide if its too much car.
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khram
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Re: Guidance on Max Car Price

Post by khram »

Luckywon wrote: Sun Jun 20, 2021 4:29 am
khram wrote: Sun Jun 20, 2021 2:14 am To me, someone making 6-figures can buy something nice at $20-30k range (or at least that's what I've done) and not have it impact their finances too much. 7-figures, or even high 6-figures, you can go higher.
One should be making high six figures to spend more than$30k on a car. Only on Bogleheads :sharebeer
I make comfortable 6 figures but wouldn't want to spend $40k on a car. I know a lot of people do... but I don't want a car to make a noticeable dent in my finances. If you're into cars and want to spend more, I understand. Maintenance and insurance may also be higher for a long time if you get the more expensive car.

I am not for keeping a car forever. Don't replace it every 2 years, but if you're driving a 10 year old car, there are probably safety features you're missing out on. Money isn't everything.

Or to illustrate with a story. When I moved to my city, a woman in an SUV that must have costed at least $40k pulled up to me and begged me to buy a meal for her and her 4 kids sitting in the back. I wanted to ask why she didn't just sell the SUV, but didn't. She may have been down on her luck, or she may have just made a series of poor decisions. I didn't understand at the time, but she was probably underwater on the car. People buy way too much car (and have way too many kids). These are things I would never do until I felt very financially ready. I don't want that ever to be me. Of course I have a cheaper car, and 0 kids, but you never know if your career takes a turn and you can't get back into a high-pay job.

Other than that, there was a bit of a wake-up call during the pandemic to not overspend on a car. I had so many colleagues who were upset that they were paying so much money every month for a nice car that just sat in their driveway. I owned my car outright but was still paying insurance and so forth. I know plenty of people who sold their 2nd car due to the frustration.
Luckywon
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Re: Guidance on Max Car Price

Post by Luckywon »

khram wrote: Sun Jun 20, 2021 12:37 pm
Luckywon wrote: Sun Jun 20, 2021 4:29 am
khram wrote: Sun Jun 20, 2021 2:14 am To me, someone making 6-figures can buy something nice at $20-30k range (or at least that's what I've done) and not have it impact their finances too much. 7-figures, or even high 6-figures, you can go higher.
One should be making high six figures to spend more than$30k on a car. Only on Bogleheads :sharebeer
I make comfortable 6 figures but wouldn't want to spend $40k on a car. I know a lot of people do... but I don't want a car to make a noticeable dent in my finances. If you're into cars and want to spend more, I understand. Maintenance and insurance may also be higher for a long time if you get the more expensive car.

I am not for keeping a car forever. Don't replace it every 2 years, but if you're driving a 10 year old car, there are probably safety features you're missing out on. Money isn't everything.

Or to illustrate with a story. When I moved to my city, a woman in an SUV that must have costed at least $40k pulled up to me and begged me to buy a meal for her and her 4 kids sitting in the back. I wanted to ask why she didn't just sell the SUV, but didn't. She may have been down on her luck, or she may have just made a series of poor decisions. I didn't understand at the time, but she was probably underwater on the car. People buy way too much car (and have way too many kids). These are things I would never do until I felt very financially ready. I don't want that ever to be me. Of course I have a cheaper car, and 0 kids, but you never know if your career takes a turn and you can't get back into a high-pay job.

Other than that, there was a bit of a wake-up call during the pandemic to not overspend on a car. I had so many colleagues who were upset that they were paying so much money every month for a nice car that just sat in their driveway. I owned my car outright but was still paying insurance and so forth. I know plenty of people who sold their 2nd car due to the frustration.
Nothing in this last comment even remotely supports your startling assertion that a person should be making at least high six figures a year before spending more than $30,000 on a vehicle.
Tingting1013
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Re: Guidance on Max Car Price

Post by Tingting1013 »

khram wrote: Sun Jun 20, 2021 12:37 pm
Luckywon wrote: Sun Jun 20, 2021 4:29 am
khram wrote: Sun Jun 20, 2021 2:14 am To me, someone making 6-figures can buy something nice at $20-30k range (or at least that's what I've done) and not have it impact their finances too much. 7-figures, or even high 6-figures, you can go higher.
One should be making high six figures to spend more than$30k on a car. Only on Bogleheads :sharebeer
I make comfortable 6 figures but wouldn't want to spend $40k on a car. I know a lot of people do... but I don't want a car to make a noticeable dent in my finances. If you're into cars and want to spend more, I understand. Maintenance and insurance may also be higher for a long time if you get the more expensive car.

I am not for keeping a car forever. Don't replace it every 2 years, but if you're driving a 10 year old car, there are probably safety features you're missing out on. Money isn't everything.

Or to illustrate with a story. When I moved to my city, a woman in an SUV that must have costed at least $40k pulled up to me and begged me to buy a meal for her and her 4 kids sitting in the back. I wanted to ask why she didn't just sell the SUV, but didn't. She may have been down on her luck, or she may have just made a series of poor decisions. I didn't understand at the time, but she was probably underwater on the car. People buy way too much car (and have way too many kids). These are things I would never do until I felt very financially ready. I don't want that ever to be me. Of course I have a cheaper car, and 0 kids, but you never know if your career takes a turn and you can't get back into a high-pay job.

Other than that, there was a bit of a wake-up call during the pandemic to not overspend on a car. I had so many colleagues who were upset that they were paying so much money every month for a nice car that just sat in their driveway. I owned my car outright but was still paying insurance and so forth. I know plenty of people who sold their 2nd car due to the frustration.
A $40k car costs about $4k per year. If that makes a “noticeable dent” in your finances then your “comfortable 6 figures” isn’t comfortable enough.

Also those friends of yours who sold their second cars might have gotten more than they paid for them.
DiMAn0684
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Re: Guidance on Max Car Price

Post by DiMAn0684 »

RickBoglehead wrote: Sun Jun 20, 2021 5:58 am The Boglehead guidance on car purchases is some of the worst of any subject matter.

"Never buy a new car"
"Keep a car for 200 years"
Followed it pretty well. Purchased 6 yr old Honda Accord, drove it for 12 yrs until it died. Would probably not do it again :)
bgf
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Re: Guidance on Max Car Price

Post by bgf »

I just traded in my 2012 Camry for a 2021 Lexus ES 300h. Delivery on wednesday. Can't wait! The payment won't affect our savings goal at all, and the depreciation will be just noise in relation to our net worth growth. So I did it.

It's weird though, spending money. I had a visceral reaction to doing it at first, then when it was done I was happy I bought it.

So if you can meet your savings goals and the decrease in value won't materially affect your net worth, then why not?
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"
tdmp
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Re: Guidance on Max Car Price

Post by tdmp »

The guiding principle should be "what makes you happy" and the "Law of diminishing Marginal return" for happiness. My personal example: I drive a prius prime: fairly inexpensive. I almost traded in for model 3; but I didn't. I felt that the Model 3 would make me happy; but not that much happier. I liked the model 3 autopilot and the acceleration. However, it would have cost a lot more. Then I thought: what would make me happier? driving the prius prime for several years AND NOT work for at least 1 or 2 years vs. driving a Model 3 and HAVE to work 1 or 2 years. The Prius Prime + NOT working 1 or 2 years won out. To each his or her own. I felt there was diminishing return in driving the Model 3 vs. Prius Prime, especially after I put Comma AI Open Pilot on the Prius Prime (basically I have the non-Tesla version of Autopilot). So to me every personal situation is different: it is not a one-size-fit-all type of deal. OP wants the Model Y: which is perfectly fine...but personally, I would get the ID4 AWD for about $12K cheaper (after tax credits). I would sacrifice charging time and 0-60 time by 1.6 sec (ID4 is 5.7 sec and Model Y is 4.1 sec). So again , my opinion might be different from everyone else. $12K at 7% return over 15 years will be about $33K.
finite_difference
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Re: Guidance on Max Car Price

Post by finite_difference »

Here’s my rule.

Spend $30k OTD. Drive it for 12 years. That’s $2.5k/yr. My preferred automakers are Toyota, Subaru, Honda and Hyundai.

The $2.5k/yr doesn’t include maintenance, car insurance or gas. A highly reliable car reduces maintenance and depreciation. A BEV reduces gas.
Last edited by finite_difference on Mon Jun 21, 2021 6:35 am, edited 1 time in total.
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bmr12
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Re: Guidance on Max Car Price

Post by bmr12 »

finite_difference wrote: Sun Jun 20, 2021 8:40 pm Here’s my rule.

Spend $30k OTD. Drive it for 12 years. That’s $2.5k/yr. My preferred automakers are Toyota, Subaru, Honda and Hyundai.

The $2.5k/yr doesn’t include depreciation, maintenance, car insurance or gas. A highly reliable car reduces maintenance and depreciation. A BEV reduces gas.
If it doesn’t include any of these things, what does the $2.5k/yr go to?
khram
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Re: Guidance on Max Car Price

Post by khram »

Tingting1013 wrote: Sun Jun 20, 2021 6:35 pm A $40k car costs about $4k per year. If that makes a “noticeable dent” in your finances then your “comfortable 6 figures” isn’t comfortable enough.

Also those friends of yours who sold their second cars might have gotten more than they paid for them.
???

Are you saying you buy it in cash, then the insurance maintenance etc. costs $4k? I am comfortable pulling $30k out of savings to buy a car if I suddenly need a new one, but would prefer not to pull $40k or $60k. That sets back other savings goals more than I would like. And I have a fear, rational or irrational, of lifestyle creep. There is nothing wrong with spending more than I do on cars if you value it more over hobbies or retiring earlier, etc.

I doubt they got more than they paid for them. This was at the beginning of the pandemic, before car prices skyrocketed.
esteen
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Re: Guidance on Max Car Price

Post by esteen »

The last two cars we bought were no more than 50% of our yearly retirement contributions. We paid cash. I didn't plan it that way but looking back that's how it lined up... maybe subconsciously that made me okay with spending the money (cars before those last two were in the "Bogleheads" category of low- to mid-4-figure used beaters).
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Re: Guidance on Max Car Price

Post by eye.surgeon »

Save aggressively for retirement and cash flow a comfortable but not lavish lifestyle. Whatever is left over spend without regrets on whatever you want, including a nice car.
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Re: Guidance on Max Car Price

Post by jharkin »

RickBoglehead wrote: Sun Jun 20, 2021 5:58 am The Boglehead guidance on car purchases is some of the worst of any subject matter.

"Never buy a new car"
"Keep a car for 200 years"
And don’t forget “ if you car is more than 3 years old it’s safety features are dated and you will DIE!!!”

….Makes you wonder how any of us survived the 70s and 80s alive. ;)


Honestly I think all the % of salary, etc rules are really most appropriate to non-bogleheads who are living paycheck to paycheck, and for early career professionals that are at the low end of earnings and dealing with lots of education debt.

For the established super savers of the board: does it really matter if the car is 20% or 40% or 50% of salary if you just pay cash? Does it matter how much % of nw it is if you have 7 figures and are so frugal it’s all going to charity when you die anyway?

Bottom line: don’t overthink it. Buy what fits your needs so long as the expense doesn’t cause you to miss some more important finance goal.
Old Guy
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Re: Guidance on Max Car Price

Post by Old Guy »

I’m retired and in my late 70s. Wife is also retired. We gross about $250,000 a year,

I like nice things.

I want a Mustang Mach E for around $50,000 before tax credit and x plan to replace my 2011 Ford Explorer, which is aging. I’ll finance through Ford for a $1,000 off and then pay it off after one or two payments. I am holding off because many dealers are charging above the list price and I will not pay that. I’m going to have to pay at least a thousand to put a 240 outlet and charger in the garage and maybe more to upgrade the electrical system in the house.

Looking forward to these expenditures maybe next year when car price become more realistic.
finite_difference
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Re: Guidance on Max Car Price

Post by finite_difference »

bmr12 wrote: Sun Jun 20, 2021 10:49 pm
finite_difference wrote: Sun Jun 20, 2021 8:40 pm Here’s my rule.

Spend $30k OTD. Drive it for 12 years. That’s $2.5k/yr. My preferred automakers are Toyota, Subaru, Honda and Hyundai.

The $2.5k/yr doesn’t include depreciation, maintenance, car insurance or gas. A highly reliable car reduces maintenance and depreciation. A BEV reduces gas.
If it doesn’t include any of these things, what does the $2.5k/yr go to?
Sorry, deleted depreciation.
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Admiral
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Re: Guidance on Max Car Price

Post by Admiral »

There is no rule of thumb or anything else that will be remotely helpful to you as general guidance because cars are expensive and most people buy more car than they need/spend more than is necessary: and that's because "need" and "necessary" are subjective.

As long as you can meet your monthly obligations for saving and other spending, spend what you like.

I do agree with (and practice) the advice that if you cannot afford to pay off the car in 36 months, it's likely too expensive.
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Re: Guidance on Max Car Price

Post by Yarlonkol12 »

I’ve always thought of the car purchase in terms of total cost of ownership. If I buy the car for $6000, spend $2000 on repairs and maintance, and sell for $5000 4 years later I’ve spent $3000 over 4 years (simplified example). For example, I like BMWs but I would never purchase a new one due to their steep depreciation curve, especially on options/upgrades. Instead, I purchase used cars near the likly floor of their depreciation to minimize that loss, in exchange for the risk and uncertantity of buying a used vehicle and the occassional unexpected repair. In 24 years of driving this math has been very favoriable, we will see what the future holds
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hand
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Re: Guidance on Max Car Price

Post by hand »

Rules of thumb aren't useful for car buying...

Evaluate your true transportation requirements - this is your need.
Anything beyond your true functional requirements is a want.

Your ability to spend on "wants" is a factor of all other financial obligations and priorities (both known and unknown) over the course of your life.

That Porsche will cost you way less when you're 60 than when you're 22 due to the time value of money - but you need to decide whether the enjoyment at 22 is worth the sacrifice.

Personally, for all the current complaining about high housing prices, I often wonder how many of these people have been driving $50k cars for the last 10 years at a cost of $200k or more to their current net worth and have effectively chosen to spend that money on a fancy car rather than a house. No judgement if cars are your true priority, as I have a soft spot for those passionate about cars, but I suspect many have not made an intentional choice to spend so much of their life's treasure on cars and other transient things.
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Re: Guidance on Max Car Price

Post by MarkBarb »

Admiral wrote: Mon Jun 21, 2021 7:02 am There is no rule of thumb or anything else that will be remotely helpful to you as general guidance because cars are expensive and most people buy more car than they need/spend more than is necessary: and that's because "need" and "necessary" are subjective.

As long as you can meet your monthly obligations for saving and other spending, spend what you like.

I do agree with (and practice) the advice that if you cannot afford to pay off the car in 36 months, it's likely too expensive.
I agree with this. I would add that the way I think about these things is by considering my alternative options for the money. If you can afford a $70K car and still meet all of your financial obligations and savings goals, then you can afford a $70K car. But would you rather have a $50K and $20K extra to spend on other things? Or maybe a $30K car, plus a trip to Italy, new furniture for the family room, maid service for 5 years, or whatever. We all have different priorities, so what may be a great car for someone with your income might be a terrible waste of money for someone else.

And I know that I've oversimplified. A car purchase is complicated because you have to consider the cost of ownership, residual value over time, reliability, safety and all that other stuff. But my fundamental message still stands. No one else can tell you how much you should spend on a car because they don't know how much you value driving a nice/fast/pretty car and how much you value other things you could do with your money.
Jags4186
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Re: Guidance on Max Car Price

Post by Jags4186 »

10% of my salary plus value of my current car. So, if for example, I have a car worth $7,500 and a $150,000 salary, I set my budget at $22,500 which means either a new compact car or relatively late model used car. Keep cars at least 100,000 miles which is 8-10 years for me.
bgf
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Re: Guidance on Max Car Price

Post by bgf »

eye.surgeon wrote: Sun Jun 20, 2021 11:59 pm Save aggressively for retirement and cash flow a comfortable but not lavish lifestyle. Whatever is left over spend without regrets on whatever you want, including a nice car.
Very well said. Framing it this way means that the two most important things are:

1) have a monthly/annual savings goal and hit it.
2) live within your means (made much easier by completing step one).
3) if you are doing the above and still have money, then do what you want. You've already avoided the two largest personal finance pitfalls. Go on vacation, buy the jet ski, buy the car, join peloton. whatever it is.

if you DONT have the money, then either readjust your goals or work to make more money.

This means that car payments as percentage of take home and all these other formulas are mostly rule of thumb nonsense.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"
Tingting1013
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Re: Guidance on Max Car Price

Post by Tingting1013 »

hand wrote: Mon Jun 21, 2021 7:36 am Personally, for all the current complaining about high housing prices, I often wonder how many of these people have been driving $50k cars for the last 10 years at a cost of $200k or more to their current net worth and have effectively chosen to spend that money on a fancy car rather than a house. No judgement if cars are your true priority, as I have a soft spot for those passionate about cars, but I suspect many have not made an intentional choice to spend so much of their life's treasure on cars and other transient things.
How exactly did you do this math?

When I buy a $50k car, that amount doesn’t disappear from my net worth, it just gets transformed from cash in my bank account to four wheels in my driveway. If I sell it three years later I’ll probably get $35k for it. That’s $5k / year in net worth decline. Rinse and repeat for 10 years, that’s only $50k in true cost over 10 years.
Tingting1013
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Re: Guidance on Max Car Price

Post by Tingting1013 »

khram wrote: Sun Jun 20, 2021 11:26 pm
Tingting1013 wrote: Sun Jun 20, 2021 6:35 pm A $40k car costs about $4k per year. If that makes a “noticeable dent” in your finances then your “comfortable 6 figures” isn’t comfortable enough.

Also those friends of yours who sold their second cars might have gotten more than they paid for them.
???

Are you saying you buy it in cash, then the insurance maintenance etc. costs $4k? I am comfortable pulling $30k out of savings to buy a car if I suddenly need a new one, but would prefer not to pull $40k or $60k. That sets back other savings goals more than I would like. And I have a fear, rational or irrational, of lifestyle creep. There is nothing wrong with spending more than I do on cars if you value it more over hobbies or retiring earlier, etc.

I doubt they got more than they paid for them. This was at the beginning of the pandemic, before car prices skyrocketed.
See my comment directly above
Jags4186
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Re: Guidance on Max Car Price

Post by Jags4186 »

hand wrote: Mon Jun 21, 2021 7:36 am Personally, for all the current complaining about high housing prices, I often wonder how many of these people have been driving $50k cars for the last 10 years at a cost of $200k or more to their current net worth and have effectively chosen to spend that money on a fancy car rather than a house. No judgement if cars are your true priority, as I have a soft spot for those passionate about cars, but I suspect many have not made an intentional choice to spend so much of their life's treasure on cars and other transient things.
100% agree. I always find it hilarious when I drive by a rather dumpy house with like $150k of cars parked in the driveway. These people are spending probably every penny they make on lease or loan payments and car insurance.
stoptothink
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Re: Guidance on Max Car Price

Post by stoptothink »

jharkin wrote: Mon Jun 21, 2021 6:04 am
RickBoglehead wrote: Sun Jun 20, 2021 5:58 am The Boglehead guidance on car purchases is some of the worst of any subject matter.

"Never buy a new car"
"Keep a car for 200 years"
And don’t forget “ if you car is more than 3 years old it’s safety features are dated and you will DIE!!!”

….Makes you wonder how any of us survived the 70s and 80s alive. ;)


Honestly I think all the % of salary, etc rules are really most appropriate to non-bogleheads who are living paycheck to paycheck, and for early career professionals that are at the low end of earnings and dealing with lots of education debt.

For the established super savers of the board: does it really matter if the car is 20% or 40% or 50% of salary if you just pay cash? Does it matter how much % of nw it is if you have 7 figures and are so frugal it’s all going to charity when you die anyway?

Bottom line: don’t overthink it. Buy what fits your needs so long as the expense doesn’t cause you to miss some more important finance goal.
That one is without a doubt my favorite. You need an Abrams tank, and one less than 3yrs old, otherwise you're putting your entire family at danger every time you go to the grocery store. I'm a total car guy, but realized quite early that driving a "nice" car every day on public roads made about zero difference in my quality of life so we have gone with the cheapest thing that meets our needs - currently a single compact sedan for a family of 4 that costed us about 3 weeks of income new (5yrs ago).

If you're on this board, chances are whatever car you decide is right for you probably isn't going to significantly impact your financial stability. Even if it did, who cares what a bunch of internet strangers think?
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hand
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Re: Guidance on Max Car Price

Post by hand »

Tingting1013 wrote: Mon Jun 21, 2021 7:59 am
hand wrote: Mon Jun 21, 2021 7:36 am Personally, for all the current complaining about high housing prices, I often wonder how many of these people have been driving $50k cars for the last 10 years at a cost of $200k or more to their current net worth and have effectively chosen to spend that money on a fancy car rather than a house. No judgement if cars are your true priority, as I have a soft spot for those passionate about cars, but I suspect many have not made an intentional choice to spend so much of their life's treasure on cars and other transient things.
How exactly did you do this math?

When I buy a $50k car, that amount doesn’t disappear from my net worth, it just gets transformed from cash in my bank account to four wheels in my driveway. If I sell it three years later I’ll probably get $35k for it. That’s $5k / year in net worth decline. Rinse and repeat for 10 years, that’s only $50k in true cost over 10 years.
Total SP500 return May 2011 - May 2021 (dividends reinvested and adjusted for inflation) was 218%
https://dqydj.com/sp-500-return-calculator/

Roughly speaking, the net worth impact of a $50k car purchased in 2011 is $200k (rounded down) today.

While the car does have some residual value which I've ignored, and does include some required spending for minimal transportation which I haven't excluded, the fundamental point remains - true impact to net worth of discretionary consumption when you're young is often massively underestimated by consumers.

The exact same Porsche costs way more to the 20 year old than the 60 year old in terms of lifetime net worth.
Rules of thumb based on income or net wealth miss badly on this important dynamic.
Tingting1013
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Re: Guidance on Max Car Price

Post by Tingting1013 »

hand wrote: Mon Jun 21, 2021 8:26 am
Tingting1013 wrote: Mon Jun 21, 2021 7:59 am
hand wrote: Mon Jun 21, 2021 7:36 am Personally, for all the current complaining about high housing prices, I often wonder how many of these people have been driving $50k cars for the last 10 years at a cost of $200k or more to their current net worth and have effectively chosen to spend that money on a fancy car rather than a house. No judgement if cars are your true priority, as I have a soft spot for those passionate about cars, but I suspect many have not made an intentional choice to spend so much of their life's treasure on cars and other transient things.
How exactly did you do this math?

When I buy a $50k car, that amount doesn’t disappear from my net worth, it just gets transformed from cash in my bank account to four wheels in my driveway. If I sell it three years later I’ll probably get $35k for it. That’s $5k / year in net worth decline. Rinse and repeat for 10 years, that’s only $50k in true cost over 10 years.
Total SP500 return May 2011 - May 2021 (dividends reinvested and adjusted for inflation) was 218%
https://dqydj.com/sp-500-return-calculator/

Roughly speaking, the net worth impact of a $50k car purchased in 2011 is $200k (rounded down) today.

While the car does have some residual value which I've ignored, and does include some required spending for minimal transportation which I haven't excluded, the fundamental point remains - true impact to net worth of discretionary consumption when you're young is often massively underestimated by consumers.

The exact same Porsche costs way more to the 20 year old than the 60 year old in terms of lifetime net worth.
Rules of thumb based on income or net wealth miss badly on this important dynamic.
Ignoring a car’s residual value is like paying cash for a house and then ignoring the equity. It’s kind of the whole point.

And if you’re going to cherry pick a time period for opportunity cost, why not try August 2000 through August 2010? What would have generated more utility for the consumer during that time period, $50k in a stagnant Vanguard account, or a 5-series in the driveway?
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Re: Guidance on Max Car Price

Post by jerrysmith »

I think this is 100% tied to a person's sensibilities.
I love cars but hate paying for them so I typically drive smaller used imports.
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hand
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Re: Guidance on Max Car Price

Post by hand »

Tingting1013 wrote: Mon Jun 21, 2021 8:28 am
Ignoring a car’s residual value is like paying cash for a house and then ignoring the equity. It’s kind of the whole point.

And if you’re going to cherry pick a time period for opportunity cost, why not try August 2000 through August 2010? What would have generated more utility for the consumer during that time period, $50k in a stagnant Vanguard account, or a 5-series in the driveway?
Disagree that ignoring a car's residual value is inappropriate - after 10 years, value of most luxury cars is not material (KBB private party value for a 10 year old 535i with avg mileage, average options and in very good condition is ~$12k).

Disagree that dates are cherry-picked - if the context is actual net worth impact today, how do you use anything other than the most recent 10 year span? It is worth noting that investment returns vary, and that the last 10 years have been very good, but on average impact to net worth is disconcertingly large.

I will fess up to being sloppy with the 10 year growth number as well as having missed the impact of taxes. Per the below calculator value of $50k invested in the SP500 in May 2011 would be only $162k after tax. Less the $12k residual, net worth impact of that 2011 5 series BMW would have *only* been $150k. Feel free to discount further to offset the base cost of required transport during that time if you like...

https://dqydj.com/sp-500-periodic-reinv ... dividends/

A rational buyer would consider the lifetime net worth impact (or opportunity cost) rather than whether they can afford the payments / annual cost. No hate here for those who rationally choose to consume, I myself drive a luxury car, but I'm very honest with myself about the true cost.
Jags4186
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Re: Guidance on Max Car Price

Post by Jags4186 »

Tingting1013 wrote: Mon Jun 21, 2021 8:28 am Ignoring a car’s residual value is like paying cash for a house and then ignoring the equity. It’s kind of the whole point.

And if you’re going to cherry pick a time period for opportunity cost, why not try August 2000 through August 2010? What would have generated more utility for the consumer during that time period, $50k in a stagnant Vanguard account, or a 5-series in the driveway?
All you have to do is go to Edmunds.com and look at their True Cost To Own calculator. A 2017 5 Series cost roughly $27k more to own over 5 years than a 2017 Honda Civic. If you are a couple and you have two 5 series that’s $54k. And if you buy a new car every 5 years, that’s $108k.

I’m not suggesting the experience of a Honda Civic and a BMW 5-Series is the same, and I’m not suggesting if you make lots of money you can’t afford a nice car, but $108,000 is $900/mo over 10 years. $900/mo can get you a pretty big upgrade in house. The difference between an $1100/mo mortgage (2.75%, 30 yr fixed) and a $2000/mo mortgage (2.75% 30yr fixed) is a $270k loan vs. a $490k loan.
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Re: Guidance on Max Car Price

Post by Mike Scott »

If you start from the bottom up... there is a general price threshold that it takes to get into the range of reliable, new, small compact cars. From there and on up, it becomes more about personal preferences, individual choices and discretionary spending. A 50K car may be either a small or large percentage of your income and you may choose to spend your money on things other than cars.
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Re: Guidance on Max Car Price

Post by Tingting1013 »

Mike Scott wrote: Mon Jun 21, 2021 9:37 am If you start from the bottom up... there is a general price threshold that it takes to get into the range of reliable, new, small compact cars.
Yes, and that cost is generally $1-2k per year.

A $50k car increases that cost to $4-5k per year.

An extra $3k per year in living expense is not going to change anyone’s financial outcome. If it would then they are living on the edge already.
TimeTheMarket
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Re: Guidance on Max Car Price

Post by TimeTheMarket »

There is no good rule of thumb.

I could tell you 1/4 of your take home, but if you're house poor even that may be too much. If on the other hand you're fine renting a small place with a roommate, splurging on a car is doable.

The better advice is: Do not purchase a vehicle that will in any way stress your finances. If you lose your job will its payment or equity start to pick at your soul? Does the money spent on it now make an appreciable difference to you long term?

A $50k Tesla is a ton of money to a family of four making $120k/year with two kids to raise. It's too much.

But a single guy with no dependents making $80k, it's actually more affordable for him than the higher income household.

All this said I've owned two very nice cars and at the end of the day the niceness of them fades fast. I appreciate the car I have now (MSRP in the 50s), but it doesn't make my life better. Don't buy any car that "hurts" to buy it.

Jim makes $100k/year and drives a paid for beater.
Bob made $100k/year also but just got a raise to $115k/year. His take home is now $750/month more. He leases a car for $600/month with the other $150/month covering more expensive tires and insurance.

Although Bob is a bit more exposed, since he cannot easily dump his lease, they are both making similar money amounts and investing the same to retirement, but instead of a 15 year old corolla like Jim, Bob is driving a new BMW.
Username is not serious :)
stoptothink
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Re: Guidance on Max Car Price

Post by stoptothink »

TimeTheMarket wrote: Mon Jun 21, 2021 10:07 amAll this said I've owned two very nice cars and at the end of the day the niceness of them fades fast. I appreciate the car I have now (MSRP in the 50s), but it doesn't make my life better. Don't buy any car that "hurts" to buy it.
I learned early on - at age 20, with my first new car with my first new job out of undergrad - that this is absolutely the case for me. As much as I love anything with a motor, driving a "nice" car every day on public roads didn't increase my QOL at all and within a few weeks I greatly regretted it (I was fortunate, it got stolen within a year and I got an insurance payout). While the difference doesn't really impact our financial stability it's simply opportunity cost; the few thousand dollars a year I save by driving an econobox can now be used in ways that do increase my QOL.
bgf
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Re: Guidance on Max Car Price

Post by bgf »

hand wrote: Mon Jun 21, 2021 8:26 am
Tingting1013 wrote: Mon Jun 21, 2021 7:59 am
hand wrote: Mon Jun 21, 2021 7:36 am Personally, for all the current complaining about high housing prices, I often wonder how many of these people have been driving $50k cars for the last 10 years at a cost of $200k or more to their current net worth and have effectively chosen to spend that money on a fancy car rather than a house. No judgement if cars are your true priority, as I have a soft spot for those passionate about cars, but I suspect many have not made an intentional choice to spend so much of their life's treasure on cars and other transient things.
How exactly did you do this math?

When I buy a $50k car, that amount doesn’t disappear from my net worth, it just gets transformed from cash in my bank account to four wheels in my driveway. If I sell it three years later I’ll probably get $35k for it. That’s $5k / year in net worth decline. Rinse and repeat for 10 years, that’s only $50k in true cost over 10 years.
Total SP500 return May 2011 - May 2021 (dividends reinvested and adjusted for inflation) was 218%
https://dqydj.com/sp-500-return-calculator/

Roughly speaking, the net worth impact of a $50k car purchased in 2011 is $200k (rounded down) today.

While the car does have some residual value which I've ignored, and does include some required spending for minimal transportation which I haven't excluded, the fundamental point remains - true impact to net worth of discretionary consumption when you're young is often massively underestimated by consumers.

The exact same Porsche costs way more to the 20 year old than the 60 year old in terms of lifetime net worth.
Rules of thumb based on income or net wealth miss badly on this important dynamic.
but so what? very few things we can purchase or invest in will match the stellar market returns we've had over the past 10 years. if you are going to use this prism with respect to your purchases, you'll never buy or do anything.

the focus shouldn't be on the math out of context. if you are already meeting your goals by investing, then why forgo purchases today that you can afford just to buy them 20 years down the road when you can more than afford them?
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"
Onlineid3089
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Re: Guidance on Max Car Price

Post by Onlineid3089 »

Every few years I get the itch to get a new truck. I usually even spend time looking at what is out there and what the more recent features are. Then I remember that the newness wears off fast and my old one still runs fine. I'm just really not a car person and don't get long term joy from a new/nice vehicle that some people do.

There is no valid rule of thumb. Spend whatever you can comfortably afford and get whatever features you'd like. Just remember that six months or a year down the road there is a decent chance you won't be nearly as impressed by it anymore, regardless of what it is. It'll likely just be something that gets you from A to B.
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Re: Guidance on Max Car Price

Post by hand »

bgf wrote: Mon Jun 21, 2021 10:27 am
but so what? very few things we can purchase or invest in will match the stellar market returns we've had over the past 10 years. if you are going to use this prism with respect to your purchases, you'll never buy or do anything.

the focus shouldn't be on the math out of context. if you are already meeting your goals by investing, then why forgo purchases today that you can afford just to buy them 20 years down the road when you can more than afford them?
Advocating to blindly defer or eliminate consumption is not my intent at all... If you can afford it by all means consume away, just be sure you understand and accept the true cost.

My intent is to point out that time value of money is often overlooked as part of consumption decisions (and rules of thumb).
To me, the math clearly shows that a higher hurdle for choosing to consume while young is often appropriate. (I do recognize that there are plenty of things/experiences that are *more valuable* when young with education and experiences topping the list.)

I understand that many people live their lives looking at cash flow or monthly costs vs. income, I just think there's an opportunity to take a more sophisticated view which maximizes lifetime consumption and happiness.

A $50k BMW may cost two year's worth of retirement when you're 20 vs. 3 months of retirement when you're 60. No judgement on my part whether either of these are worth it, just a hope that more people recognize that simplifying the cost of a car to $5k / month and comparing to monthly income misses a key component of the equation.
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Re: Guidance on Max Car Price

Post by khram »

Tingting1013 wrote: Mon Jun 21, 2021 8:01 am
khram wrote: Sun Jun 20, 2021 11:26 pm ???

Are you saying you buy it in cash, then the insurance maintenance etc. costs $4k? I am comfortable pulling $30k out of savings to buy a car if I suddenly need a new one, but would prefer not to pull $40k or $60k. That sets back other savings goals more than I would like. And I have a fear, rational or irrational, of lifestyle creep. There is nothing wrong with spending more than I do on cars if you value it more over hobbies or retiring earlier, etc.

I doubt they got more than they paid for them. This was at the beginning of the pandemic, before car prices skyrocketed.
See my comment directly above
Okay. Presumably you need some car to get you from A to B, and spending $50k instead of $30k means you have less available liquid to spend on your house down payment or a big new home improvement project or funding various hobbies or travel etc. (or just earlier retirement). I guess under this argument you can still buy an $80k car and your annual bills for insurance, maintenance, etc. are probably a bit higher than $4k but still manageable. I am not sure how you prevent lifestyle creep in this situation (bigger house etc.), everything becomes more expensive. It all comes down to how much you value having an expensive car vs. spending money on other things or just having a higher liquid net worth.

Because a car is a hopefully fairly small portion of one's net worth (at least as you age), and you need one anyway (unless you live in a place like NYC), I don't even factor it into my net worth calculations (I also don't include my computers, phone, furniture, guitar, other things I could sell). I realize I could sell it in a pinch and get something cheap, but I go for something that's nice enough that I don't need to worry about whether it'll start up tomorrow but not so nice that I'm overspending on it relative to my other interests or needs.

If I were closer to retirement than college, I might be more willing or inclined to spend $50k or $80k or whatever on a car for the point hand made. But I probably still wouldn't. I get some enjoyment out of my $30k car, and have driven some nicer cars that just didn't do anything for me. The extra $20-50k in value of those cars are not worth it to me.
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Re: Guidance on Max Car Price

Post by Tingting1013 »

khram wrote: Mon Jun 21, 2021 11:38 am
Tingting1013 wrote: Mon Jun 21, 2021 8:01 am
khram wrote: Sun Jun 20, 2021 11:26 pm ???

Are you saying you buy it in cash, then the insurance maintenance etc. costs $4k? I am comfortable pulling $30k out of savings to buy a car if I suddenly need a new one, but would prefer not to pull $40k or $60k. That sets back other savings goals more than I would like. And I have a fear, rational or irrational, of lifestyle creep. There is nothing wrong with spending more than I do on cars if you value it more over hobbies or retiring earlier, etc.

I doubt they got more than they paid for them. This was at the beginning of the pandemic, before car prices skyrocketed.
See my comment directly above
Okay. Presumably you need some car to get you from A to B, and spending $50k instead of $30k means you have less available liquid to spend on your house down payment or a big new home improvement project or funding various hobbies or travel etc. (or just earlier retirement). I guess under this argument you can still buy an $80k car and your annual bills for insurance, maintenance, etc. are probably a bit higher than $4k but still manageable.
It’s not the insurance and maintenance that are big drivers of cost, it’s depreciation. A new $80k car will cost you $10k/year for the first five years or so.

Is that going to materially harm someone who is making $200k? Any more than a golfing habit that costs the same? And as you say, only a portion of that $10k is incremental to the cost that you would be incurring for an basic car anyway.

People are thrown off by the large sticker price of a new vehicle, but that’s entirely the wrong way of thinking about the cost. It’s like if I said I spend $10k/year at Costco instead of $3k/yr at Aldi. Same impact to my net worth as that X7 vs a Honda Pilot but I bet most Bogleheads wouldn’t bat an eye at a Costco habit, but are more than happy to criticize the car.
khram
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Re: Guidance on Max Car Price

Post by khram »

My gym membership is $45/month. It's not a huge deal if you make $200k/year forever, but nothing in life is guaranteed (and you may want to retire at 45 instead of 65). You may lose the job and not be able to get over $80k/year, or any other number of scenarios could play out where not having spent so much on a car would have been better.
Tingting1013
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Re: Guidance on Max Car Price

Post by Tingting1013 »

khram wrote: Mon Jun 21, 2021 11:56 am My gym membership is $45/month. It's not a huge deal if you make $200k/year forever, but nothing in life is guaranteed (and you may want to retire at 45 instead of 65). You may lose the job and not be able to get over $80k/year, or any other number of scenarios could play out where not having spent so much on a car would have been better.
Here is a list of my living expenses:

Mortgage interest
Property tax
Insurance
Utilities
Cars / gas
Daycare
House cleaners / yard / tree / plumber
Travel / entertainment
Other monthly bills
Medical
Charity
Food / restaurants
Amazon

Cars / gas does not enter the top five, and I drive a $70k car. If it does for you and you are at risk of not hitting your goals because of it then yeah you should probably sell your Bimmer and get a Honda. But I don’t think that’s the case for most Bogleheads.
VoiceOfReason
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Re: Guidance on Max Car Price

Post by VoiceOfReason »

TimeTheMarket wrote: Mon Jun 21, 2021 10:07 am

Jim makes $100k/year and drives a paid for beater.
Bob made $100k/year also but just got a raise to $115k/year. His take home is now $750/month more. He leases a car for $600/month with the other $150/month covering more expensive tires and insurance.

Although Bob is a bit more exposed, since he cannot easily dump his lease, they are both making similar money amounts and investing the same to retirement, but instead of a 15 year old corolla like Jim, Bob is driving a new BMW.
You left out the best part of the story:

"Jim also got a raise to $115k/year. His take home is now $750/month more. Instead of getting a nicer car he decides to invest that $750/month in the stock market for 30 years with an average rate of return of 7%. They both get from point A to point B reliably, the only difference is when they reach retirement in 30 years, Jim has $910,000 more in his brokerage account than Bob."
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