Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

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teuton33
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Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by teuton33 »

Lot of threads about this with people nervous with how much to spend on a car. I know this has bugged me too over the years. I am posting because I believe I have found the perfect rule: 5% of net worth. If you can stay at or under that you are good. It also lets you get some nice cars once your NW is in the millions :)

Here’s my buying history

I bought a brand new car for 22k in 2006 after graduation with a net worth of 500 bucks. It stung quite a bit and the loan bothered me. My income was 70k

I bought a new Honda in 2013 for 31k. After taxes and trade I paid 24 out the door. My net worth at the time was 230k. I actually regretted this purchase as I felt it was a bit too pricy. But it turned into a very reliable car it retained value well. I was well over 5% of net worth :( Income was about 125k

I purchased a car for my wife in 2017 (a brand new touring trim honda) out the door cost was a little less than 5% of net worth at that time after trading in her old Honda. Net worth was in the low 500k range with HHI ~250k This purchase didn’t sting at all. I was under the 5% threshold.

I just bought a brand new 2021 bmw 330xi pretty much fully loaded. Sticker was 51.5k but got it for 45k after discount and incentive. I think sedan buyers have much more leverage than suv in this market. Traded the old Honda for 12k so out the door cost after taxes is about 36k.

Net worth is about 2 million so I’m less than 2.5%. HHI is ~ 550k Purchase didn’t sting at all and honestly I kinda of wish I spent more and went with the m340xi :) oh well next car.
Last edited by teuton33 on Wed Jun 23, 2021 9:21 am, edited 3 times in total.
bwalling
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Re: Best rule of thumb for car purchase: 5% of net worth

Post by bwalling »

The median net worth for people under 35 is $13,900. 5% of that is $695, which might not even get you an annual bus pass.
kleiner
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Re: Best rule of thumb for car purchase: 5% of net worth

Post by kleiner »

I just bought a new Honda CRV EX-L earlier this which was $37k out of the door (with taxes etc) and it represents about 0.6% of our invested net worth :happy

I did look hard at at the luxury brands but ultimately I found that I was just not inclined to pay more. This car is more than luxurious enough for my needs!
alfaspider
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Re: Best rule of thumb for car purchase: 5% of net worth

Post by alfaspider »

I'm not sure "5% of net worth" is any better than other arbitrary rules of thumb like percentage of paycheck. The problem is that net worth is heavily dependent on age and ignores income (both current and future).

When I was just out of law school and had student loans (negative net worth), that would have meant I couldn't buy any sort of car despite having very healthy income and earning potential. I could have easily afforded a $50k car with my income (although I spent quite a bit less than that).

By contrast, a 65 year old with $1 million net worth, almost exclusively in real estate in a HCOL area they don't want to move away from, who is retired and with significant long-term healthcare needs, absolutely can NOT afford a $50k car.

I don't think there is any clear rule of thumb with car purchases. How much car you should buy depends on what your personal situation is (single, married, kids, working retired), your car needs (have to get your 5 kids to school every morning or only use the car on weekends?), your car wants (car indifferent or dyed in the wool petrolhead), and the type of car you are buying (brand new depreciation special like a Mercedes S class or a classic car that is likely to appreciate).

Finally, you need to integrate it with your goals and spending needs. Spending 5% of my NW on a car would interfere with my goals of early FI. If I didn't have that goal it would make more sense. Also, I have a very significant spending obligations in the form of private daycare/preschool (to the tune of $80k before kids are both in public school)- that's $80k not available to spend on a car someone in a different situation might be able to utilize .
Last edited by alfaspider on Wed Jun 23, 2021 8:55 am, edited 1 time in total.
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teuton33
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Re: Best rule of thumb for car purchase: 5% of net worth

Post by teuton33 »

alfaspider wrote: Wed Jun 23, 2021 8:39 am By contrast, a 65 year old with $1 million net worth, almost exclusively in real estate in a HCOL area they don't want to move away from, who is retired and with significant long-term healthcare needs, absolutely can NOT afford a $50k car.
How common is this case really? 1m in RE assets 0 in other asset classes? They are making a choice to have that asset allocation.
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Re: Best rule of thumb for car purchase: 5% of net worth

Post by HomerJ »

teuton33 wrote: Wed Jun 23, 2021 8:02 am Lot of threads about this with people nervous with how much to spend on a car. I know this has bugged me too over the years. I am posting because I believe I have found the perfect rule: 5% of net worth. If you can stay at or under that you are good. It also lets you get some nice cars once your NW is in the millions :)

Here’s my buying history

I bought a brand new car for 22k in 2006 after graduation with a net worth of 500 bucks. It stung quite a bit and the loan bothered me.

I bought a new Honda in 2013 for 31k. After taxes and trade I paid 24 out the door. My net worth at the time was 230k. I actually regretted this purchase as I felt it was a bit too pricy. But it turned into a very reliable car it retained value well. I was well over 5% of net worth :(

I purchased a car for my wife in 2017 (a brand new touring trim honda) out the door cost was a little less than 5% of net worth at that time after trading in her old Honda. Net worth was in the low 500k range. This purchase didn’t sting at all. I was under the 5% threshold.

I just bought a brand new 2021 bmw 330xi pretty much fully loaded. Sticker was 51.5k but got it for 45k after discount and incentive. I think sedan buyers have much more leverage than suv in this market. Traded the old Honda for 12k so out the door cost after taxes is about 36k.

Net worth is about 2 million so I’m less than 2.5%. Purchase didn’t sting at all and honestly I kinda of wish I spent more and went with the m340xi :) oh well next car.
So none of your examples are 5% of net worth.

My first couple of cars were used junkers that broke down on me.

Got tired of that, so bought a brand-new Hyundai Excel that was the basest of base models. No frills, stick-shift, no air-conditioning (lived in New Hampshire at the time), didn't even spring for the dashboard clock (saved $100).

Cost me $7000 which was infinity more than my net worth, since it was negative at the time.

But I drove that car a long time, and after that I've always bought Honda Civics for cash. Never ever once considered net worth.
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Re: Best rule of thumb for car purchase: 5% of net worth

Post by Kagord »

IMHO, a vehicle purchase (functional purpose, point A to point B) should be 0.5% to 1.0% of net worth (before house equity), this is a depreciating asset we are talking about here.
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Re: Best rule of thumb for car purchase: 5% of net worth

Post by alfaspider »

teuton33 wrote: Wed Jun 23, 2021 8:50 am
alfaspider wrote: Wed Jun 23, 2021 8:39 am By contrast, a 65 year old with $1 million net worth, almost exclusively in real estate in a HCOL area they don't want to move away from, who is retired and with significant long-term healthcare needs, absolutely can NOT afford a $50k car.
How common is this case really? 1m in RE assets 0 in other asset classes? They are making a choice to have that asset allocation.
It was obviously intended as an outlier, but more common that you might think. Imagine someone who bought a modest house in the San Francisco bay area 40 years ago, when prices were much more moderate. The mortgage has been paid off, but like many Americans they never saved much for retirement. They don't want to move because all of their friends/family are in the area and they've been there a very long time. Yes, they could sell the house and rent, but they are worried about whether that $1 million will pay 20 years of rent and don't want to leave the house they've lived in for 40 years. With social security, low property taxes (due to grandfathering), and modest living, they could afford to stay in the house long-term.
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Re: Best rule of thumb for car purchase: 5% of net worth

Post by Ron Ronnerson »

I’m sorry but this benchmark won’t work for my family. I just couldn’t afford the payments on an $80k car with an AGI of $60k. My net worth is mostly in retirement accounts and home equity so turning it into cash would require paying penalties since I’m not yet at retirement age or selling my home. Also, my wife needs a car so that’s got to be considered too. We somehow managed to scrape enough together to buy a couple of Corollas. The plan is to keep them for at least 15 years.
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Re: Best rule of thumb for car purchase: 5% of net worth

Post by TxFrog »

Huh? I don’t find this rule of thumb practical for many.

Graduated college with negative net worth (student loans) in a state with poor public transportation (Texas). I needed a car for transportation to my first job. Should I have just considered jobs within walking distance of my apartment at the time? Of course not. I ended up buying a used Civic for $10k.

IMO a better rule of thumb would be: 1) Save 20% of gross income, 2) Build healthy EF, 3) Pay down all debt. After 1, 2 and 3, then you can consider splurging on a car.
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teuton33
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Re: Best rule of thumb for car purchase: 5% of net worth

Post by teuton33 »

TxFrog wrote: Wed Jun 23, 2021 9:12 am Huh? I don’t find this rule of thumb practical for many.

Graduated college with negative net worth (student loans) in a state with poor public transportation (Texas). I needed a car for transportation to my first job. Should I have just considered jobs within walking distance of my apartment at the time? Of course not. I ended up buying a used Civic for $10k.

IMO a better rule of thumb would be: 1) Save 20% of gross income, 2) Build healthy EF, 3) Pay down all debt. After 1, 2 and 3, then you can consider splurging on a car.
I don't agree with your logic. The reason is simple: to get rich the only number that matters is net worth and you want to grow that number as quickly as possible. It is really the single most important number that you can optimize for. Cars are a drag on net worth obviously so to minimize drag one should consider the purchase relative to net worth.

Note that my first car was 23k on 0 net worth. It is an aspirational rule of thumb that probably won't be achievable until later in ones career.
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Re: Best rule of thumb for car purchase: 5% of net worth

Post by Triple digit golfer »

This rule of thumb is silly and impractical.

A new physician with a $500k income and an 80% savings rate with a -$250k net worth can certainly afford to spend more than negative $12.5k on a car.

A minimum wage worker with a $100k net worth and -5% savings rate cannot afford to spend any more on a car than absolutely necessary for basic transportation.

Yet, in this rule of thumb, the new physician can't even afford a Hot Wheels car while the minimum wage worker can get a $5k used car.
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Re: Best rule of thumb for car purchase: 5% of net worth

Post by gogreen »

teuton33 wrote: Wed Jun 23, 2021 8:02 am I am posting because I believe I have found the perfect rule: 5% of net worth.
Dang, I guess Mr Buffett has to glue a number of huge diamonds to different parts of his car :confused
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Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by Jack FFR1846 »

5% of my net worth means I can get a car for $211,700. With Ford GT prices, I'm still shy. Can I trade in a few of my current cars to up that. Oh, wait. Those are figured into my net worth. Dang. I guess I'll have to continue to slum it.
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Re: Best rule of thumb for car purchase: 5% of net worth

Post by Tingting1013 »

teuton33 wrote: Wed Jun 23, 2021 9:14 am
TxFrog wrote: Wed Jun 23, 2021 9:12 am Huh? I don’t find this rule of thumb practical for many.

Graduated college with negative net worth (student loans) in a state with poor public transportation (Texas). I needed a car for transportation to my first job. Should I have just considered jobs within walking distance of my apartment at the time? Of course not. I ended up buying a used Civic for $10k.

IMO a better rule of thumb would be: 1) Save 20% of gross income, 2) Build healthy EF, 3) Pay down all debt. After 1, 2 and 3, then you can consider splurging on a car.
I don't agree with your logic. The reason is simple: to get rich the only number that matters is net worth and you want to grow that number as quickly as possible. It is really the single most important number that you can optimize for. Cars are a drag on net worth obviously so to minimize drag one should consider the purchase relative to net worth.

Note that my first car was 23k on 0 net worth. It is an aspirational rule of thumb that probably won't be achievable until later in ones career.
The drag on net worth is not the absolute value of the car, it’s the depreciation and maintenance and repairs on the car.

Which is a bigger drag on net worth, a $40k Model 3 that is worth the same three years later as when purchased new, or a $25k Nissan Altima that is worth $18k three years later?
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Re: Best rule of thumb for car purchase: 5% of net worth

Post by Ron Ronnerson »

Triple digit golfer wrote: Wed Jun 23, 2021 9:19 am This rule of thumb is silly and impractical.

A new physician with a $500k income and an 80% savings rate with a -$250k net worth can certainly afford to spend more than negative $12.5k on a car.

A minimum wage worker with a $100k net worth and -5% savings rate cannot afford to spend any more on a car than absolutely necessary for basic transportation.

Yet, in this rule of thumb, the new physician can't even afford a Hot Wheels car while the minimum wage worker can get a $5k used car.
This is a good example to demonstrate that you need to look at things more holistically. Life is too complex to just rely on one simple benchmark.
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Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by firebirdparts »

Net worth is an absolutely nonsensical measure. Honestly, you should not have to ask. Car ownership is a daily cost. You cash flow it. This is like asking how much of your net worth you should spend on groceries, deodorant, and toothpaste.
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Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by grettman »

Your rule gives me permission to buy a $150,000 car.

No thanks. That is an insane amount of money to spend on a car for someone who I’m not uber wealthy.

I think my NW is where it is partly because I don’t spend that kind of money on cars.
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Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by Californiastate »

Who comes up with these figures? Is it the same guy who tells you how much to spend on wedding rings? It sure sounds like Paul from the Diamond Center.
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Re: Best rule of thumb for car purchase: 5% of net worth

Post by Broken Man 1999 »

I don't put a lot of stock in rules of thumb.

At best, they are an exact match for a moment in time for someone.

The members here so very diverse, the rule of thumb would have no worth to most. For some, there definitely could be an intersection of the cost of the vehicle and 5% of net worth. I would guess few, though.

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teuton33
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Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by teuton33 »

grettman wrote: Wed Jun 23, 2021 9:37 am Your rule gives me permission to buy a $150,000 car.

No thanks. That is an insane amount of money to spend on a car for someone who I’m not uber wealthy.

I think my NW is where it is partly because I don’t spend that kind of money on cars.
You have a 3m net worth. In all seriousness if you went out and bought a 150k car today and kept it for 7 or 8 years it would not impact your financial situation much at all. Many years the car cost would be < 1 year of gains in the market. And if you financed it at 2% (many cars are offering that now) you could smooth the net worth drag over 5 years. It would probably be imperceptible to someone looking at graphs of your net worth.

It doesn't mean you have to spend the full 5% though. My bmw was roughly 2.5% of net worth (little less than 5% of my taxable). If you spent 2.5% then that would get you a much more reasonable (but still extremely nice) 75k car. That wouldn't make a dent in your financial picture as long as you kept it for a reasonable period and didn't get a new one each year.
Last edited by teuton33 on Wed Jun 23, 2021 9:45 am, edited 1 time in total.
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Re: Best rule of thumb for car purchase: 5% of net worth

Post by Walkure »

gogreen wrote: Wed Jun 23, 2021 9:21 am
teuton33 wrote: Wed Jun 23, 2021 8:02 am I am posting because I believe I have found the perfect rule: 5% of net worth.
Dang, I guess Mr Buffett has to glue a number of huge diamonds to different parts of his car :confused
This was $4.8 million in 2007. Question is, once you cover it in diamonds, is it still a depreciating asset or do the diamonds keep up with inflation?
https://carfromjapan.com/article/indust ... -diamonds/
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Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by tibbitts »

Neither is an appropriate metric for choosing a car. There's no rule of thumb I can think of that would work.
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Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by runner3081 »

Net worth being used to calculate any purchase is wrong, in my opinion.

Net worth includes value of a house, this has nothing to do with how much car to purchase.
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Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by Californiastate »

teuton33 wrote: Wed Jun 23, 2021 9:41 am
grettman wrote: Wed Jun 23, 2021 9:37 am Your rule gives me permission to buy a $150,000 car.

No thanks. That is an insane amount of money to spend on a car for someone who I’m not uber wealthy.

I think my NW is where it is partly because I don’t spend that kind of money on cars.
You have a 3m net worth. In all seriousness if you went out and bought a 150k car today and kept it for 7 or 8 years it would not impact your financial situation much at all. Many years the car cost would be < 1 year of gains in the market.

It doesn't mean you have to spend the full 5% though. My bmw was roughly 2.5% of net worth. If you spent 2.5% then that would get you a much more reasonable (but still extremely nice) 75k car. That wouldn't make a dent in your financial picture as long as you kept it for a reasonable period and didn't get a new one each year.
How much are you willing to spend on the roundel? How much does the public's perception of your financial position sway your purchase? I could see it being important if future business demands you look the part. Then the roundel has it's value. Otherwise you're just a slave to fashion and pay the required charge.
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Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by Mike Scott »

None of the % rules of thumb make any sense. Minimum car needs are individually specific ranging from no car needed to perhaps something that is more expensive with work related requirements. "Toy cars" are discretionary.
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teuton33
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Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by teuton33 »

Californiastate wrote: Wed Jun 23, 2021 9:51 am
teuton33 wrote: Wed Jun 23, 2021 9:41 am
grettman wrote: Wed Jun 23, 2021 9:37 am Your rule gives me permission to buy a $150,000 car.

No thanks. That is an insane amount of money to spend on a car for someone who I’m not uber wealthy.

I think my NW is where it is partly because I don’t spend that kind of money on cars.
You have a 3m net worth. In all seriousness if you went out and bought a 150k car today and kept it for 7 or 8 years it would not impact your financial situation much at all. Many years the car cost would be < 1 year of gains in the market.

It doesn't mean you have to spend the full 5% though. My bmw was roughly 2.5% of net worth. If you spent 2.5% then that would get you a much more reasonable (but still extremely nice) 75k car. That wouldn't make a dent in your financial picture as long as you kept it for a reasonable period and didn't get a new one each year.
How much are you willing to spend on the roundel? How much does the public's perception of your financial position sway your purchase? I could see it being important if future business demands you look the part. Then the roundel has it's value. Otherwise you're just a slave to fashion and pay the required charge.
Don't kid yourself. The difference in driving a bmw vs a accord/camry is much different than just the badge. Much stiffer/sportier handling, better acceleration, in general more fun to drive. Technology is also way better in the newer models.

Its a 10k delta compared to a top trim accord, but IMHO it is worth it. Better tech and a much better ride. The accord has gotten too big and floaty for my liking, and as someone coming from a top trim accord, a 250HP FWD car is an absolute waste. When i first got my v6 accord i was spinning the tires constantly and had to adapt to the car. It also torque steered under heavy acceleration and body rolled when cornering hard. The bimmer has AWD so no wheel spin and handling is much more fun!
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Re: Best rule of thumb for car purchase: 5% of net worth

Post by TxFrog »

teuton33 wrote: Wed Jun 23, 2021 9:14 am
TxFrog wrote: Wed Jun 23, 2021 9:12 am Huh? I don’t find this rule of thumb practical for many.

Graduated college with negative net worth (student loans) in a state with poor public transportation (Texas). I needed a car for transportation to my first job. Should I have just considered jobs within walking distance of my apartment at the time? Of course not. I ended up buying a used Civic for $10k.

IMO a better rule of thumb would be: 1) Save 20% of gross income, 2) Build healthy EF, 3) Pay down all debt. After 1, 2 and 3, then you can consider splurging on a car.
I don't agree with your logic. The reason is simple: to get rich the only number that matters is net worth and you want to grow that number as quickly as possible. It is really the single most important number that you can optimize for. Cars are a drag on net worth obviously so to minimize drag one should consider the purchase relative to net worth.

Note that my first car was 23k on 0 net worth. It is an aspirational rule of thumb that probably won't be achievable until later in ones career.
I think your rule of thumb is OK for retirees or people nearing retirement.

However, you also need to consider the alternatives. In my case, I ended up driving that used Civic for the first 9 years of my career. During that time many of my friends and colleagues were buying $40k-$50k new trucks and SUVs every 3-4 years. All the money I could have spent on cars was used to by pay down student loans or was invested. I consider the used Civic I purchased for $10k to actually increase my net worth (relative to my peers and relative to the alternative of limiting my job prospects if I didn’t have a car).
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Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by Ron Ronnerson »

runner3081 wrote: Wed Jun 23, 2021 9:47 am Net worth being used to calculate any purchase is wrong, in my opinion.

Net worth includes value of a house, this has nothing to do with how much car to purchase.
To highlight this last point, I will share that my house has appreciated about $100k per MONTH during 2021. My income and expenses have remained just about the same as they have been in the recent past. I’m a teacher and my wife is a stay-at-home parent. While it’s nice and all that the house value has attached itself to a rocket, our budget would bust if we spent $80k on a car with an AGI of $60k.

On a related note, I’m expecting a six-figure pension in retirement. It should make it so that we might actually be able to afford a car covered in diamonds at some point but this benchmark would ignore that income stream because it isn’t part of net worth.
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Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by Coachrhino11 »

Ron Ronnerson wrote: Wed Jun 23, 2021 10:00 am
runner3081 wrote: Wed Jun 23, 2021 9:47 am Net worth being used to calculate any purchase is wrong, in my opinion.

Net worth includes value of a house, this has nothing to do with how much car to purchase.
To highlight this last point, I will share that my house has appreciated about $100k per MONTH during 2021. My income and expenses have remained just about the same as they have been in the recent past. I’m a teacher and my wife is a stay-at-home parent. While it’s nice and all that the house value has attached itself to a rocket, our budget would bust if we spent $80k on a car with an AGI of $60k.

On a related note, I’m expecting a six-figure pension in retirement. It should make it so that we might actually be able to afford a car covered in diamonds at some point but this benchmark would ignore that income stream because it isn’t part of net worth.
Lol, let's be honest Ron, very few have houses going up 100k per month. However, if accurate according to "zillow" my house appreciated over 50k this past month here in Austin. Just beyond stupid.
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Re: Best rule of thumb for car purchase: 5% of net worth

Post by JackoC »

Triple digit golfer wrote: Wed Jun 23, 2021 9:19 am This rule of thumb is silly and impractical.

A new physician with a $500k income and an 80% savings rate with a -$250k net worth can certainly afford to spend more than negative $12.5k on a car.

A minimum wage worker with a $100k net worth and -5% savings rate cannot afford to spend any more on a car than absolutely necessary for basic transportation.

Yet, in this rule of thumb, the new physician can't even afford a Hot Wheels car while the minimum wage worker can get a $5k used car.
Silly and impractical for people with high expected future value of labor income relative to assets. Just like % of 'salary' (adjacent thread) rule for car buying is silly and impractical for people who are retired, even besides people adopting silly levels of supposed car affordability (need to make high six figures to buy $30k cars) who are just earning a salary. :happy For asset heavy people later in life even 'income' (rather than 'salary') is a semi-arbitrary construct.

I think the obvious answer is that car purchase defies an easy rule of thumb unless you settle for it being applicable to a majority of people and accept it being silly for some significant minority of people. There are basically no 'rules of thumb' which fit nearly 100% of people ('rule of thumb' is originally related to the size of men's [it was men's, look it up, it's not nice so I won't state the specifics] thumbs which obviously varies widely).

As responses show, with cars more than perhaps most things, it also gets mixed up between people who really think a BMW M2 is the same as a Camry, both being cars, and people (like myself) who find that utterly ridiculous. Which is in general subjective but I'm choosing an example where the objective difference is glaring: the ride on my M2 is a lot 'better' when cornering confidently within the car's limits on a super winding canyon road, way beyond a Camry's. It's kind of harsh, to some tastes, in normal driving particularly if the roads aren't good, unlike say a standard 3 series where the immediately previous statement would be more apt, again depending on taste. Saying M2 and Camry are the same thing except a badge is ridiculous however. A different thing you don't want...OK that's entirely reasonable.
Last edited by JackoC on Wed Jun 23, 2021 10:07 am, edited 1 time in total.
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Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by anon_investor »

Coachrhino11 wrote: Wed Jun 23, 2021 10:03 am
Ron Ronnerson wrote: Wed Jun 23, 2021 10:00 am
runner3081 wrote: Wed Jun 23, 2021 9:47 am Net worth being used to calculate any purchase is wrong, in my opinion.

Net worth includes value of a house, this has nothing to do with how much car to purchase.
To highlight this last point, I will share that my house has appreciated about $100k per MONTH during 2021. My income and expenses have remained just about the same as they have been in the recent past. I’m a teacher and my wife is a stay-at-home parent. While it’s nice and all that the house value has attached itself to a rocket, our budget would bust if we spent $80k on a car with an AGI of $60k.

On a related note, I’m expecting a six-figure pension in retirement. It should make it so that we might actually be able to afford a car covered in diamonds at some point but this benchmark would ignore that income stream because it isn’t part of net worth.
Lol, let's be honest Ron, very few have houses going up 100k per month. However, if accurate according to "zillow" my house appreciated over 50k this past month here in Austin. Just beyond stupid.
Obviously it means you can buy a more expensive car now! :twisted:
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Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by Coachrhino11 »

anon_investor wrote: Wed Jun 23, 2021 10:06 am
Coachrhino11 wrote: Wed Jun 23, 2021 10:03 am
Ron Ronnerson wrote: Wed Jun 23, 2021 10:00 am
runner3081 wrote: Wed Jun 23, 2021 9:47 am Net worth being used to calculate any purchase is wrong, in my opinion.

Net worth includes value of a house, this has nothing to do with how much car to purchase.
To highlight this last point, I will share that my house has appreciated about $100k per MONTH during 2021. My income and expenses have remained just about the same as they have been in the recent past. I’m a teacher and my wife is a stay-at-home parent. While it’s nice and all that the house value has attached itself to a rocket, our budget would bust if we spent $80k on a car with an AGI of $60k.

On a related note, I’m expecting a six-figure pension in retirement. It should make it so that we might actually be able to afford a car covered in diamonds at some point but this benchmark would ignore that income stream because it isn’t part of net worth.
Lol, let's be honest Ron, very few have houses going up 100k per month. However, if accurate according to "zillow" my house appreciated over 50k this past month here in Austin. Just beyond stupid.
Obviously it means you can buy a more expensive car now! :twisted:
Heck yes! I'm showing wife OP's post and increased value of house to go buy new car this week! :beer
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Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by anon_investor »

Coachrhino11 wrote: Wed Jun 23, 2021 10:09 am
anon_investor wrote: Wed Jun 23, 2021 10:06 am
Coachrhino11 wrote: Wed Jun 23, 2021 10:03 am
Ron Ronnerson wrote: Wed Jun 23, 2021 10:00 am
runner3081 wrote: Wed Jun 23, 2021 9:47 am Net worth being used to calculate any purchase is wrong, in my opinion.

Net worth includes value of a house, this has nothing to do with how much car to purchase.
To highlight this last point, I will share that my house has appreciated about $100k per MONTH during 2021. My income and expenses have remained just about the same as they have been in the recent past. I’m a teacher and my wife is a stay-at-home parent. While it’s nice and all that the house value has attached itself to a rocket, our budget would bust if we spent $80k on a car with an AGI of $60k.

On a related note, I’m expecting a six-figure pension in retirement. It should make it so that we might actually be able to afford a car covered in diamonds at some point but this benchmark would ignore that income stream because it isn’t part of net worth.
Lol, let's be honest Ron, very few have houses going up 100k per month. However, if accurate according to "zillow" my house appreciated over 50k this past month here in Austin. Just beyond stupid.
Obviously it means you can buy a more expensive car now! :twisted:
Heck yes! I'm showing wife OP's post and increased value of house to go buy new car this week! :beer
May I suggest the one covered in diamonds? :twisted:
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Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by spdoublebass »

So your first car you had for 7 years and the second car 8 years. Why can’t you hit the 10 year mark?

My personal rule of thumb is I look for a new car at 10 years or 300K miles, whichever comes first.

I have a 2011 Ford Escape with 255K on it. So I know that one will be needing replacement soon. My other car is a 2015 Ford Explorer with 150K on it. So that should be good for another few years.
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Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by SQRT »

Your rule of thumb might work for some people some of the time. Certainly doesn’t work for me. 10% of net worth for a well funded retired person is way too much to spend on a car.
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Re: Best rule of thumb for car purchase: 5% of net worth

Post by Monsterflockster »

bwalling wrote: Wed Jun 23, 2021 8:06 am The median net worth for people under 35 is $13,900. 5% of that is $695, which might not even get you an annual bus pass.
+1.
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Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by teuton33 »

spdoublebass wrote: Wed Jun 23, 2021 10:21 am So your first car you had for 7 years and the second car 8 years. Why can’t you hit the 10 year mark?

My personal rule of thumb is I look for a new car at 10 years or 300K miles, whichever comes first.

I have a 2011 Ford Escape with 255K on it. So I know that one will be needing replacement soon. My other car is a 2015 Ford Explorer with 150K on it. So that should be good for another few years.
Because I like driving newer cars
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Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by quantAndHold »

This is pretty silly. I can’t imagine a scenario where this metric would actually be useful in real life. It completely ignores future earnings potential, and overweights non liquid sources of net worth (i.e. the house).

By this metric, when I first got out of college and needed a car to get to my entry level job, this would have limited me to a complete clunker, even though I had a stable job with a steady income, and decades of high earning years ahead of me. And today, as a house heavy early retiree, it would allow me to buy a car that would cause all sorts of havoc with my future retirement. I suspect my situation is more common than any scenario in which this rule of thumb would actually work.
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Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by Californiastate »

teuton33 wrote: Wed Jun 23, 2021 9:56 am
Californiastate wrote: Wed Jun 23, 2021 9:51 am
teuton33 wrote: Wed Jun 23, 2021 9:41 am
grettman wrote: Wed Jun 23, 2021 9:37 am Your rule gives me permission to buy a $150,000 car.

No thanks. That is an insane amount of money to spend on a car for someone who I’m not uber wealthy.

I think my NW is where it is partly because I don’t spend that kind of money on cars.
You have a 3m net worth. In all seriousness if you went out and bought a 150k car today and kept it for 7 or 8 years it would not impact your financial situation much at all. Many years the car cost would be < 1 year of gains in the market.

It doesn't mean you have to spend the full 5% though. My bmw was roughly 2.5% of net worth. If you spent 2.5% then that would get you a much more reasonable (but still extremely nice) 75k car. That wouldn't make a dent in your financial picture as long as you kept it for a reasonable period and didn't get a new one each year.
How much are you willing to spend on the roundel? How much does the public's perception of your financial position sway your purchase? I could see it being important if future business demands you look the part. Then the roundel has it's value. Otherwise you're just a slave to fashion and pay the required charge.
Don't kid yourself. The difference in driving a bmw vs a accord/camry is much different than just the badge. Much stiffer/sportier handling, better acceleration, in general more fun to drive. Technology is also way better in the newer models.

Its a 10k delta compared to a top trim accord, but IMHO it is worth it. Better tech and a much better ride. The accord has gotten too big and floaty for my liking, and as someone coming from a top trim accord, a 250HP FWD car is an absolute waste. When i first got my v6 accord i was spinning the tires constantly and had to adapt to the car. It also torque steered under heavy acceleration and body rolled when cornering hard. The bimmer has AWD so no wheel spin and handling is much more fun!
I don't take my street vehicles to the track.
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Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by teuton33 »

Californiastate wrote: Wed Jun 23, 2021 10:29 am
teuton33 wrote: Wed Jun 23, 2021 9:56 am
Californiastate wrote: Wed Jun 23, 2021 9:51 am
teuton33 wrote: Wed Jun 23, 2021 9:41 am
grettman wrote: Wed Jun 23, 2021 9:37 am Your rule gives me permission to buy a $150,000 car.

No thanks. That is an insane amount of money to spend on a car for someone who I’m not uber wealthy.

I think my NW is where it is partly because I don’t spend that kind of money on cars.
You have a 3m net worth. In all seriousness if you went out and bought a 150k car today and kept it for 7 or 8 years it would not impact your financial situation much at all. Many years the car cost would be < 1 year of gains in the market.

It doesn't mean you have to spend the full 5% though. My bmw was roughly 2.5% of net worth. If you spent 2.5% then that would get you a much more reasonable (but still extremely nice) 75k car. That wouldn't make a dent in your financial picture as long as you kept it for a reasonable period and didn't get a new one each year.
How much are you willing to spend on the roundel? How much does the public's perception of your financial position sway your purchase? I could see it being important if future business demands you look the part. Then the roundel has it's value. Otherwise you're just a slave to fashion and pay the required charge.
Don't kid yourself. The difference in driving a bmw vs a accord/camry is much different than just the badge. Much stiffer/sportier handling, better acceleration, in general more fun to drive. Technology is also way better in the newer models.

Its a 10k delta compared to a top trim accord, but IMHO it is worth it. Better tech and a much better ride. The accord has gotten too big and floaty for my liking, and as someone coming from a top trim accord, a 250HP FWD car is an absolute waste. When i first got my v6 accord i was spinning the tires constantly and had to adapt to the car. It also torque steered under heavy acceleration and body rolled when cornering hard. The bimmer has AWD so no wheel spin and handling is much more fun!
I don't take my street vehicles to the track.
I don't either, but i definitely like the feel of the BMW when driving at street legal speeds. This car is especially good around town and in the city at < 40MPH. 300+ torque and fun handling around turns! Night and day difference compared to the accord really.
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Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by anon_investor »

SQRT wrote: Wed Jun 23, 2021 10:22 am Your rule of thumb might work for some people some of the time. Certainly doesn’t work for me. 10% of net worth for a well funded retired person is way too much to spend on a car.
So you're not going to buy a diamond covered car? :twisted:

But I agree, many BH have a lot saved for retirement, 10% net worth is going to be a very un-BH car.
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Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by spdoublebass »

teuton33 wrote: Wed Jun 23, 2021 10:24 am
spdoublebass wrote: Wed Jun 23, 2021 10:21 am So your first car you had for 7 years and the second car 8 years. Why can’t you hit the 10 year mark?

My personal rule of thumb is I look for a new car at 10 years or 300K miles, whichever comes first.

I have a 2011 Ford Escape with 255K on it. So I know that one will be needing replacement soon. My other car is a 2015 Ford Explorer with 150K on it. So that should be good for another few years.
Because I like driving newer cars
So why are you worried about a formula if you are acting on a want? Why do you need to justify how much to spend if you know you want something? Just buy the car you want regardless of cost.
I'm trying to think, but nothing happens
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Re: Best rule of thumb for car purchase: 5% of net worth

Post by Lee_WSP »

teuton33 wrote: Wed Jun 23, 2021 8:50 am
alfaspider wrote: Wed Jun 23, 2021 8:39 am By contrast, a 65 year old with $1 million net worth, almost exclusively in real estate in a HCOL area they don't want to move away from, who is retired and with significant long-term healthcare needs, absolutely can NOT afford a $50k car.
How common is this case really? 1m in RE assets 0 in other asset classes? They are making a choice to have that asset allocation.
Fairly common. Lots of older folks did not invest in the stock market and instead opted for real estate. One rental plus family home will do it pretty easily.
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Re: Best rule of thumb for car purchase: 5% of net worth

Post by bligh »

Lee_WSP wrote: Wed Jun 23, 2021 10:57 am
teuton33 wrote: Wed Jun 23, 2021 8:50 am
alfaspider wrote: Wed Jun 23, 2021 8:39 am By contrast, a 65 year old with $1 million net worth, almost exclusively in real estate in a HCOL area they don't want to move away from, who is retired and with significant long-term healthcare needs, absolutely can NOT afford a $50k car.
How common is this case really? 1m in RE assets 0 in other asset classes? They are making a choice to have that asset allocation.
Fairly common. Lots of older folks did not invest in the stock market and instead opted for real estate. One rental plus family home will do it pretty easily.
Not to mention the massive windfall the older generation have had due to the last 20 years of falling interest rates and rising house prices. My barber who is in his 70s (yes he still works) was telling me about how his home is worth over a million dollars now and how it was the smartest purchase he ever made.

It wasn't an asset allocation decision on his part, it is a windfall on a purchase he made. I doubt the current generation will see a similar windfall in home price rises during their life times. If they do, God help their kids.
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Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by randomguy »

teuton33 wrote: Wed Jun 23, 2021 8:02 am Lot of threads about this with people nervous with how much to spend on a car. I know this has bugged me too over the years. I am posting because I believe I have found the perfect rule: 5% of net worth. If you can stay at or under that you are good. It also lets you get some nice cars once your NW is in the millions :)

It is stupid at both ends. I am working making 150k/year with a 300k net worth. I should be driving a 15k car. I am retire and am worth 3 million. My income is now 120k/year but you think I can now afford a 150k car? In both cases most people would be better off with the 25-50k car depending on needs and desires.

And of course purchase price doesn't really matter. Total cost of ownership does. The fact that I can buy some Aston Martin for 30k isn't the same as buying some brand new toyota for 50k.
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Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by snackdog »

I would love to see Bezos or Musk spend 5% of net worth on a car.
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Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by bligh »

teuton33 wrote: Wed Jun 23, 2021 8:02 am Lot of threads about this with people nervous with how much to spend on a car. I know this has bugged me too over the years. I am posting because I believe I have found the perfect rule: 5% of net worth. If you can stay at or under that you are good. It also lets you get some nice cars once your NW is in the millions :)
Personally, the rule I would suggest to someone would be 2% of net worth or 25% of annual gross pay, which ever is greater, for a car you would keep 10 years or more. With exceptions to the rule super late or very early in life, or for exceptionally large portfolios.

If you are making $100K / year, I think you can buy a $25K car.
If you are making $50K / year I think you can buy a $12.5K car
If you are making $300K / year, I think you can buy a $75K car.

and so on..

If you re having to account for your net worth to buy the car then it makes more sense to be conservative. It means your portfolio is disproportionate to your income. You may be retired, out of a job, or at the tail end of your accumulation phase. So it makes sense to limit it to a smaller 2% cap, similar to the livesoft rule of car buying.

If you have $500K net worth, you can buy a $10K car.
If you have a $1 million net worth, you can buy a $20K car
If you have $2 million net worth, you can buy a $40K car.

and so on...

It's a big enough amount that you can get a good car for that much, and its a small enough amount that it won't affect your portfolio too much. In the event that you are earlier in the accumulation phase, 25% of your income is likely the larger factor anyway, so your smaller portfolio should not be coming into consideration.
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Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by Escapevelocity »

I do appreciate the pleasure of driving a well made and engineered car. Having said that, I've never made a car purchase based on how "fun" it is to drive or how many horsepower, torque, etc. it has under the hood. I choose a car based on comfort, utility and total cost of ownership.

My latest car purchase is a 2018 Honda Clarity PHEV. I bought it at the end of my 3 year lease for $15k after paying $335/month on the zero-down lease. The car is pristine with 30k miles. I plan to drive it for 10 more years and anticipate minimal cost of upkeep and maintenance.
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Re: Best rule of thumb for car purchase: 5% of net worth or 10% of yearly income (whichever is greater)

Post by teuton33 »

bligh wrote: Wed Jun 23, 2021 11:16 am
teuton33 wrote: Wed Jun 23, 2021 8:02 am Lot of threads about this with people nervous with how much to spend on a car. I know this has bugged me too over the years. I am posting because I believe I have found the perfect rule: 5% of net worth. If you can stay at or under that you are good. It also lets you get some nice cars once your NW is in the millions :)
Personally, the rule I would suggest to someone would be 2% of net worth or 25% of annual gross pay, which ever is greater, for a car you would keep 10 years or more. With exceptions to the rule super late or very early in life, or for exceptionally large portfolios.

If you are making $100K / year, I think you can buy a $25K car.
If you are making $50K / year I think you can buy a $12.5K car
If you are making $300K / year, I think you can buy a $75K car.

and so on..

If you re having to account for your net worth to buy the car then it makes more sense to be conservative. It means your portfolio is disproportionate to your income. You may be retired, out of a job, or at the tail end of your accumulation phase. So it makes sense to limit it to a smaller 2% cap, similar to the livesoft rule of car buying.

If you have $500K net worth, you can buy a $10K car.
If you have a $1 million net worth, you can buy a $20K car
If you have $2 million net worth, you can buy a $40K car.

and so on...

It's a big enough amount that you can get a good car for that much, and its a small enough amount that it won't affect your portfolio too much. In the event that you are earlier in the accumulation phase, 25% of your income is likely the larger factor anyway, so your smaller portfolio should not be coming into consideration.
So I can buy at 125k car at 500k income? Yeah right.

I agree 2% NW is better. I spent about 2.5% next car I will surely be <=2%

But realistically 2% is pretty strict so I went with *up to* 5%
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