2022-09-07-Decide_How_Much_to_Spend_on_a_Car
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00:00:25.480 | Welcome to Radical Personal Finance, a show dedicated to providing you with the knowledge,
00:00:28.520 | skills, insight, and encouragement you need to live a rich and meaningful life now while
00:00:32.720 | building a plan for financial freedom in 10 years or less.
00:00:35.340 | My name is Joshua Sheets.
00:00:36.340 | Today we continue our How to Buy a Car series.
00:00:38.820 | This is episode 3 in that series.
00:00:41.560 | Episode 1, we talked about deciding whether you should buy a car or not, and I encouraged
00:00:45.820 | you that if possible, most people should avoid owning a car from a financial perspective,
00:00:52.780 | but many of us from a lifestyle perspective will choose to buy a car.
00:00:56.880 | But you should decide and think carefully about the things you would give up by even
00:01:00.040 | buying a car in the first place, while also considering the reasons why a car could be
00:01:04.840 | a really important part of your life assets.
00:01:08.820 | In episode 2, we talked about deciding what kind of car you should buy.
00:01:13.080 | We talked about analyzing your needs, your wants, the size of the car, the specific capabilities,
00:01:17.960 | the features, the fanciness, the image, etc. and even your needs now and later.
00:01:23.520 | I walked you through so hopefully you have some ideas of deciding what kind of car would
00:01:27.400 | be appropriate for you.
00:01:29.440 | In today's episode, I want to talk to you about step 3, which is decide how much you
00:01:35.920 | should spend on a car.
00:01:38.520 | We want to do this before we go to the market to look at what is available.
00:01:43.320 | We want to decide how much you should spend on a car.
00:01:47.400 | I want you to come up with a specific number that will be appropriate for you to spend
00:01:53.280 | on a car.
00:01:55.200 | Quick reminder, why does this matter?
00:01:57.960 | Very simply, a car is a big purchase that will go down in value.
00:02:03.960 | Again, slight caveat, over the last couple of years it has been a wacky market, cars
00:02:08.480 | have not gone down in value the way they traditionally have, but I think it is very obvious that
00:02:16.060 | this is a temporary aberration and we will quickly return if we haven't already returned
00:02:21.840 | to a normal market with cars, where cars go down in value.
00:02:28.120 | This matters a lot when you think about growing your finances.
00:02:31.680 | Cars are not usually the biggest expense that people make.
00:02:35.400 | For example, a house is usually the biggest expense that most normal people make, but
00:02:41.520 | purchasing a house is a good way to increase your net worth.
00:02:45.600 | Houses generally go up in value.
00:02:48.840 | Cars generally go down in value.
00:02:50.800 | There are other large expenses that we know are pure consumption items.
00:02:55.160 | For example, if you plan an elaborate and expensive vacation this year, you will go
00:02:59.440 | into that knowing that I am spending money on something that I want to spend money on
00:03:03.560 | and there is no sense of financial return to it.
00:03:07.640 | People look at cars as having utility value, I have to have one, it is something that I
00:03:13.760 | need.
00:03:14.760 | If you are going to be losing money on something that has utility value, you want to make sure
00:03:18.440 | that the amount of money that you lose is not going to sink you.
00:03:23.520 | We make lots of purchases of things that go down in value.
00:03:28.400 | You might go out and buy the latest $1,000 iPhone and that iPhone will lose half or more
00:03:33.680 | than half of its value in the first year of ownership.
00:03:37.080 | But that amount of financial loss isn't going to sink most people.
00:03:41.440 | It might sink someone who is very young or who has very low wages, but that decrease
00:03:45.720 | in value of a $1,000 iPhone losing $500 of depreciation is not going to sink most people's
00:03:51.680 | finances.
00:03:52.680 | But if we compare the $1,000 iPhone to a $50,000 car, we are in a very different situation.
00:04:00.440 | A $50,000 car that loses 15% of its value in a year, which is the normal rate of depreciation
00:04:06.600 | of vehicles, will lose $7,500 of value this year.
00:04:13.000 | That's too much money to lose until you're rich.
00:04:16.760 | Remember, I often compare this to something like fully funding a retirement account.
00:04:22.360 | If you fully fund a Roth IRA, that simple annual contribution, instead of losing $7,500
00:04:30.160 | on vehicle depreciation, you choose to put the money into a retirement account.
00:04:33.820 | That decision alone, doing that every year, can make you a millionaire in the fullness
00:04:37.800 | of time.
00:04:39.280 | So that's too much money to lose until you're rich, especially when we're talking about
00:04:44.320 | depreciation alone.
00:04:46.360 | Remember that depreciation is not the only expense.
00:04:49.280 | The rest of your car expenses will generally be proportionate to the purchase price of
00:04:54.640 | your car.
00:04:55.880 | Buy a more expensive car that's newer, you'll generally have a higher cost of insurance.
00:05:01.380 | Buy a more expensive car that's newer, you're more likely to spend extra money modifying
00:05:06.400 | it and getting it accessorized just the way that you want.
00:05:10.160 | Even buy a new car and you're going to spend more money on car washes and car washing equipment,
00:05:14.720 | etc.
00:05:15.720 | Now, these aren't always perfectly proportional.
00:05:19.000 | There are often ways that you can look at this and argue the opposite.
00:05:22.960 | For example, an older car might actually not save you that much on insurance if it is an
00:05:29.280 | unsafe car.
00:05:30.280 | Because remember that there are two components to purchasing auto insurance.
00:05:34.380 | There is your liability component and then also your comprehensive and collision insurance,
00:05:40.440 | which is based upon the value of the car.
00:05:42.920 | But if you're just maintaining liability insurance on your vehicle and you are seeking to carry
00:05:50.040 | -- you're maintaining liability insurance on the vehicle, then your risk -- my brain
00:06:00.420 | totally froze up -- your risk is going to be based upon the risk of injury to inhabitants
00:06:06.900 | of that vehicle in many cases.
00:06:08.640 | So sometimes an older car doesn't actually save you that much money on the liability
00:06:12.240 | component.
00:06:13.240 | But generally, you're going to have cheaper insurance with an older car.
00:06:17.360 | You can often drop your comprehensive and collision coverage on an older car where you
00:06:21.400 | wouldn't do that with a newer car, etc.
00:06:23.200 | So prices and costs and expenses on a car are generally proportionate to the purchase
00:06:28.440 | price.
00:06:29.440 | A car is a big purchase that will go down in value.
00:06:33.200 | And so we want to minimize the losses to an amount that is acceptable based upon our current
00:06:39.960 | net worth and our ambitions for wealth building.
00:06:44.680 | So how much should you spend on a car?
00:06:47.200 | I'm going to give you three suggestions.
00:06:50.280 | The first suggestion is you should spend the amount of money that you have.
00:06:55.840 | And what I mean is you should limit your purchase to the amount of money that you have saved.
00:07:01.680 | I'll talk in a separate episode about the advisability of financing cars versus paying
00:07:06.400 | cash.
00:07:07.760 | There are a few scenarios in which it can make sense to finance a car, which I'll deal
00:07:11.560 | with separately.
00:07:13.120 | But in virtually all other scenarios, you're better off simply paying cash.
00:07:19.640 | And you should limit yourself to the amount of money that you have saved.
00:07:24.640 | Here I'm specifically targeting people who are younger in their wealth building journey.
00:07:28.720 | If you've got $5,000 saved in a bank account and you want to go and buy a car, don't go
00:07:34.380 | out and start shopping for $20,000 cars.
00:07:37.780 | Shop for $4,000 and under cars.
00:07:41.400 | Always limit yourself to the amount of money that you have saved.
00:07:44.920 | Car payments are a seductive thing.
00:07:49.300 | Car payments are the sign and stigma of poor people.
00:07:54.140 | You can raise your income to the point where, "Yeah, I've got a car payment.
00:07:59.200 | It's no big deal."
00:08:00.440 | There are lots and lots and lots of multi-millionaires out there who have a couple thousand dollars
00:08:05.280 | a month in car payments, and it's no big deal.
00:08:07.600 | They take advantage of a 0% financing.
00:08:09.240 | They like driving new cars, and it's no big deal.
00:08:12.040 | But most people who have large car payments are broke.
00:08:17.680 | They're not broke because they borrowed money.
00:08:20.080 | They're broke because they borrowed too much money.
00:08:22.360 | They're broke because they didn't obey the rules that I'm going to get to in a moment.
00:08:26.240 | One simple way of avoiding disaster is simply limiting yourself to the amount of money that
00:08:31.800 | you have.
00:08:33.680 | This simple rule is astoundingly effective because it causes you to think very carefully
00:08:40.000 | about the value of a car.
00:08:41.480 | Let me give you an example.
00:08:43.320 | Let's say that you're 25 years old.
00:08:45.440 | You've been a diligent saver.
00:08:47.000 | You've saved $50,000.
00:08:49.300 | Would you really go out and freely spend $50,000 on a car in that scenario?
00:08:56.440 | Most people who were diligent enough to save and accumulate $50,000 would not do that.
00:09:01.860 | They would recognize that they saved the money for a reason, and they would focus on finding
00:09:06.240 | an investment for the money that could allow it to grow more.
00:09:10.700 | But there are many people who will go out, and because there's lower friction of having
00:09:15.040 | car payments, easily buy a $50,000 car with a series of timed payments.
00:09:20.920 | You want to avoid that.
00:09:21.920 | Rule number one is limit yourself to the amount of money that you have, the amount of money
00:09:26.560 | that you have saved.
00:09:27.800 | It's a good rule of thumb.
00:09:30.760 | The next limitation is don't ever spend more than somewhere between 10% to 50% of your
00:09:38.800 | annual income on cars or cumulatively vehicles.
00:09:46.240 | You'll notice that's a very broad range.
00:09:48.400 | 10% to 50% is a big range.
00:09:52.440 | Your decision on how much to spend on a vehicle will come down to some of the other factors
00:10:00.320 | that we've talked about.
00:10:02.200 | If you never go more than 50%, you're going to be fine.
00:10:05.840 | But if you really care about wealth building, I would encourage you to focus on about a
00:10:10.560 | 10% of your annual income.
00:10:13.160 | Again, the reason this is important is it keeps your money available to you to invest
00:10:18.840 | in the things that are going up in value.
00:10:21.440 | Let me talk about these ranges of numbers.
00:10:24.160 | The 10% rule I owe to many years ago, a blog post by the financial blogger Financial Samurai.
00:10:31.560 | This was 10 years ago.
00:10:32.720 | I came across his original blog post on the subject and I thought, "That makes sense."
00:10:38.840 | Prior to that, I had no personal rule for the amount of car to buy.
00:10:43.720 | Most people don't.
00:10:44.720 | If you go and you ask a random person on the street, "How much should you spend on a car?"
00:10:50.440 | Most people don't have any rule.
00:10:52.200 | They will say, "As much as you can afford," but how would you know what you can afford?
00:10:56.200 | Or they'll say, "As much as you have," or you need some rule.
00:11:01.360 | When I found the 10% rule, it resonated with me because 10% is such a low amount of money
00:11:07.440 | that it always keeps huge amounts of your money available for investing.
00:11:13.920 | Let's go through some numbers.
00:11:15.280 | If you're earning $30,000 a year, that means that you should buy a car that's worth about
00:11:19.720 | $3,000.
00:11:22.160 | To me, that feels right.
00:11:24.480 | Somebody making $30,000 a year desperately needs to save money.
00:11:28.400 | They can't afford to take a bunch of depreciation.
00:11:30.760 | $3,000 car will go down by 15%, which means that it will lose about $450 a year.
00:11:37.360 | That's reasonable.
00:11:38.360 | That person will have a $1,000 iPhone and a $30,000 car will lose $1,000 between the
00:11:43.160 | two of them.
00:11:44.160 | Good to go.
00:11:45.160 | But if a person making $30,000 goes out and buys a $30,000 car, again, that $30,000 car
00:11:53.200 | will lose 15% of its value this year.
00:11:55.440 | That'll be $4,500.
00:11:57.960 | That is a huge percentage of income to be losing.
00:12:05.080 | If someone's making $100,000 a year, they can go and buy a $10,000 car.
00:12:10.800 | When we get to those numbers, it starts to feel a little bit stranger because most people's
00:12:15.120 | lives are not optimized towards wealth accumulation.
00:12:17.920 | Say, $100,000, you should buy more than a $10,000 car.
00:12:22.120 | If you care about being wealthy, you'll stick to the 10% rule or something near it.
00:12:27.400 | A $10,000 car will lose 15% of its value, which means you'll lose $1,500 this year on
00:12:33.600 | depreciation.
00:12:35.160 | That's a reasonable amount of money to lose in depreciation if you're earning $100,000.
00:12:39.400 | But if the person earning $100,000 goes out and buys a $50,000 car, again, that's $7,500
00:12:47.040 | of depreciation lost this year on a $50,000 car.
00:12:50.400 | That feels excessive to me.
00:12:51.760 | To lose 7.5% of your income to depreciation on an automobile, that's too much.
00:12:57.560 | You're not going to get wealthy losing that much on silly expenses if you can avoid it.
00:13:02.640 | Someone making $300,000 a year, well now $300,000 a year, 10%, means that you can go out and
00:13:09.180 | you can purchase a $30,000 car.
00:13:12.200 | Here's where the numbers start to get a little bit more unglued.
00:13:17.080 | I think that you can follow that 10% rule all the way up.
00:13:20.200 | Want to have a $100,000 car?
00:13:22.320 | Make sure you're earning a million dollars a year.
00:13:24.600 | That feels right in many circumstances.
00:13:27.960 | But the problem is that you start to get into a lifestyle disparity.
00:13:33.840 | Someone's making half a million dollars a year buying a $50,000 car.
00:13:38.200 | Because the numbers are so much larger, I think there you could tilt it up and still
00:13:44.320 | be fine.
00:13:46.360 | Someone earning $500,000 a year could go and purchase a $200,000 car.
00:13:53.720 | That would be a lot, but you could do it.
00:13:57.680 | A $200,000 car would have a depreciation this year of $30,000.
00:14:02.840 | If the person earning $500,000 a year is also saving $150,000 to $200,000, that person is
00:14:10.520 | going to be wealthy no matter what happens.
00:14:12.840 | You can follow the 10% rule all the way up.
00:14:16.340 | Can you change on the 10% rule?
00:14:18.200 | Can you adjust it?
00:14:19.200 | Well, I think you can.
00:14:20.800 | If becoming rich fast is not your number one goal, there'll be times in life where you
00:14:26.880 | look around and you say, "I can't quite accomplish what I need on this budget."
00:14:32.560 | I imagine a father with a few children, three children, wants to go buy a minivan, looking
00:14:39.280 | around and saying, "I'm making $50,000 or $60,000 a year, but the minivans in the $5,000
00:14:45.360 | space, that's not quite what I want.
00:14:49.160 | I'd like to have something that's a little bit newer that I can own for longer.
00:14:52.720 | I want to have something that's more comfortable, long road trips, et cetera, all the reasons
00:14:56.680 | we always give for buying new cars."
00:14:59.680 | Can you go a little higher?
00:15:00.680 | Well, I think you can.
00:15:02.480 | My number is the absolute maximum ceiling should be 50% of your annual income, 50%.
00:15:10.600 | That 50% number needs to not just be for one car, but the 50% number needs to go for all
00:15:17.760 | of the vehicles or all of the stuff in your life that is depreciating assets, depreciating
00:15:24.720 | rolling stock, cars, motorcycles, boats, campers.
00:15:30.880 | Anything like that that goes down in value needs to be limited to 50% of your annual
00:15:35.480 | income.
00:15:36.480 | Here, I want to credit Dave Ramsey as the loudest proponent of this rule, and I think
00:15:42.160 | he's right.
00:15:43.440 | If you think about the financial space, let's say that you have a household income of $50,000.
00:15:49.240 | If you have a household income of $50,000 and you have up to $25,000 in vehicles, $25,000
00:15:56.360 | going down at 15% per year this year, that would be $3,750.
00:16:01.600 | That's quite a lot of money for someone making $50,000 to lose, but it's probably not going
00:16:07.320 | to sink that person.
00:16:08.880 | There's still going to be enough other money available.
00:16:11.880 | As you go up, the numbers make even more sense.
00:16:14.440 | $150,000 household, okay, $75,000, that's not unreasonable.
00:16:18.760 | Let's say you have two cars, two $30,000 cars and a $15,000 camper, things like that, $15,000
00:16:26.040 | boat, two $30,000 cars.
00:16:28.000 | You can put it together however you want.
00:16:30.280 | That's not unreasonable.
00:16:31.760 | It's still a significant amount of money in depreciation.
00:16:35.120 | $75,000 of vehicles would be a loss of $11,250 this year in depreciation, but at least you're
00:16:43.000 | okay.
00:16:44.000 | It's not too high.
00:16:45.400 | My answer to you, if you can't find something that you need at 10% is, you can go anywhere
00:16:51.640 | from 10% to as high as 50% if you need to.
00:16:55.680 | If you're serious about wealth building, focus on 10%.
00:17:00.180 | If you're not so serious about wealth building, you just want to be generally prudent, you
00:17:04.720 | can go as high as 50%.
00:17:07.240 | But if you have more than 50% of your annual income in the total value of cars, vehicles,
00:17:15.640 | etc., then you should limit those expenses and consider changing something.
00:17:21.880 | In a moment, I want to talk about what do you do if you wake up and you have too much,
00:17:25.800 | but let's go on to the third rule.
00:17:28.160 | Here again, I want to credit Financial Samurai.
00:17:30.880 | What's the net worth rule?
00:17:32.680 | What if you are someone who has $5 million in the bank, but you just have some dividend
00:17:37.660 | stocks that are paying you some money and you don't spend a lot of money, you live debt
00:17:41.420 | free, you own all your assets, you're doing fine, you spend say $100,000.
00:17:48.160 | You have $5 million of assets, but you have $100,000 of income that you're living on.
00:17:52.440 | Does that mean that you should only drive a car worth $10,000?
00:17:55.280 | Well, here I think we can move to a net worth rule.
00:18:00.240 | Financial Samurai's math, which again I'll link both of his excellent blog articles on
00:18:04.040 | this topic, Financial Samurai's math is 5% of your net worth.
00:18:09.200 | So if you think about a net worth rule, you can always go and spend 5% of your net worth
00:18:14.740 | on a vehicle.
00:18:16.340 | If you have $100,000 net worth, you can buy a $5,000 car.
00:18:20.960 | Most people with $100,000 net worth are not calculating their wealth based upon their
00:18:25.400 | net worth, they're calculating their net worth based upon their income.
00:18:28.640 | But if you have a $5 million net worth, you could go and you could spend 5% of your net
00:18:34.520 | worth on vehicles, $250,000 total.
00:18:37.120 | Now if you think about it, that ratio feels really good to me.
00:18:43.080 | And again, this is not just for a car, this is for all of your, what I call rolling stock,
00:18:49.360 | right?
00:18:50.360 | All of your cars, all your trucks, all your tractors, all of your boats, your motorcycles,
00:18:54.600 | etc.
00:18:55.600 | Even airplanes, whatever it is that you have.
00:18:57.960 | $5 million, $250,000 of stuff going down in value, that seems to me really reasonable.
00:19:04.560 | You can fit in plenty of toys on that.
00:19:06.640 | You would have a depreciation of $37,500 on a $5 million net worth.
00:19:12.560 | That's not going to sink you, right?
00:19:14.480 | If your income, if your assets increase by 5%, they're going to increase by $250,000.
00:19:21.560 | So you're still going to be building wealth over time.
00:19:25.160 | $37,500 of depreciation is not going to sink you.
00:19:28.800 | And that still allows you with enough money for you to be able to go and purchase the
00:19:34.740 | kinds of toys that you might like to have.
00:19:37.980 | Could you go higher?
00:19:38.980 | You can.
00:19:40.200 | And so if you choose to, you can.
00:19:44.240 | There is going to come a time in which having more assets is not so significant for you
00:19:51.480 | as much as consuming those assets and using them for their purpose, the reason you saved
00:19:56.400 | them in the first place.
00:19:58.160 | So if you make the conscious decision at some point to stop growing your net worth, then
00:20:03.880 | you can spend up to the amount of your net worth that you have in income.
00:20:08.640 | You can spend up to your income in depreciating assets, and you could choose at some point
00:20:12.480 | to go ahead and start consuming assets.
00:20:15.380 | But if you want to continue growing your net worth and you're looking for a good round
00:20:19.320 | target to target, the number is 5% of your net worth.
00:20:25.880 | So those are the three rules.
00:20:27.040 | Number one, limit yourself to the amount of money that you have saved.
00:20:30.920 | Don't go into debt for stuff.
00:20:33.160 | Don't go into debt for cars.
00:20:34.320 | Don't go into debt for boats.
00:20:35.360 | Don't go into debt for that stuff.
00:20:37.720 | I'm not 100% on that, but I'm 98%.
00:20:41.440 | I'll lay out in a separate show the exceptions to that.
00:20:45.000 | But my entire lifetime, I have watched people, when times are good, they say, "I'm going
00:20:50.160 | to go into debt."
00:20:51.240 | Times are not always good.
00:20:52.440 | And so there's a benefit to being conservative and avoiding payments.
00:20:57.080 | Years ago, I knew a guy, very wealthy guy, and his comment to me was, "I always avoid
00:21:02.440 | payments because then no matter what happens, I'm fine.
00:21:05.760 | I can go get a job as a bagger at a grocery store and I can be fine because I don't have
00:21:10.520 | payments.
00:21:11.520 | My life isn't going to collapse."
00:21:12.520 | And to me, that's always been something very attractive.
00:21:16.600 | There are a few situations in which I think it makes sense to take payments on, but they're
00:21:20.400 | very, very limited.
00:21:22.080 | And the vast majority of the time, you should limit yourself to the amount of money that
00:21:25.080 | you have saved.
00:21:26.080 | It will allow you to make good decisions.
00:21:28.840 | Second rule is spend no more than 50% of your annual income and target, if you're serious
00:21:35.040 | about building well, spending no more than 10% of your annual income on a vehicle.
00:21:40.320 | And if you're wealthy and you're living based on assets and you don't have an income that
00:21:44.200 | you're going to calculate on, you can spend up to 5% of your net worth on things that
00:21:48.040 | are going down in value like cars.
00:21:53.420 | Are there counter arguments as to why you should spend more?
00:21:59.760 | Of course there are.
00:22:01.520 | People who want to spend their money will always find ways to justify spending their
00:22:04.480 | money.
00:22:05.480 | But I think the counter arguments as to why you should spend more, given the guidelines
00:22:09.800 | that I've given, can always be negated.
00:22:13.600 | The primary argument that people will give is, "I don't want an old car that's going
00:22:19.080 | to break down all the time."
00:22:22.080 | That kind of comment reflects basically a 1980s mentality.
00:22:28.320 | There was a period in car history in which if you had an older car, you could expect
00:22:34.560 | it to be breaking down all the time.
00:22:37.440 | But after the revolution of Japanese automobiles in the 1980s, followed up by Japanese and
00:22:42.320 | Korean and just amazing improvements in quality across the board on practically all manufacturers,
00:22:49.080 | we're at a point now where any car can be reliable.
00:22:54.140 | Reliability is much more a function of your carefully choosing a make and model that is
00:22:58.520 | known for reliability and carefully choosing a vehicle that has a known history, more than
00:23:05.280 | it is a function of the age of the car.
00:23:09.040 | On virtually any budget, you can find a very reliable automobile on virtually any budget
00:23:16.440 | following those rules.
00:23:18.840 | Making $50,000 a year, you can find all day long reliable $5,000 vehicles.
00:23:25.720 | The one that is more persuasive to me has to do with safety.
00:23:30.260 | Can I get a safe car based upon those numbers?
00:23:34.140 | I've taken a lot of pride over the years of finding cheap cars.
00:23:37.700 | I've told this story, but I'll say it again.
00:23:39.720 | One of the best deals I found one of the years ago was I was going along and I found a friend
00:23:46.160 | of mine who was selling an old Toyota Corolla and she sold it to me.
00:23:50.680 | She didn't want to drive anymore.
00:23:51.920 | She sold it to me for $500.
00:23:54.480 | It was a fair price and the car was basically the perfect cheap car.
00:23:58.860 | It was a little four cylinder car, manual transmission, manual windows, manual door
00:24:04.560 | locks, nothing to go down, nothing to break down.
00:24:06.600 | It was a 1998 Toyota Corolla.
00:24:08.640 | The engine will run until about a half a million miles.
00:24:11.440 | It's a completely bulletproof car.
00:24:13.560 | I bought it for $500.
00:24:15.160 | I fixed up a couple of things, cosmetic, I don't even remember at this point in time,
00:24:19.360 | but I had virtually no money in the car and I just kept it as a little beater that I could
00:24:22.520 | lend out to people or if my car went broke, broke, went broke.
00:24:26.240 | If my car broke down, I could use it, et cetera.
00:24:30.160 | I was driving it one time and I thought to myself, Joshua, why are you driving this?
00:24:35.320 | This is not worth it because for all of the frugality benefits of that car, it is not
00:24:40.600 | a safe car.
00:24:41.600 | I was driving along at 70 miles an hour on I-95 and I thought to myself, I do not want
00:24:48.000 | to get in an accident in this car.
00:24:50.160 | Yes, it has an airbag, but I do not want to get in an accident in this car.
00:24:54.780 | I decided to get rid of it.
00:24:55.780 | I sold it to a friend of mine and that friend is still driving.
00:24:58.600 | It's still doing fine.
00:25:01.420 | Never breaks down because there's nothing that can break on it.
00:25:03.880 | It's a perfectly reliable, perfectly useful car that was unsafe.
00:25:09.280 | But that doesn't mean I need to go and spend $30,000 on a vehicle.
00:25:14.560 | To get a safe car, I don't need to spend $30,000.
00:25:18.060 | If you will shop based upon safety on almost any budget, again, $5,000 to $10,000, you
00:25:25.240 | can find cars that are very well regarded for safety.
00:25:30.880 | Years ago, I bought a $5,000 minivan, five-star crash rating minivan, all of the airbags,
00:25:37.600 | all of the stuff around the side curtain, the front, everything, et cetera.
00:25:41.240 | I went and watched the crash tests.
00:25:43.120 | Perfectly safe, perfectly reliable, $5,000.
00:25:47.000 | If you're at least in that range of $5,000 to $10,000, you can find cars that are safe.
00:25:53.000 | What about image?
00:25:55.080 | Image is one where you will often have a hard time.
00:25:59.400 | If by image you mean a new car or a certain brand of a car, you will often have a hard
00:26:04.820 | time getting a car that fits those rules, especially if you're trying to tend towards
00:26:11.680 | the luxury brand schedule.
00:26:13.880 | A BMW, a Mercedes, with a few exceptions on the models, they're just not going to be as
00:26:19.640 | reliable.
00:26:20.640 | You buy an older one, it's not going to be as reliable.
00:26:22.440 | It may still be very pleasurable, but it's not as reliable as a '98 Toyota Corolla in
00:26:26.720 | terms of breaking down.
00:26:28.720 | What you can do is if your budget limits you to an amount that is below what many people
00:26:36.320 | are doing, you can often find one of those hard to categorize vehicles that I mentioned
00:26:44.420 | in the previous episode.
00:26:46.140 | You might find a great 1970s Jeep Grand Wagoneer that has all this classic style.
00:26:54.180 | It's not super reliable, but it's not expensive.
00:26:56.760 | You might find vehicles that shift through.
00:26:59.900 | For example, Land Rovers have horrible value.
00:27:05.840 | They depreciate like crazy.
00:27:08.340 | That's because they're pretty unreliable.
00:27:11.140 | If you need a Land Rover, you can often buy something like that that's cheaper.
00:27:15.780 | It's not going to be reliable, but your image needs where those vehicles are perceived to
00:27:21.260 | be prestige brands.
00:27:23.260 | Minivans, SUVs, et cetera, those kinds of vehicles that break through the mold, you
00:27:28.020 | can often find something that fits those budgets.
00:27:32.700 | Don't automatically take an excuse and say, "I'm limited to a certain amount.
00:27:37.460 | I can't get the car that I want."
00:27:39.380 | Exercise your creative juice and find a vehicle that fits your needs.
00:27:47.020 | Last question, what do you do if you have too much car?
00:27:50.580 | What if you wake up today and you have 80% of your annual income in cars?
00:27:57.140 | It's probably something that you should change.
00:27:59.620 | The numbers here will vary.
00:28:01.940 | If you say, "Joshua, I've got 59% of my annual income is in vehicles, but I was strategic
00:28:09.980 | and careful about the vehicles that I chose."
00:28:12.460 | I find this most of the time with young families.
00:28:15.020 | They say, "We wanted a minivan.
00:28:16.020 | We went out and bought a brand new minivan.
00:28:17.580 | We're planning to have it for a long time.
00:28:18.980 | Yeah, we paid $55,000.
00:28:20.740 | We got a household income of $85,000."
00:28:23.540 | I would say it's too much money.
00:28:26.100 | If I were advising you before the sale, I would advise you not to do it.
00:28:32.100 | But that doesn't necessarily mean you should just dump the car today.
00:28:36.500 | You should probably, in that situation, just keep it.
00:28:39.980 | If you own too much of a car, your first way out is just keep the vehicles until they depreciate
00:28:47.220 | down to a lower amount and then be more thoughtful the next time around.
00:28:51.740 | The best way for you—I need to be careful with my words—a very good, reliable way
00:28:58.820 | to eliminate the problems of buying too much vehicle is to keep your vehicle for a very
00:29:03.960 | long time.
00:29:05.740 | Remember, depreciation is an annual number based upon the current value.
00:29:12.160 | So that $50,000 car that declines in value this year by $7,500, this next year it's
00:29:19.620 | worth $42,500.
00:29:22.220 | And then it'll receive a 15% depreciation, which means it'll lose $6,375.
00:29:28.540 | And in the second year, it'll be down to $35,000.
00:29:31.720 | So your car today that is too much for your income will very quickly be worth less.
00:29:39.340 | If you keep it, you can enjoy the benefits, the reasons that you bought the car in the
00:29:45.420 | first place, and enjoy them for a long time by just committing to keep the car.
00:29:51.660 | Because cars depreciate in value so much, very quickly your car will be down into the
00:29:57.580 | ratio where it makes sense.
00:29:59.780 | And now that you know the ratio, you can avoid going out and simply making another big mistake.
00:30:06.660 | I think financially a very good argument can be made that the person that goes out and
00:30:11.020 | buys a brand new vehicle today, spends $60,000 for a wonderful loaded minivan, and keeps
00:30:18.500 | it for 20 years, will probably be ahead of the person that's constantly trading out a
00:30:24.260 | vehicle every three or four years and trying to keep frugal purchases by following the
00:30:29.860 | numbers and buying $15,000 vehicles.
00:30:32.660 | I think there's a good argument to be made for that.
00:30:35.360 | If you bought it new, you know the history of the car.
00:30:39.540 | If you bought a car that was a good vehicle, that was known for reliability and for good
00:30:44.960 | ownership costs, you can own it from new, you can make sure that all the maintenance
00:30:49.080 | is taken care of, you can get your real money's worth out of accessories, modifications, things
00:30:53.980 | like that.
00:30:54.980 | The car can serve you, be a wonderful part of your lifestyle, and it can just be, it
00:30:59.660 | pays off when you keep it for a long time.
00:31:02.360 | So in most cases, I think the best thing is just keep your vehicles that you have and
00:31:07.340 | own them until they're insignificant in terms of your overall financial situation.
00:31:13.060 | Where that advice is not appropriate is if the numbers are radically out of whack, or
00:31:20.140 | if you've got a radically inappropriate vehicle.
00:31:23.940 | You're making $50,000 a year and you've got a $100,000 car that you got on payments and
00:31:30.540 | you're just barely making it and you've got a huge amount of money left that you owe on
00:31:35.040 | it.
00:31:36.040 | Well in those kinds of situations, you're so radically out of balance that you have
00:31:39.180 | to get rid of it.
00:31:40.260 | You will never get ahead financially making $50,000 a year with a $100,000 car.
00:31:46.880 | You have to change it.
00:31:48.380 | And in today's world, it's remarkably not unheard of to have some of those numbers.
00:31:54.540 | You can have a loaded out pickup truck or a loaded out SUV that approaches $100,000
00:31:59.980 | and if you finance the car and you had a big down payment and you stretched the payment
00:32:04.220 | out over 72 months, etc., that may have been considered affordable and they lent you the
00:32:08.500 | money for it.
00:32:09.500 | But you'll never get ahead financially owning that much vehicle.
00:32:12.380 | So if the numbers are radically out of whack, then you should sell the car.
00:32:17.220 | If you have payments on a vehicle, then you should very seriously consider selling the
00:32:22.060 | car.
00:32:23.060 | I will devote an entire episode to the scenario of, "Hey Joshua, I've got a big car payment
00:32:28.420 | and I owe more on it than it's worth and I have no money.
00:32:30.860 | What do I do?"
00:32:31.860 | This is a very difficult situation that many people wind up in because people who are in
00:32:35.620 | the habit of buying new cars frequently roll negative equity from vehicle to vehicle to
00:32:42.980 | vehicle to vehicle and they wind up upside down having a car that's worth $40,000 and
00:32:48.300 | they have a car note of $52,000 and there's nothing they can do because if they sold the
00:32:53.340 | vehicle, not only would it sell for $40,000, they would have to come up with $12,000 out
00:32:58.380 | of pocket to pay off the note in order to get the title so they can accomplish the sale.
00:33:05.740 | And worse than that, they would still have to come up with the money out of pocket to
00:33:08.580 | go and pay for another car.
00:33:10.820 | So this is a very difficult situation.
00:33:13.820 | But in some cases, if you can effectuate the sale, just simply amputating cars can free
00:33:19.340 | up enough money that you can clean up other messes, etc.
00:33:23.660 | In closing, you decide how much money you're going to spend on a car and decide it before
00:33:32.780 | you go shopping.
00:33:35.500 | You may find after shopping that you need to adjust your budget in some regard.
00:33:43.100 | But don't start by going out to the car market and kind of wandering around because as soon
00:33:50.300 | as you do that, you will be quickly and easily enticed by low monthly payments, easy financing,
00:33:58.060 | you'll be quickly enticed by the wonderful new car smell, how shiny it is, how beautiful
00:34:03.420 | it is, how comfortable it is.
00:34:05.500 | Then you'll start justifying to yourself a whole long list of very practical justifications.
00:34:09.500 | "I'm going to buy this car because it's safer for my children and after all, my children
00:34:13.700 | are my number one most valuable possession and aren't they worth it to protect?
00:34:17.380 | I'm going to buy this car because it has a really great MPGs and after all, gas prices
00:34:21.180 | are really high right now.
00:34:22.660 | I'm going to buy this car because it's going to impress the world and it's going to give
00:34:26.180 | them the image that I need to portray to them.
00:34:29.100 | I'm going to buy this car and I'm going to keep it for a really long time.
00:34:32.380 | That way, my mistake of buying too much car and spending too much on it isn't going to
00:34:36.340 | actually pay off."
00:34:37.340 | You'll justify it.
00:34:38.340 | We all do.
00:34:39.340 | All of us justify it to ourselves.
00:34:41.260 | So come up with your rule for the reasons that make sense to you and stick to your rule
00:34:47.220 | and understand what your numbers are before you go to the car marketplace.
00:34:52.420 | These are my suggestions.
00:34:53.500 | Number one, don't spend more money than you have saved that you can just simply write
00:34:57.260 | a check for and buy the car.
00:34:59.580 | Number two, limit your total vehicle ownership to 10% of your annual income, annual household
00:35:04.860 | income.
00:35:05.860 | If you can't do it on 10% and you're willing to have a slower path to wealth, you can go
00:35:11.060 | above 10% to a maximum of 50%, never more than 50%.
00:35:17.160 | But if it's 15%, okay, and you're willing to give it up, that's fine.
00:35:21.100 | Or if you're wealthy, then limit your vehicle exposure to 5% of your net worth.
00:35:27.220 | If you follow those rules, you'll have the vehicle that you need and that you want, and
00:35:31.980 | you'll continue to build wealth, which makes the vehicle far more enjoyable.
00:35:38.780 | I have made a lot of financial mistakes in my life.
00:35:43.940 | One of the few mistakes that I have avoided is having a car payment.
00:35:48.260 | I've never had a car payment.
00:35:50.840 | And having lived my entire adult life free of car payments, you can't get me to go and
00:35:56.620 | change that.
00:35:57.620 | I'm telling you, it is the best feeling in the world to know that you have control of
00:36:01.900 | your money.
00:36:03.180 | If you avoid car payments, virtually anything else that you want is within your reach.
00:36:10.180 | I'm not opposed to borrowing money for assets that are going up in value.
00:36:14.940 | Houses, businesses, investments, those are all good uses of borrowed money.
00:36:21.500 | But cars are not a good use of borrowed money.
00:36:26.820 | Boats are not a good use of borrowed money.
00:36:29.420 | RVs are not a good use of borrowed money.
00:36:33.100 | Because when you wind up out there in the thing, you're always thinking about how much
00:36:36.380 | it costs you, and you can't ever enjoy it.
00:36:39.180 | So if I want something that is more than I have, I use that as motivation.
00:36:46.780 | If you're earning $100,000 a year and you say, "Josh, you're telling me I can only spend
00:36:50.100 | $10,000 on a car?"
00:36:51.420 | You have two choices.
00:36:54.260 | Choice A is throw the advice out the window and go spend more money on a car and wind
00:36:58.820 | up less wealthy.
00:37:01.420 | If you become wealthy, it's a much slower process, not in 10 years, or maybe even wind
00:37:06.140 | up broke like many people do.
00:37:08.340 | Or choice B is use your desire for stuff as motivation to work and say, "I want a $100,000
00:37:18.060 | car.
00:37:19.060 | Okay, 10x your income."
00:37:22.180 | And for me, I've always found those goals incredibly persuasive.
00:37:26.180 | You want something?
00:37:27.300 | Awesome.
00:37:28.300 | Set yourself the rule of what you're going to do, and when you do this, you're going
00:37:32.020 | to go and buy it.
00:37:33.620 | And making that deal with yourself and saying, "I want this consumption item, so therefore
00:37:39.460 | I am going to work my tail off."
00:37:41.300 | That's a good thing, because then you wind up getting the thing and still getting richer
00:37:46.540 | along the way, which means you enjoy the thing a whole lot more.
00:37:50.820 | Don't borrow money for cars.
00:37:52.180 | Stick to these rules.
00:37:53.180 | You'll become wealthy.
00:37:54.680 | And then finally, in line with the show, remember how to live a rich and meaningful life now
00:38:00.100 | while building a plan for financial freedom in 10 years or less.
00:38:04.620 | How does avoiding this allow you to live rich now?
00:38:09.660 | If you free up the money in car depreciation costs, you can often spend that on other things.
00:38:16.940 | I know a lot of people that travel a lot.
00:38:21.100 | And one of the things that seems very consistent is people who travel simply make the intentional
00:38:28.460 | choice that they prefer traveling to driving an expensive car.
00:38:35.700 | Remember, the depreciation on a $50,000 car, a 15% this year, is $7,500.
00:38:44.620 | If you avoid the depreciation, if you choose not to save that money, you choose to spend
00:38:49.740 | it, you can travel a lot on $7,500.
00:38:55.060 | So think carefully before you go and sign up for something that's going to wind up just
00:38:59.340 | sucking money out every year.
00:39:02.260 | New cars always become used cars.
00:39:05.700 | Things that inspire that lust and desire quickly become, eh, they're old, they're scratched,
00:39:10.900 | they don't inspire that lust and desire.
00:39:13.500 | The older I get, the more amazed I am to watch this process.
00:39:15.980 | I remember in high school, I would go to car dealerships and get all their physical paper
00:39:19.340 | catalogs and I'd take them home and I'd dream about them and study them and look through
00:39:23.420 | them.
00:39:24.420 | These are the cars that were my dream cars when I was in high school, the brand new ones
00:39:29.020 | that I just dreamed about.
00:39:31.180 | They all look like junky, white trash, poor people vehicles.
00:39:38.540 | And you see them out and I think, wow, what was wrong with me?
00:39:41.980 | Why was I so enamored with that thing?
00:39:46.100 | So build some financial formulas that will allow you to have the things that you need
00:39:50.880 | but protect you from the regret of buying cars that keep you poor and broke.
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