Home_to_Car_Ratio
00:00:00.000 | Hello everybody, it's Sam from the Financial Samurai podcast where I help you achieve financial
00:00:13.560 | freedom sooner rather than later.
00:00:16.180 | In this solo episode, I want to talk about what I think is the most important personal
00:00:22.220 | finance ratio you can follow.
00:00:25.300 | It is my house to car ratio for financial freedom.
00:00:29.880 | We all need to live somewhere and most of us, or at least many of us, need transportation
00:00:35.240 | to get somewhere, maybe to go to work, to send your kids to school, and so forth.
00:00:40.300 | However, what I have noticed since I started Financial Samurai in 2009 is that people spend
00:00:46.240 | way too much money on a car to their financial detriment.
00:00:51.360 | I don't know what it is, but in America we have a love affair with cars, maybe it's because
00:00:55.360 | we have so much space to drive around, but I think we can all agree that paying a lot
00:01:00.520 | of money for an asset that is guaranteed to depreciate in value over time unless you are
00:01:05.640 | buying an expensive, expensive collector's item is not good for your wealth.
00:01:11.080 | I think that's pretty clear.
00:01:13.460 | So when you see numbers like the average new car price is now around $49,000 in 2024 and
00:01:20.540 | likely to continue going up over time, that to me is absurd because the median household
00:01:26.920 | income is about $76,000.
00:01:29.760 | That's pre-tax.
00:01:30.760 | So after tax, maybe that's $60,000.
00:01:33.480 | So you're saying the median or typical household in America is going to spend 80% of their
00:01:40.080 | after tax income or thereabouts on a new car?
00:01:44.600 | That's absurd.
00:01:45.600 | That is a recipe for financial mediocrity over time.
00:01:50.600 | So I came out with my 1/10 rule for car buying, which states to spend no more than 10% of
00:01:56.700 | your gross income on the purchase price or lease price of a car.
00:02:00.900 | It's a very simple rule that I think if you can stick with, it'll help you going forward.
00:02:06.780 | Now a lot of people are against this rule, probably because they have already violated
00:02:11.540 | the rule.
00:02:12.540 | And that's understandable.
00:02:13.540 | If you read something on the internet or you hear something in a podcast that goes against
00:02:17.160 | what you've done, you might feel defensive.
00:02:19.720 | You might want to back up your reasoning for doing.
00:02:22.840 | That's totally fine.
00:02:24.240 | This is a free world.
00:02:25.240 | You can do whatever you want.
00:02:26.240 | I'm just providing this rule to help you stay disciplined so you can save and invest more
00:02:30.520 | of your money over time.
00:02:32.380 | Just rewind time back to let's say 2009.
00:02:36.360 | It's the depths of the financial crisis.
00:02:39.120 | Instead of buying that new car for then what was maybe $30,000 or maybe you spend more,
00:02:44.960 | I don't know, think about how much more money you would have if you had invested that money
00:02:50.760 | in the S&P 500 or in real estate.
00:02:53.240 | You would have a lot more money, probably triple, quadruple, maybe five times.
00:02:57.960 | Meanwhile, your car is probably worth next to nothing now.
00:03:02.060 | So yes, I know you enjoyed your car, you needed a nice car, whatever the case may be.
00:03:06.680 | But always think about the opportunity cost of not investing in things like stocks, real
00:03:12.260 | estate and other risk assets.
00:03:14.360 | My strong, strong belief is that the freedom you feel after becoming financially independent
00:03:21.200 | or after you feel more financially independent feels way better than any type of car you
00:03:28.480 | will drive.
00:03:29.760 | You will get bored of your car within six months.
00:03:33.040 | Trust me on this.
00:03:34.040 | I've gone through 15 cars in my life.
00:03:36.080 | It's way too many cars.
00:03:38.080 | And over time, as you get older, you just realize, hmm, it's just a car, gets you from
00:03:43.600 | point A to point B. And that interest generally fades for the majority of the car buying and
00:03:48.600 | driving population.
00:03:50.620 | So let's focus on the house to car ratio because I think we can also all agree that buying
00:03:56.080 | a home, getting neutral real estate by owning your primary residence is a good idea due
00:04:01.740 | to inflation and due to the historical rate of return of residential real estate in America.
00:04:08.640 | That rate of return is about 4.8%, let's call it 5%, which has been historically 2-3% above
00:04:15.440 | the rate of inflation of 2-2.5%.
00:04:19.580 | Inflation is running higher now post pandemic and all that stimulus.
00:04:23.000 | So we're around 3.5%.
00:04:24.800 | However, home prices since 2020, since the pandemic have gone up way faster than inflation
00:04:30.720 | plus 2-3% that historical spread.
00:04:35.160 | So getting neutral real estate I think is very important for the vast majority of listeners
00:04:40.040 | here because inflation is too powerful, too powerful an economic force to combat.
00:04:46.040 | You just cannot win.
00:04:47.580 | You want to fix your costs as much as possible because the average person spends about 33%
00:04:53.320 | of their cash flow, their cash flow on living expenses.
00:04:56.560 | If you can fix that cost over time as inflation whittles down the real cost of paying down
00:05:02.280 | your mortgage or any other expenses, that's a good thing because just look at history.
00:05:08.080 | Just like you wouldn't short the S&P 500 long term, you wouldn't short the housing market
00:05:14.000 | long term.
00:05:15.800 | So with the house to car ratio, we have to first come up with a baseline ratio for what
00:05:22.040 | is going on in the average, the typical American household.
00:05:24.720 | So the median home price in America is about $420,000.
00:05:29.640 | The average car price $48,000, $49,000.
00:05:32.200 | So you have a ratio of about 8.8.
00:05:35.600 | So in other words, the typical American has a house to car ratio of around 8.8.
00:05:40.040 | The higher your ratio, I think the better because that means your car's value is a smaller
00:05:46.120 | percentage of your home's value.
00:05:48.680 | And the other assumption is that the average person spends way too much on a car, right?
00:05:52.360 | Now for used cars, well according to Edmunds.com, the average price of a used car vehicle is
00:05:57.160 | about $27,300.
00:06:00.160 | Therefore we can conduct another simple calculation by dividing $420,000, the median home price,
00:06:06.920 | by $27,300, the average used car price, and that gives you a ratio of 15.4.
00:06:14.360 | So in other words, the typical American household has a house to car ratio of between 8.8 to
00:06:20.640 | 15.4.
00:06:22.800 | And since you're seeking financial freedom sooner than the masses, your goal is to beat
00:06:28.520 | this ratio by as much as possible if you want to attain financial freedom sooner rather
00:06:35.140 | than later.
00:06:36.400 | Pretty straightforward, right folks?
00:06:38.560 | You don't want to be like the typical American because the typical American doesn't have
00:06:42.880 | a lot in taxable retirement savings or tax-advantaged retirement savings accounts.
00:06:49.400 | Typical American saves around 3.5% of their cash flow every single month.
00:06:55.360 | The typical American is not someone you want to model your finances after if you want to
00:07:01.120 | outperform the typical American, right?
00:07:03.140 | We want to achieve more wealth, have more freedom, have the optionality of retiring
00:07:08.280 | earlier if we want, and to just have more optionality in general so we can do more of
00:07:12.800 | the things that we want to do.
00:07:14.360 | Now just a couple notes on this ratio.
00:07:16.040 | If you have more than one car, you must add the total current value of your cars, not
00:07:20.840 | the purchase prices, to come up with the denominator.
00:07:23.280 | And your house's value is the current estimate value, not your home's purchase price.
00:07:30.040 | And if you lease a car, use the estimated value of your car for the denominator as well.
00:07:35.460 | Some of you might be asking, "Well, what if you don't own a car, but you own a home?"
00:07:39.800 | Well, I say you're winning because you're resourceful, you're taking public transportation,
00:07:45.400 | carpool, you're utilizing rideshare platforms, and/or have the ability to work from home.
00:07:51.560 | You might be lucky enough to live in a city with fantastic public transportation, such
00:07:55.400 | as New York City or every major city in Europe and Asia.
00:08:00.680 | Given a car is a liability that will grow over time with maintenance issues, wear and
00:08:05.360 | tear parking tickets, and potential accidents, to not need a car to get around is a huge
00:08:10.900 | financial benefit.
00:08:12.880 | As long as you're saving and investing in the stock market, public real estate funds,
00:08:17.680 | private real estate funds, or other risk assets based on your risk tolerance and goals, you're
00:08:23.140 | likely going to build much more wealth than the average person over time.
00:08:26.880 | So I say with this scenario, where you don't own a car, but own a home, you can have a
00:08:32.520 | house-to-car ratio default of 30, so you are outperforming the typical American household.
00:08:39.520 | Now, what if you own a car, but not a home?
00:08:42.880 | Well, I say this is a negative scenario.
00:08:46.840 | Most people will own a car first before buying a home, given a car is cheaper than a home,
00:08:51.400 | and that's fine.
00:08:52.400 | However, after age 35, if you still own a car, but not a home, unfortunately, I don't
00:08:58.680 | think you're going to achieve financial independence before the traditional retirement age of 60
00:09:02.820 | to 65, and you may underperform the typical American household, because again, inflation
00:09:09.740 | is too hard to combat, so you might as well ride it, and cars depreciate in value.
00:09:15.500 | When I got to San Francisco in 2001, I was 24, 24 and a half years old, and I got a raise
00:09:22.180 | and a promotion.
00:09:23.340 | So what did I do?
00:09:24.820 | I spent a lot of the money on a car.
00:09:28.020 | First, it was a used BMW 528.
00:09:31.940 | I loved the car because it was tinted windows, it had BBS rims, 18-inch rims, and it had
00:09:37.300 | an amazing sound system inside with a display that came out of the dashboard and popped
00:09:43.700 | up.
00:09:44.700 | So back then, that was really, really cool, and I spent, I think, about $20,000, $22,000
00:09:50.100 | on the car, and that was a lot of money for me.
00:09:53.280 | And soon I realized after about a year, man, this was just not good for my wealth.
00:09:58.100 | So I sold it, but not before I bought another car, a more expensive car, after my first
00:10:03.500 | bonus with this new firm, which was a G500 Mercedes, and that was another financial mistake.
00:10:10.280 | So it's almost like you've got to get this car desire out of your system to realize a
00:10:15.100 | nice car is kind of overrated after a while, because after a while, your payments stay
00:10:21.900 | the same, but your enjoyment and appreciation of the car declines.
00:10:26.560 | Now what about the final scenario if you don't own a car or a home?
00:10:31.740 | Well, in such a scenario, I say you have a clean slate, so don't blow it.
00:10:36.940 | You are lucky to hear about this car ratio because you have an opportunity to asset allocate
00:10:43.100 | and spend your money appropriately.
00:10:45.740 | Now we know the typical American household has a house-to-car ratio of between 8.8 to
00:10:51.740 | 15.4.
00:10:53.700 | So what is that ideal home-to-car ratio you should shoot for?
00:10:59.060 | Well, here it is, folks.
00:11:01.140 | I think that ideal ratio is 50.
00:11:04.220 | Once you have a house-to-car ratio of 50 or higher, you're in the golden zone of financial
00:11:10.540 | responsibility.
00:11:12.260 | The longer you own your car, the higher your ratio will grow, given your car will depreciate
00:11:18.560 | and your home will tend to appreciate.
00:11:21.760 | And ideally, you get a home-to-car ratio of 100 or higher.
00:11:27.860 | At a ratio of 100, I feel financial freedom sooner for you is an inevitability.
00:11:35.140 | Now does shooting for 30 or higher seem unreasonable?
00:11:39.140 | Well, let me share you some real-life examples.
00:11:42.980 | Here's a software engineer.
00:11:44.480 | He's 39 years old.
00:11:46.100 | He owns a home for $850,000 and he drives a $30,000 Hyundai Sonata.
00:11:51.120 | So his home-to-car ratio is 28.
00:11:53.180 | And so if he waits just one year, he's going to hit a house-to-car ratio of 30+.
00:12:00.340 | Now I have a roofer here in San Francisco.
00:12:02.300 | He's 56 years old.
00:12:03.300 | He owns a $780,000 home down south.
00:12:06.960 | So that's really cheap for the San Francisco Bay Area.
00:12:10.140 | And his cars total about $250,000 because he has five cars and two motorbikes.
00:12:16.520 | So he has a home-to-car ratio of 3.1.
00:12:20.480 | He is 56.
00:12:21.480 | He's still climbing up ladders and I think that's pretty dangerous after like 50.
00:12:27.660 | You really want to be climbing up ladders and doing roofing but that's just his business
00:12:30.900 | and he's probably an expert.
00:12:31.900 | He doesn't feel that fear that typical folks who don't climb up roofs feel.
00:12:37.860 | And so I feel, unfortunately, he's going to have to be working on roofs for the rest of
00:12:43.900 | his life with a ratio of 3.1.
00:12:46.840 | Now here's an entrepreneur, he's age 46, owns a median home price in San Francisco of $1.7
00:12:52.880 | million.
00:12:53.880 | It's actually more like $1.8 million now.
00:12:56.800 | He drives a $29,000 Toyota Prius.
00:12:59.560 | So his home-to-car ratio is 59.
00:13:02.220 | And here's a retiree age 75, owns a home that's worth $1.8 million now, owns a car, a 1997
00:13:11.240 | Toyota Avalon that's worth about $3,200.
00:13:15.680 | Home-to-car ratio of 563.
00:13:18.560 | So at 74, the retiree has no need for a fancy car, doesn't really drive, can take Uber or
00:13:25.120 | Lyft or the bus and the retiree is good to go.
00:13:29.360 | Now if you think about it in a different way, these people I've surveyed live in more expensive
00:13:34.720 | parts of the country, San Francisco Bay Area and Honolulu.
00:13:38.420 | So what about the rest of the country that lives in more moderately priced cities where
00:13:43.000 | you can buy a home for let's say $500,000, $500,000 and you drive a $30,000 car.
00:13:50.560 | Doesn't seem too obnoxious or too unreasonable financially, a $30,000 car.
00:13:56.100 | But that ratio is only 16.7.
00:13:59.120 | So what do you do in that case?
00:14:00.740 | Are you a bad person?
00:14:02.360 | No, of course not.
00:14:04.120 | Because you're thoughtful, you give to charity, you help others and you think about others
00:14:07.860 | first before you think about yourself.
00:14:10.460 | What you do is you simply own your car, your $30,000 car until it depreciates to the level
00:14:17.960 | where your ratio, home to price ratio, gets to 30 or higher.
00:14:22.320 | So doing some simple math, if your home price stays the same at $500,000, all you have to
00:14:26.920 | do is own your car until it depreciates to $16,650.
00:14:32.600 | And then you want to keep on owning your car until it depreciates to $10,000 or less because
00:14:37.360 | then you'll have a home to car ratio of 50 or higher, which is the golden zone.
00:14:42.960 | Now since I came up with this financial samurai house to car ratio for financial freedom,
00:14:47.960 | I've received a lot of criticism about it.
00:14:52.080 | And supposedly, I'm assuming these people who criticize don't have a ratio of 30 or
00:14:57.280 | higher.
00:14:58.280 | And they say, "Are you kidding me?
00:14:59.880 | Are you telling me I have to buy a much more expensive home to get to a ratio of 30 or
00:15:05.440 | higher?"
00:15:06.440 | And no, that's not what I'm saying at all.
00:15:09.720 | This ratio is predominantly to help you focus on buying a more affordable car and owning
00:15:16.560 | that car for a longer period of time.
00:15:19.280 | The average tenure or the average age of a car on the road today is something like 12
00:15:24.240 | to 13 years.
00:15:25.920 | So it's another barometer.
00:15:28.160 | Our target to shoot for is to own your car longer than the average.
00:15:32.400 | In terms of home buying, it's super important to follow a home buying guide.
00:15:37.040 | I recommend following my guide, the 30/30/3 Home Buying Guide Ratio.
00:15:42.900 | And it talks about spending no more than three times your average gross household income
00:15:47.720 | on the purchase price of a home and to spend no more than 30% of your monthly cash flow
00:15:52.960 | on a mortgage.
00:15:54.440 | And it's to come up with a 20% down payment and have a 10% buffer, liquidity buffer, after
00:16:00.640 | you put down that down payment for the home.
00:16:02.960 | Now it is also a strict home buying rule to prevent you from spending too much on a home,
00:16:09.480 | getting into a bidding war, and getting stressed out once you buy a home.
00:16:13.420 | So please, my house to car ratio is not about buying the most expensive house possible so
00:16:19.360 | you can have a higher ratio.
00:16:21.680 | It's really about buying the most affordable car possible and owning it for as long a time
00:16:28.600 | period as possible so you can naturally let that depreciation of the car work for you.
00:16:33.960 | How awesome is that?
00:16:36.000 | If you believe in the logic of my house to car ratio, if you believe that homes tend
00:16:41.480 | to appreciate in value over time and cars tend to depreciate in value over time, I strongly
00:16:48.480 | believe you are going to do much better financially than the typical American or the typical person
00:16:54.600 | in this world, frankly.
00:16:56.400 | And yes, there is a lift, a ratio lift if you live in an expensive city because homes
00:17:02.360 | are much more expensive in expensive cities, right?
00:17:05.160 | But a Honda Accord is generally the same price everywhere in America.
00:17:09.600 | And that's something to think about too because if you live in an expensive city, there are
00:17:14.040 | more income generating and wealth building opportunities.
00:17:17.440 | So expensive cities are expensive for a reason because of the wealth it can create.
00:17:21.520 | Think about Apple after its Worldwide Developers Conference coming out with all their AI initiatives
00:17:27.200 | and stock is up 5% plus and that's building hundreds of billions of wealth for tens of
00:17:33.040 | thousands of people.
00:17:34.640 | This is what happens in expensive cities.
00:17:36.200 | They get generally more expensive because the wealth generally increases at an even
00:17:40.360 | faster rate.
00:17:42.440 | So it's just something to think about.
00:17:43.960 | Expensive cities, don't look at them as a vacuum like, "Ah, the house price is so expensive."
00:17:47.600 | Well, think about how much you could potentially earn.
00:17:50.760 | And yes, there is a penalty for living in a less expensive city because home prices
00:17:56.440 | are less and cars are generally the same price.
00:18:00.100 | So if you want to make an adjustment and say, well, if you live in a city that has a median
00:18:05.700 | home price that's 20% below the median, well, you can take my ideal ratio of 30 or higher
00:18:12.200 | and discounted by 20% to say 24, shoot for a 24 target.
00:18:17.240 | My house to car ratio is really to help you think about where to be spending your money
00:18:22.180 | if you don't own a home, if you own a home, you want to buy a car, you want to get rid
00:18:26.620 | of a car.
00:18:27.860 | In conclusion, run the numbers for your own self and see how long you have to own your
00:18:33.720 | car to get to a ratio of 30 or higher.
00:18:36.760 | I promise you once you get there, you are going to feel great about your finances if
00:18:42.240 | you aren't feeling great already.
00:18:45.440 | The financial samurai home to car ratio, I think is the most important personal finance
00:18:50.400 | ratio we can think about and talk about today.
00:18:54.080 | Please run the numbers and let me know what your ratio is and tell me how you plan to
00:18:58.880 | improve it.
00:18:59.880 | All right, everyone.
00:19:00.880 | If you enjoyed this podcast, please rate, share and review it.
00:19:04.480 | It keeps me motivated.
00:19:05.480 | I'd love for you to talk about this home to car ratio with your friends and with your
00:19:10.080 | loved ones and see whether they agree or disagree.
00:19:13.200 | I'm always willing to listen to feedback, to improve these ratios, to improve these
00:19:17.320 | concepts for the number one purpose of helping you achieve financial freedom sooner rather
00:19:23.200 | than later.
00:19:24.200 | Please subscribe to the Financial Samurai newsletter at financialsamurai.com/news.
00:19:29.460 | Talk to you all later.
00:19:29.960 | [music]
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