Hello everybody, it's Sam from the Financial Samurai podcast where I help you achieve financial freedom sooner rather than later. In this solo episode, I want to talk about what I think is the most important personal finance ratio you can follow. It is my house to car ratio for financial freedom.

We all need to live somewhere and most of us, or at least many of us, need transportation to get somewhere, maybe to go to work, to send your kids to school, and so forth. However, what I have noticed since I started Financial Samurai in 2009 is that people spend way too much money on a car to their financial detriment.

I don't know what it is, but in America we have a love affair with cars, maybe it's because we have so much space to drive around, but I think we can all agree that paying a lot of money for an asset that is guaranteed to depreciate in value over time unless you are buying an expensive, expensive collector's item is not good for your wealth.

I think that's pretty clear. So when you see numbers like the average new car price is now around $49,000 in 2024 and likely to continue going up over time, that to me is absurd because the median household income is about $76,000. That's pre-tax. So after tax, maybe that's $60,000.

So you're saying the median or typical household in America is going to spend 80% of their after tax income or thereabouts on a new car? That's absurd. That is a recipe for financial mediocrity over time. So I came out with my 1/10 rule for car buying, which states to spend no more than 10% of your gross income on the purchase price or lease price of a car.

It's a very simple rule that I think if you can stick with, it'll help you going forward. Now a lot of people are against this rule, probably because they have already violated the rule. And that's understandable. If you read something on the internet or you hear something in a podcast that goes against what you've done, you might feel defensive.

You might want to back up your reasoning for doing. That's totally fine. This is a free world. You can do whatever you want. I'm just providing this rule to help you stay disciplined so you can save and invest more of your money over time. Just rewind time back to let's say 2009.

It's the depths of the financial crisis. Instead of buying that new car for then what was maybe $30,000 or maybe you spend more, I don't know, think about how much more money you would have if you had invested that money in the S&P 500 or in real estate. You would have a lot more money, probably triple, quadruple, maybe five times.

Meanwhile, your car is probably worth next to nothing now. So yes, I know you enjoyed your car, you needed a nice car, whatever the case may be. But always think about the opportunity cost of not investing in things like stocks, real estate and other risk assets. My strong, strong belief is that the freedom you feel after becoming financially independent or after you feel more financially independent feels way better than any type of car you will drive.

You will get bored of your car within six months. Trust me on this. I've gone through 15 cars in my life. It's way too many cars. And over time, as you get older, you just realize, hmm, it's just a car, gets you from point A to point B. And that interest generally fades for the majority of the car buying and driving population.

So let's focus on the house to car ratio because I think we can also all agree that buying a home, getting neutral real estate by owning your primary residence is a good idea due to inflation and due to the historical rate of return of residential real estate in America.

That rate of return is about 4.8%, let's call it 5%, which has been historically 2-3% above the rate of inflation of 2-2.5%. Inflation is running higher now post pandemic and all that stimulus. So we're around 3.5%. However, home prices since 2020, since the pandemic have gone up way faster than inflation plus 2-3% that historical spread.

So getting neutral real estate I think is very important for the vast majority of listeners here because inflation is too powerful, too powerful an economic force to combat. You just cannot win. You want to fix your costs as much as possible because the average person spends about 33% of their cash flow, their cash flow on living expenses.

If you can fix that cost over time as inflation whittles down the real cost of paying down your mortgage or any other expenses, that's a good thing because just look at history. Just like you wouldn't short the S&P 500 long term, you wouldn't short the housing market long term.

So with the house to car ratio, we have to first come up with a baseline ratio for what is going on in the average, the typical American household. So the median home price in America is about $420,000. The average car price $48,000, $49,000. So you have a ratio of about 8.8.

So in other words, the typical American has a house to car ratio of around 8.8. The higher your ratio, I think the better because that means your car's value is a smaller percentage of your home's value. And the other assumption is that the average person spends way too much on a car, right?

Now for used cars, well according to Edmunds.com, the average price of a used car vehicle is about $27,300. Therefore we can conduct another simple calculation by dividing $420,000, the median home price, by $27,300, the average used car price, and that gives you a ratio of 15.4. So in other words, the typical American household has a house to car ratio of between 8.8 to 15.4.

And since you're seeking financial freedom sooner than the masses, your goal is to beat this ratio by as much as possible if you want to attain financial freedom sooner rather than later. Pretty straightforward, right folks? You don't want to be like the typical American because the typical American doesn't have a lot in taxable retirement savings or tax-advantaged retirement savings accounts.

Typical American saves around 3.5% of their cash flow every single month. The typical American is not someone you want to model your finances after if you want to outperform the typical American, right? We want to achieve more wealth, have more freedom, have the optionality of retiring earlier if we want, and to just have more optionality in general so we can do more of the things that we want to do.

Now just a couple notes on this ratio. If you have more than one car, you must add the total current value of your cars, not the purchase prices, to come up with the denominator. And your house's value is the current estimate value, not your home's purchase price. And if you lease a car, use the estimated value of your car for the denominator as well.

Some of you might be asking, "Well, what if you don't own a car, but you own a home?" Well, I say you're winning because you're resourceful, you're taking public transportation, carpool, you're utilizing rideshare platforms, and/or have the ability to work from home. You might be lucky enough to live in a city with fantastic public transportation, such as New York City or every major city in Europe and Asia.

Given a car is a liability that will grow over time with maintenance issues, wear and tear parking tickets, and potential accidents, to not need a car to get around is a huge financial benefit. As long as you're saving and investing in the stock market, public real estate funds, private real estate funds, or other risk assets based on your risk tolerance and goals, you're likely going to build much more wealth than the average person over time.

So I say with this scenario, where you don't own a car, but own a home, you can have a house-to-car ratio default of 30, so you are outperforming the typical American household. Now, what if you own a car, but not a home? Well, I say this is a negative scenario.

Most people will own a car first before buying a home, given a car is cheaper than a home, and that's fine. However, after age 35, if you still own a car, but not a home, unfortunately, I don't think you're going to achieve financial independence before the traditional retirement age of 60 to 65, and you may underperform the typical American household, because again, inflation is too hard to combat, so you might as well ride it, and cars depreciate in value.

When I got to San Francisco in 2001, I was 24, 24 and a half years old, and I got a raise and a promotion. So what did I do? I spent a lot of the money on a car. First, it was a used BMW 528. I loved the car because it was tinted windows, it had BBS rims, 18-inch rims, and it had an amazing sound system inside with a display that came out of the dashboard and popped up.

So back then, that was really, really cool, and I spent, I think, about $20,000, $22,000 on the car, and that was a lot of money for me. And soon I realized after about a year, man, this was just not good for my wealth. So I sold it, but not before I bought another car, a more expensive car, after my first bonus with this new firm, which was a G500 Mercedes, and that was another financial mistake.

So it's almost like you've got to get this car desire out of your system to realize a nice car is kind of overrated after a while, because after a while, your payments stay the same, but your enjoyment and appreciation of the car declines. Now what about the final scenario if you don't own a car or a home?

Well, in such a scenario, I say you have a clean slate, so don't blow it. You are lucky to hear about this car ratio because you have an opportunity to asset allocate and spend your money appropriately. Now we know the typical American household has a house-to-car ratio of between 8.8 to 15.4.

So what is that ideal home-to-car ratio you should shoot for? Well, here it is, folks. I think that ideal ratio is 50. Once you have a house-to-car ratio of 50 or higher, you're in the golden zone of financial responsibility. The longer you own your car, the higher your ratio will grow, given your car will depreciate and your home will tend to appreciate.

And ideally, you get a home-to-car ratio of 100 or higher. At a ratio of 100, I feel financial freedom sooner for you is an inevitability. Now does shooting for 30 or higher seem unreasonable? Well, let me share you some real-life examples. Here's a software engineer. He's 39 years old.

He owns a home for $850,000 and he drives a $30,000 Hyundai Sonata. So his home-to-car ratio is 28. And so if he waits just one year, he's going to hit a house-to-car ratio of 30+. Now I have a roofer here in San Francisco. He's 56 years old. He owns a $780,000 home down south.

So that's really cheap for the San Francisco Bay Area. And his cars total about $250,000 because he has five cars and two motorbikes. So he has a home-to-car ratio of 3.1. He is 56. He's still climbing up ladders and I think that's pretty dangerous after like 50. You really want to be climbing up ladders and doing roofing but that's just his business and he's probably an expert.

He doesn't feel that fear that typical folks who don't climb up roofs feel. And so I feel, unfortunately, he's going to have to be working on roofs for the rest of his life with a ratio of 3.1. Now here's an entrepreneur, he's age 46, owns a median home price in San Francisco of $1.7 million.

It's actually more like $1.8 million now. He drives a $29,000 Toyota Prius. So his home-to-car ratio is 59. And here's a retiree age 75, owns a home that's worth $1.8 million now, owns a car, a 1997 Toyota Avalon that's worth about $3,200. Home-to-car ratio of 563. So at 74, the retiree has no need for a fancy car, doesn't really drive, can take Uber or Lyft or the bus and the retiree is good to go.

Now if you think about it in a different way, these people I've surveyed live in more expensive parts of the country, San Francisco Bay Area and Honolulu. So what about the rest of the country that lives in more moderately priced cities where you can buy a home for let's say $500,000, $500,000 and you drive a $30,000 car.

Doesn't seem too obnoxious or too unreasonable financially, a $30,000 car. But that ratio is only 16.7. So what do you do in that case? Are you a bad person? No, of course not. Because you're thoughtful, you give to charity, you help others and you think about others first before you think about yourself.

What you do is you simply own your car, your $30,000 car until it depreciates to the level where your ratio, home to price ratio, gets to 30 or higher. So doing some simple math, if your home price stays the same at $500,000, all you have to do is own your car until it depreciates to $16,650.

And then you want to keep on owning your car until it depreciates to $10,000 or less because then you'll have a home to car ratio of 50 or higher, which is the golden zone. Now since I came up with this financial samurai house to car ratio for financial freedom, I've received a lot of criticism about it.

And supposedly, I'm assuming these people who criticize don't have a ratio of 30 or higher. And they say, "Are you kidding me? Are you telling me I have to buy a much more expensive home to get to a ratio of 30 or higher?" And no, that's not what I'm saying at all.

This ratio is predominantly to help you focus on buying a more affordable car and owning that car for a longer period of time. The average tenure or the average age of a car on the road today is something like 12 to 13 years. So it's another barometer. Our target to shoot for is to own your car longer than the average.

In terms of home buying, it's super important to follow a home buying guide. I recommend following my guide, the 30/30/3 Home Buying Guide Ratio. And it talks about spending no more than three times your average gross household income on the purchase price of a home and to spend no more than 30% of your monthly cash flow on a mortgage.

And it's to come up with a 20% down payment and have a 10% buffer, liquidity buffer, after you put down that down payment for the home. Now it is also a strict home buying rule to prevent you from spending too much on a home, getting into a bidding war, and getting stressed out once you buy a home.

So please, my house to car ratio is not about buying the most expensive house possible so you can have a higher ratio. It's really about buying the most affordable car possible and owning it for as long a time period as possible so you can naturally let that depreciation of the car work for you.

How awesome is that? If you believe in the logic of my house to car ratio, if you believe that homes tend to appreciate in value over time and cars tend to depreciate in value over time, I strongly believe you are going to do much better financially than the typical American or the typical person in this world, frankly.

And yes, there is a lift, a ratio lift if you live in an expensive city because homes are much more expensive in expensive cities, right? But a Honda Accord is generally the same price everywhere in America. And that's something to think about too because if you live in an expensive city, there are more income generating and wealth building opportunities.

So expensive cities are expensive for a reason because of the wealth it can create. Think about Apple after its Worldwide Developers Conference coming out with all their AI initiatives and stock is up 5% plus and that's building hundreds of billions of wealth for tens of thousands of people. This is what happens in expensive cities.

They get generally more expensive because the wealth generally increases at an even faster rate. So it's just something to think about. Expensive cities, don't look at them as a vacuum like, "Ah, the house price is so expensive." Well, think about how much you could potentially earn. And yes, there is a penalty for living in a less expensive city because home prices are less and cars are generally the same price.

So if you want to make an adjustment and say, well, if you live in a city that has a median home price that's 20% below the median, well, you can take my ideal ratio of 30 or higher and discounted by 20% to say 24, shoot for a 24 target.

My house to car ratio is really to help you think about where to be spending your money if you don't own a home, if you own a home, you want to buy a car, you want to get rid of a car. In conclusion, run the numbers for your own self and see how long you have to own your car to get to a ratio of 30 or higher.

I promise you once you get there, you are going to feel great about your finances if you aren't feeling great already. The financial samurai home to car ratio, I think is the most important personal finance ratio we can think about and talk about today. Please run the numbers and let me know what your ratio is and tell me how you plan to improve it.

All right, everyone. If you enjoyed this podcast, please rate, share and review it. It keeps me motivated. I'd love for you to talk about this home to car ratio with your friends and with your loved ones and see whether they agree or disagree. I'm always willing to listen to feedback, to improve these ratios, to improve these concepts for the number one purpose of helping you achieve financial freedom sooner rather than later.

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