10% Rule and Real Life Car Stories

Wake up and smell the coffee, that’s what it feels like once you realize where your money is going, most people are shocked at how much they are spending on eating out, groceries, cable, shopping, cell phones, and all the other little ones that certainly add up.  The Big 3 as I like to call them are what really impact your financial future because they are the biggest, which is housing, transportation, and food.  I want to tackle transportation aka the big fat car loan that’s killing your wallet and preventing you from sending your kids to college, and stopping you from golfing every weekend.

I have pretty strong views on cars and car loans in general.  You can read about possibly my biggest financial mistake and the Mercedes Benz I owned that has made me this way.  Many financial bloggers and personal finance experts talk about buying a car and how much you should be spending, let me start out with my favorite from the Financial Samurai, which goes into detail and confirms many of my beliefs about how much you should be spending on a car.

There is certainly more than one school of thought on the details of purchasing a car, but this is where I stand.  If you plan on achieving financial independence you should MUST follow the 10% rule.  It simply states that your vehicle purchase should be no more than 10% of your gross household income.

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10% or less on buying a car is for the financial hero out there who wants to be financially independent yesterday and knows that driving around in a brand new Toyota Camry when they are making 50K is not the fastest way to get there.  They will be dishing out a $400 car payment for the next 5 years, not factoring in any of the normal costs of gas, insurance, and maintenance.  I tend to agree with the charts above from the Financial Samurai, but I think they could be simplified into 3 categories.  Those who want financial independence as soon as humanly possible(the 10%ers), next up those who live within their means, plan to work their entire adult lives, are happy with driving 2 vehicles they are not keeping up with the Joneses but they are not far off, they probably own a Toyota Camry and a SUV because they “need” it for the kids, they make good money probably in that 100-150K range, but the cars are just under half of that (50% or less, living the “I need this car dream”), and finally the 3rd category is the guy keeping up with the Joneses, he’s buying the Range Rover because he has a cool job in the city, doesn’t matter if it’s over half his annual salary, this car is sweetmeat, he tells himself that he can “afford” the payments, which he can just like I can afford to buy 100 Snuggies to wear on a daily basis, that doesn’t mean it’s a good idea.(50% or more, the “I can afford it, I earned it, you only live once” category).

I think this is where so many everyday people make a financial mistake; the biggest problem is it repeats every 4 or 5 years.  In most cases an everyday vehicle is needed, I don’t suggest that it is not.  If you want to make big gains in your financial independence, retirement, and overall way of life I suggest sticking in the 0%-25% range anything above this is asking for trouble.  Over the past few months I surprisingly have encountered numerous examples of real life situations, I won’t be giving out any names and I will do my best to paint an estimated financial picture, here they are Real Life Car Stories:

Single and Loving It.  Over the weekend I was golfing and when we finished we all went back to our vehicles, when one of the guys mentioned how he liked the other guy’s car, turns out it was nice and expensive.  He had purchased a new 3 series BMW which according to Financial Samurai cheat sheet would fall in the range of making 250K to 500K, I am certain he is not.  He may have bought the car with cash, runs a small business with his new mobile text marketing campaign, maybe he put down a large down payment, I honestly don’t know, but I know he is failing the 10% rule.  He has a lot of great things going for him, he has no student loans, to my knowledge no credit card debt, lives with friends in a house so a very small payment for housing. Housing is nice and low, his car payment is nice and high, and I’ll assume he is somewhere in the middle on food and eating out.  How’s he doing?  Some people would say he’s great, I would say he is asking to work forever, and his new expectation on a car is going to be the same, in 2020 or even sooner he will want a new BMW and start the same process over.  If you assume he’s making 100K, the new Beamer is costing him a cool 40% of his salary, not cool.  If I were him I would sell the car and buy something in the 5-10K range, how about an old Toyota Corolla?

Baby and Insurance Check.  Congratulations you are having a baby!!! Or should I say $$$, but a child is priceless and they need a safety certified tank to haul their precious child around and it must be brand new, nothing else will suffice.  Upon the good news of hearing they were having a baby, the car was damaged in flood, but they received an insurance check!  Insurance lottery congrats, those monthly payments finally paid off.  Let’s assume the car was a little older and they received a check for 5K, not bad right?  Baby and Insurance Check want a bigger, better, newer vehicle, certified tank to haul the kiddos and a fatty car loan to go with it.  I heard multiple times that they “need” a new car and remember we NEED 2 reliable cars, not want was the direct quote from Baby and Youi Insurance Check.  Obviously a vehicle cannot be purchased with 5K alone!  What about all the money you have saved up for the car?  Nada!  Yeah definitely go and grab a loan during one of the most expensive times in your life, make sure when costs are rising to go and grab some more payments that would be perfect, I say with as much sarcasm as humanly possible.  If I were her, I would go and buy a nice used dependable vehicle for about 2 or 3K and save the rest for the baby costs and in case I need any maintenance in the first couple months.  They already have one vehicle, adding another one at a low cost is the right move for me.

2 is Better than 1.  Meet a happily married very frugal couple, they are probably like many of us who read and write on this very blog.  They have 2 good incomes, both with older vehicles that are paid off and in working condition; they wouldn’t mind retiring early, something like 50 or 55 sounds great to them.  They are saving up for retirement and any major purchases they need along the way.  As luck would have it, Mr. 2 is Better than 1 truck is on its last leg, he has been saving since he paid off his truck and has enough cash to buy a brand new one.  Let’s assume the truck is in the 30K-40K range, he’s paying with cash I probably can’t argue too much right?  I’ll hold off on answering.  Mrs. 2 is Better than 1 goes along and figures why not I have the cash and my car isn’t in great shape, I want a better, newer vehicle in that same 30K-40K range, so consider it all taken care because of course 2 is better than 1.  I don’t know how much they make, but using the high price range of the vehicles it’s safe to say they are not making 800K!  Well let’s assume they make 200K and they spent 80K on 2 vehicles, which is 40% of their annual income, that’s not any different than Single and Loving It from above!  But they paid cash this is what sets them apart, not by a huge amount, but not having a large payment does make a difference.  I think they made 2 or 3 right moves, but if their plan is to retire early don’t you want to make that sacrifice today and  not buy 2 brand new vehicles? Couldn’t you have kept the total closer to 25% of the 200K and purchased 2 used vehicles because cars are depreciating vehicles, when’s the last time you heard someone say they retired early because their Ford Raptor really beat the market and went up 12% this year?  Never, because it doesn’t happen.  They saved money for a vehicle, paid cash, the only mistake is going above 10-25% of their household income, it’s not going to hurt them today or even tomorrow, but that 80K could be the difference in retiring at 50 and 55.

All in all I think every financial decision has a positive and a negative involved with it.  Buy a new BMW that looks great and impresses friends, positive.  Have a $400 car payment for 5 years, negative.  It comes down to a simple choice:  Are you willing to live with the negative and how it affects your future?  I am not ready for the negative of buying a new BMW, I’m riding the train everyday taking the negative now of not enjoying a cushy, faster ride to work, instead I want the positive of no payments and paying my debt off faster for an early retirement.

If you want to achieve financial independence in the fastest way possible, you must adhere to the 10% rule, I know I do.  If you have chosen a life where you want to be ahead of the game financially, you should be somewhere in the 0%-25% range, anything over that and you putting yourself in a negative situation that will affect your future, are you ready to make that negative into a positive and sell your new Range Rover?

Do you agree with the 10% rule?  What percentage range are you in?  What is your views on buying a car?

43 Responses to “10% Rule and Real Life Car Stories

  • I think the 10% rule is a good one but I don’t need a car that is even 10% of our income. I currently drive a minivan worth around 5K and will probably drive it until it dies. I work at home, so I only drive 4 or 5 times a week as it is. A nice car is really just a waste for me. With that being said, we aren’t really “car people” anyway. It’s just not our thing.
    Holly@ClubThrifty recently posted…Things I Hate About TravelMy Profile

    • EvenStevenMoney
      3 years ago

      I don’t think you have to be car people to purchase a new car, I think you will see when your minivan dies and if you want to buy the new luxury minivan valued at a low price of 40K or if you look for that great used one that’s 10%-25% of your income. I say congrats on being less than 10%!

      • Yeah, I will definitely NOT be buying a new minivan for 40K! We pay for cars in cash and that helps us keep ourselves in check. Fortunately, my minivan is a 2007 with only 50,000 miles on it. I don’t think I’ll need a new vehicle for a long time.
        Holly@ClubThrifty recently posted…Things I Hate About TravelMy Profile

        • EvenStevenMoney
          3 years ago

          Love it, that’s why you are Club Thrifty after all!

  • I think we’re in pretty good shape when it comes to cars. We own two. One, which is the one I imported from Canada has been paid off for years, and the other one we just bought used and paid in cash. We’ll never finance a car if we can help it and we’re already putting aside money for a future car purchase down the road. I don’t have a issue if people decide to purchase brand new cars if they intend to keep it until it dies, but too many cannot afford the monthly car payments. I have no qualms about taking the time to research and shop for a good used vehicle.
    Kassandra @ More Than Just Money recently posted…Don’t Let Debt Amount To A Life SentenceMy Profile

    • EvenStevenMoney
      3 years ago

      I think one of the worst decisions everyday people make is buying a brand new car, the depreciation alone in driving it off the lot would make a PF blogger go nuts.

  • The 10% rule sounds good to me but I understand if people don’t really follow it. As long as you save up and buy used, you could probably buy something that’s more than 10%. If I make $50,000 a year and take care of my finances, I could probably afford more than a $5,000 car. I’m not saying you should, but I wouldn’t judge you if you decided to get a $8,000-$10,000 car. I’ll probably follow the 10% rule, but I wouldn’t hate you if you went up to 20%. More than that and I might hate you a little, lol.
    Aldo @ Million Dollar Ninja recently posted…How Much Money Do I Need To Retire?My Profile

    • EvenStevenMoney
      3 years ago

      It’s a great point to just start thinking about it. Below 10% says I want to retire early, 10-25% says I’m really trying hard and I’m frugal don’t hate me, no 20% for me.

  • I have a totally different opinion than I did 3 years ago. We have two vehicles – a truck fully paid 4 years old, a small car 3 years old $8K interest free loan remaining. We will drive them into ground and buy one used car after that. By then we will be retired and only need one vehicle. If I use your 10% rule, and we’re retired and living on 60K income before tax – 50K after tax, then you are saying we should only buy a car at $5K? What kind of car can you get for that? I think here in Canada you’d be looking at at an 8 year old car at least. Is that in line with what you are proposing, Steven?
    debs @ debt debs recently posted…Six Month Blogiversary!My Profile

    • EvenStevenMoney
      3 years ago

      The 10% rule is for those who want financial independence. Those of us who take a hard look at our expenses like you have done realize that buying a brand new vehicle is a complete waste of money. The fastest possible way to get to FI is through less expenses and higher revenue. A quick search on Kelly Blue Book http://www.kbb.com/cars-for-sale/models/?pricerange=0-6000&distance=75 shows that I can buy over 1,200 different cars in the Chicago area alone. Using one of the more popular models, I have 26 different Toyota Camry’s from 1994-2005 available, SUV’s also are available from a Ford Explorer, Jeep Grand Cherokee. So yes they are available and you will need to put in some extra effort to find a vehicle that fits the 10% rule, but if your goal is FI, the focus is on lowering expenses and having assets that appreciate and/or provide a monthly income, a vehicle does neither so long winded yes this is what I’m proposing.

  • I think that regardless of your income it’s always good to drive an older car. I am driving my wife’s old car and it’s got a lot of rust on the sides and is getting way up there in miles. With that being said, I am very happy driving it as long as it runs. No car payment!
    DC @ Young Adult Money recently posted…5 (More) Things Every Blogger Struggles WithMy Profile

    • EvenStevenMoney
      3 years ago

      Buying used and having no car payment are 2 out of the 3 most important items when buying a car, throw in the 10% rule and FI is even a step closer with all the money you would be saving.

  • Interesting rule…..I see it being broken on a daily basis though. I know someone who lives in a house worth $350k, who makes about $90k annually and drives a car worth about $80k. It’s a super nice car and I’m sure he loves it but he likely has some huge monthly car payments and doesn’t follow the 10% rule
    Dan @ Our Big Fat Wallet recently posted…Book Review: Wealthing Like RabbitsMy Profile

    • EvenStevenMoney
      3 years ago

      Over 50% of your annual income and 5 years or even 30 years from now he will be asking himself why he can’t retire or why his bills are so high, it’s a car wreck away, pun intended.

  • My hubs is planning to get a car loan, but for me we don’t really need it. I want to save every income that we have, especially that I’m working at home, it’s not really necessary to have a car.
    Teffany @ RideShare Guy recently posted…Are Lyft’s New Heat Maps A Good Thing For Drivers?My Profile

    • EvenStevenMoney
      3 years ago

      If you have 2 incomes it’s likely that having 1 car could fit into the 10% rule, it depends on your goals, but I’d rather have him save up for the car and maybe downsize his choice, but it depends on your goals and what kind of car you would need if it’s for business.

  • Our rockin’ 1996 Honda Minivan is a wonderful vehicle. We just rolled over 202,000 miles the other day. I won’t claim that she’s a looker, but she gets us from A to B just as well as something nicer. I’d imagine it’s probably worth $1k or so. That would put us under 1%.

    We’re going to drive it until it blows up or breaks in half!
    Mr. Frugalwoods recently posted…Great Trash Finds: The Sister EditionMy Profile

    • EvenStevenMoney
      3 years ago

      Well I can’t say I envy you, but I certainly can say I am proud of such a great percentage to value of your car. We are under the 10%, but not 1% I guess that’s why you are closer to FI, Testify the truth of the 10% rule!!!

  • I like the 10% rule. I do notice that most of the cars listed are of foreign model which is fine, but I love finding slightly used creampuffs from chevy that the general public doesn’t really like…i.e. my 2010 chevy cobalt. Great gas mileage, nice big trunk, and 30-35mpg. I’m not brand myopic, but I love getting a great deal!
    Old School recently posted…Old School’s (negative) NET WORTH!!! September EditionMy Profile

    • EvenStevenMoney
      3 years ago

      Financial Samurai must love his foreign cars. A great deal is a great deal with cars, as long as they are lasting longer than expected at a great price that’s where the value hits, especially when you keep the cost to salary low. Thanks for commenting for the first time Old School, you are always welcome!

  • As we clear financial hurdles, my view on cars is changing. In an effort to simplify we bought our first new car after about 12 years. During this time we paid off our mortgage and did some diligent saving and investing.

    Once you get to a point, having a new car under warranty can be “worth it”. Family safety comes to the top of my mind. New cars have some amazing safety features.

    I was a “no new cars, drive cheap cars” guy for years. I’m actually considering trading our 2007 next spring for a second new car. Previously we traded a 2006 minivan for a 2014.

    I like the 10% rule, but basing it only off income doesn’t seem to paint a great picture. What if you have $5 million in investments and now only make $50k/year?

    Get debt free, build your investments and savings and then decide if new cars are one of your select “luxury” items.
    Wade recently posted…Pillars Of The EarthMy Profile

    • EvenStevenMoney
      3 years ago

      While I didn’t think of this on my own, this came up previously for those who have already reached FI. It would then be based on 5% of your net worth plus 10% of your annual income, so in your example, you would have a limit of $255,000, so in this case you are right we throw out the 10% rule for the most part and your net worth is your basis once you reach FI. So feel free to get that Lambo;)

  • Good thoughts Even Steven. My last purchase DEFINITELY did not fall in the 10% rule… but I plan on future purchases doing so, which gives me upto about $7,500. And I don’t even want to do that much, probably more like $5k depending on what is available.
    Kipp recently posted…Income and Expense for August 14My Profile

    • EvenStevenMoney
      3 years ago

      When you are on a mission for FI, it just makes sense to take a drastic cut on something considered a big ticket item/3 Big Ticket Items, plus that $7500 can get you a pretty great car that will last you a long time.

  • Having a % for a car purchase is a very interesting and effective tool, Steven! Great tip.

    When considering European prices for cars, 10% is not realistic though. The cheapest cars (about €5,000) are already 25% of most people’s yearly salary (after taxes).

    I’ll have to do some more research since I’m not too knowledge about cars. Don’t own one myself! 🙂
    No More Waffles recently posted…Stuff Our Parents Never Taught Us, Part V: InvestingMy Profile

    • EvenStevenMoney
      3 years ago

      Yeah the 10% rule is certainly intended for America, I don’t think I could even begin to research the trends and costs for Europe, sounds like a fun project. However I would say this, having visited many places in Europe, the overall transportation system is better than the US, it is much easier to get around and more common for a train ride from country to country than state to state in the US. My initial reaction to the “10% rule doesn’t work in Europe” is BS, make it work;) and that’s what most people not in the pf world think as well. FI and FI and FI that’s who does the 10% rule!

  • I sold my BMW, my graduation present to myself. Even though it was used and perhaps 33% of my salary at the time I had NO business buying it with my student loans. I did the same as you Steven. Now I traded down for a VW Jetta which I wrote a check for. It’s a small fraction of my annual income. It felt great to write a check and be done, zero credit check. The Car Max guy seemed a bit amused as it appears very few people pay cash.

    • EvenStevenMoney
      3 years ago

      I have to say a big Congrats to you Carlos! I think we went down the same road together, the only difference in mine is I have not purchased a car since, living in Chicago makes transportation easier and Mrs. Even Steven coming into the marriage with one. Congrats again because that’s why I write this stuff to share my story and hope that people take a little longer when they make that car decision or like you they pat themselves on the back for making the right one.

  • I never thought of car costs as a percentage of the total salary (hence the reason I am not a financial blogger), but it makes total sense to plan your budget that way. I fell into the 50% bucket. It is shocking that people spend so much money on cars!!
    Kate @ Babaganosh.org recently posted…Banana Chia Seed Cinnamon Muffins with PecansMy Profile

    • EvenStevenMoney
      3 years ago

      50% bucket will certainly slow down the race to FI or debt freedom. If I were in your shoes I would consider selling the car to get down to something in the 10-25% range, good luck!

  • Please delete this post! I can’t let my husband see it! Cars are one of his weaknesses – and according to this post, he can spend more! Last year we bought him a new (used) Hyundai, at about 6%. Paid in cash too – which the dealership didn’t like – I guess they couldn’t make money off of the loan financing.

    • EvenStevenMoney
      3 years ago

      Sounds like you are winning more than the rest, go head get a used Honda instead really up your percentage, maybe to 8%!!!

  • Hello! Thank you for your advice! I found you by way of the Frugalhounds who were featured on your site.
    Question: Doesn’t it make a difference as to how long you intend to keep the car? For example, buying a $20K is 25% of my income, but the idea is different financially if I replace it after 5 years, 10 years, or 15 years.

    • EvenStevenMoney
      3 years ago

      That’s a great question Gira. In my opinion it does not since the number of years a car lasts can be unknown and it could make sense to get rid of a car after 5 years if the repairs and maintenance cost more than the car is worth for example. The philosophy behind the 10% rule is that buying a car is considered one of the big 3 in terms of cost to your budget, if you keep this cost as low as possible, 10% of your income, you have put yourself into a position to reduce a large cost and save more money.

      I would also think that whatever car you purchase, whether it is 20K or 5k you want to keep it as long as possible, this will make your purchase mathematically more effective over time like you mentioned. Thanks for the great question.

  • This table is incredibly helpful to learn the costs of cars. It seems that different makes and models are sold at different rates. Learning how much you spend on your car is also another great tip. I can’t wait to show my wife this, it will help us a lot.

  • My car definitely falls below the 10% category, it’s a used Mazda 3 that I boght from my parents for $2000. I also use it for my part time gig as a driver for Lyft and Uber, so it is necessary to own a car. It’s always tempting to buy something nicer, but it just doesn’t add up financially.
    Jake Wall recently posted…Lyft Expands With a New Office in SeattleMy Profile

  • The first car I bought out of college was an Audi, I had a great job out of school but I was still breaking the 10%. I have since reevaluated my finances, and I traded in for a used Subaru. Great car and it is a burden off of my shoulders to have it fully paid for. I’ve used it to drive part time for Uber and all the passengers have loved the car as well.
    Jonathan White recently posted…Uber Surge PricingMy Profile

  • This is simply a great advice for anyone that wants to attain financial freedom, one need to cut his coat according to his cloth. My parent gave me a Honda civic as a birthday present, but I sold it and put the money into business, I hope to get a car soon anyway.

  • Nice little sneaky use of Sam’s (from Fin Samurai) work there :)..
    I completely agree with the % there and it very much follows a millionaire next door approach.
    I’m driving around in a 1998 Nissan Pulsar that I paid 5k for and has served me well since 2010..

    Awesome post here Steve, hope you don’t mind me going through your archives 😉 ha

    • EvenStevenMoney
      1 year ago

      Go right ahead the archives have some hidden gold!

      I think you win on the ’98 Nissan Pulsar, although I might be gaining on you since I technically haven’t had a car since 2010, but marriage has brought a paid off SUV into the mix.

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