So my wife and I just had our first child. I’m trying to become a real “adult” and focus on managing my finances. Im starting to read finance blogs and I came across the 10% rule for cars. I’ll admit I’ve never been the frugal type and I’m more of a natural spender than a saver but I don’t understand how that’s even a thing. It’s taken me some time but I’m currently making a healthy salary for my age bracket, probably in the 90th percentile. I usually lease my vehicles but this year we purchased a car and even with my wife’s income combined we spent about 25% of our gross annual income out the door (she makes significantly less than I do). Am I reckless spender compared to most people on this forum? What financial “rules” exist for those leasing? Would it be closer to 2% of gross annual income for yearly lease costs if people average say around 5 years of ownership per car?
Those “rules” you see in the internet cannot account for individual circumstances hence useless . Be honest to yourself based on your and your family’s future financial goals and decide an appropriate spend. Life is too short to drive a crappy car and too unpredictable to splurge on an exotic for a wage earner father like me in my opinion so I drive a Grand Cherokee. If we owned our home outright with no kids, I would drive Porsche 911 4S Targa.
Congrats on the new born, kids grow up very fast so enjoy the time you spend with them. My 8 year old now already started not listening to me unconditionally.
You already bought the car, so don’t think too much, enjoy the smell of the brand new car and take your family to places. 25% is not a YOLO kind of spending.
Do you own a house? If you don’t then you should focus on that first.
I believe the 10% is based off your take home or net monthly income. Let’s say your after tax monthly income is 10k then your payments should be around $1000. If your payment is around 2500, then I think you’re spending too much. When you add in insurance, gas and maintenance, you’re looking at using 30% of your income. I would look to trade it in for something financially less stressful. Also, kids are expensive. You’ll need to save for them right away. Good luck with parenthood!
I think he paid the car in cash, hence 25% of gross income
Interesting question. I’d be interested to know where I stand in terms of car payments to salary ratio compared to others but it’s probably not super useful for any sort of planning. Everyone’s got their own thing going on. A single person living on 100K income can probably “afford” a much nicer car than a family of 4 or 5 on a 300K income. Caring for children, schooling, etc cost way more than most cars would cost.
That being said, I’ve always had these mental barriers around cost of a car regardless of my salary. I probably make 2.5x more yearly now than I did when I started leasing but mentally I still set the same budget on car spending.
Exactly, if your retirement plan is on track than you can splurge a little. A retirement plan is supposed to take care of income/expense of various life events.
I like percentage rules as quick evals. I think you can’t go wrong with a 10% rule of your income being spent yearly on your car payments (should include payments, insurance and maintenance)…
Sounds like you bought a car 25% of your combined incomes? Sounds healthy to me. If payments are 25% of your income, that might get in the way of other financial goals you might have (e.g., buying house, retirement, etc).
To be financially stable,
You can not see these % in a vacuum. You have to see & apply them in aggregate.
1st things 1st, you have to determine whether you want to base the % off Gross Income or Net/Take Home Income.
If you’re not a financially wavy individual,(which you illuded that you aren’t) I’d suggest working off actual $ amount based on net take home pay.
It will actually help you much more than % of income method.
Make sure to account for retirement & savings for your kid(s) & other goals like rainy day fund, house down payment fund etc.
Good luck
This doesn’t tell us anything about your financial status.
25% if you make 100k gross on 2 cars is a lot.
25% of 70k is horrible
25% of 500k may be okay
I realize that you want to not divulge much about how much you make etc. But as i said % don’t always give you the right picture
No we don’t own a home. We live in Los Angeles so there’s been a few barriers to entry. But her parents own a 4 bedroom house so we’ve moved in for the time being. We figured we could use the extra help and save some extra money. Obviously I’m not thrilled to be living with my in-laws lol but it’s been tolerable. I’d be the first person in my family who would own a home so that’s always been a personal goal of mine. I have enough saved up in cash to put down 20%+ so it will happen at some point. Just hoping the market softens a little in the next year or two.
The purchase price of the car was 25% of our combined annual income. If our monthly payments were 25% we’d be in a whole lot of trouble
It seems fine, I like to look at car spending annualized. So what would matter is how long you keep it, then what you can sell it for later.
I think 10% annualized is far too high early in life when you haven’t saved most of what you need for retirement, college, a house, etc.
yeah, you aren’t calculating it correctly. you spent 25%, but that’s only 1 year. The car won’t last you just 1 year.
Those rules of thumb are only that, and as others pointed out can vary a lot in metro areas. They are usually based on debt load/payment, not paying cash. It says a lot you’re even asking the question.
If you were already house poor, or this debt bumped your DTI to threaten a future house purchase, different story.
If (for example) your total income is 80k and you bought a 20k car, this Internet stranger doesn’t think you necessarily overspent. If you make $400k and bought a $100k house while living with your in-laws, different story.
Enjoy your new car - what was it?
Just my opinion. These general rules are not really useful. It’s in a vacuum, and neglects just about every other important factor you need to consider before plunking down tons of cash on a car. Sure, if you want to use it to rationalize your overpriced appliance, go ahead, but in the end, you should be able to figure out for yourself what an acceptable amount of money is to spend on a car. If you can’t and need a rule of thumb, I would suggest pausing the car search to better understand your personal finances.
In that case your calculation is off. If you financed your car for 5 years, you are really only at 5% gross (25/5). This would be less if your combined income grows over the next 5 yrs. This is perfectly fine. Enjoy the car and the kid!
A lot of these rules are general guidelines and don’t take into account individual priorities.
And ESPECIALLY when it comes to cars - pretty much all rules assume cars are an appliance meant to get you from point A to point B and you should ideally spend as little as absolutely necessary on a car. So if you’re a car enthusiast, that’s something to consider as well.
In my example, I love cars and I don’t buy my cars with the intent of showing off or impressing others. I truly enjoy cars as a driving experience. So I’d be inclined to spend more on a car than, say, someone who doesn’t care what they’re driving as long as it works.
What car did you end up buying? 4xe or 45e?
My wife went from a 2017 430i to a Model Y