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Inspired post by How much should you spend on a car.
Why working in insurance 2 years ago, my manager at the time had extensive experience working with wealthy clients and what he told me I remember to this day.
I asked him about how much should people spend on buying a car?
He told me 10% of their income, so if you make 40K, buy a car for 4K.
…reality check
But wait, do we see this anywhere? Heck no, we see a 1:1 match between income and car or somewhere close to it. Isn’t risky to wager your income you are projected to make for the next 12 months for a purchase you made this instant? Many things can happen in those 12 months and you could end up digging a bigger whole for yourself.
When did it make sense to hold assets (depreciating) that is worth more then you are capable of earning. Plus on top of this you have a mortgage or some sort of living expenses which essentially if anything minor happens, you are doomed.
Imagine you miss 2 weeks of work or a month for whatever reason, do you have any idea how screwed you are? Not only are you living at the edge but you are going to ruin other peoples lives.
When exactly is it OK for us to just go out and spend, spend, spend without considering the consequences, costs, lost opportunity and possible risks?
Do we not use our brains for logical thinking or do we just acquire stuff hoping it will make us happy so that we can forget the realities of our lives?
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Andrew
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Nice rule of thumb. I always heard you should spend about 30% of your housing, but I never heard anything for car payments and expenses. It’s a long time coming because Americans are so enamored with their cars. I am not sure if this is the case in Canada.
I occasionally volunteer for Habitat for Humanity and many of the people who were candidates for the houses had brand new cars. My own car is 10 years old! That made no sense to me, since cars lose so much value.
Valerie M´s last blog ..LiveSay [Haiti]: Marathon for hungry children
That’s probably a good rule of thumb. However, I like the Dave Ramsey rule even better: if you have $2k (cash) to spend on a car, you buy a $2k car. I wish we had done that. At least we’ll try to next time.
Valerie thanks for your comment.
Exactly, people seem so out of touch with reality that its like if you tell them to spend 10% on a car purchase they would call you insane and crazy.
Meg, thanks for your comment.
You mean you buy a car for whatever you have?
I didn’t mean 10% by whatever means, I am totally against borrowing money to buy a car. I have done it myself and it cost me big time.
Yeah, exactly! Basically, you buy what you can afford without going into debt — and ideally while still having a good emergency fund, retirement, etc.