Financial Samurai: Stick to the One-Tenth Rule To Keep Car Purchases Affordable
With very few exceptions, cars are guaranteed to lose value and waste your money. You may love your car, but there's no reason to overspend on a depreciating liability, especially when all other goods and services eat so much of your income.
What Is the One-Tenth Rule for Buying a Car?
The one-tenth rule for car buying is a budgeting strategy advanced by the Financial Samurai, aka Sam Dogen, and has been gaining traction among car buyers looking to spend as little as possible on an asset that loses them money.
Often lumped into the 20/4/10 rule (which adds being able to pay 20% or more of the total purchase price upfront and being able to pay off the balance in 48 months or fewer to the mix), the one-tenth rule alone is something worth sticking to when shopping for a new ride. Guest-writing on CBNC Make It, Dogen explained the thinking behind his 10% spending suggestion.
Go New: 6 Cars You Should Avoid Buying Used
Look Out! 5 Signs You’re Losing Money Every Month — and How To Find the Leaks
"Too often, people will purchase a car without having a realistic understanding of how much more it will cost to own it," he noted. "As a result, they end up spending too much and exceeding their budget."
He continued, "If you make the median per capita income of about $42,000 a year, for example, you should limit your budget to $4,200. If you make the median household income of about $62,000 a year, don't spend more than $6,200 on a car."
Remembering that total car costs include insurance, maintenance and gas (not to mention parking and traffic tickets!), if you can manage to spend only one-tenth of your gross income on a new-to-you car, the financial benefits are plentiful.
Here are three reasons to try the one-tenth rule the next time you buy a car.
Practice Responsible Spending
According to Quicken, there are only two questions you need to ask yourself when buying a car:
What kind of car do you need?
How much can you afford to pay?
Following the one-tenth rule helps you select a vehicle you can comfortably afford, by looking at not just the purchase price, but also the ongoing expenses like insurance, maintenance and fuel.
Keep Financial Literacy Month going — learn how the MoneyLion app helps you track, manage and move your money in one place.
Saving and Investing Opportunities
Spending more than 10% of your income on a car means you'll have less money for other things, such as assets that can grow your wealth.
By making a modest investment in a vehicle, you can redirect other funds towards savings or investments that could potentially grow over time, ultimately improving your financial future.
"Buying too much car is like negative compounding!" Dogen wrote.
Less Ownership Stress and Guilt
According to Dogen, paying over one-tenth of your income on a car can cause stress because you're always considering what can go wrong and what potential damage could cost.
Often, when people overspend on an item, they fear the money should go towards something more important, causing guilt and resentment. Sticking to spending one-tenth of your income on a car makes ownership stress-free, even if it can't do much about parallel parking.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal, or tax advice.
More From MoneyLion: