Why You Should Stick to the One-Tenth Rule When Buying a Car
Written by
David Nadelle
Edited by
T. Woods
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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.
The 1/10th rule for car buying is a budgeting strategy advanced by the Financial Samurai, 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 1/10th 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.
“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 1/10th 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.
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.
As Dogen wrote, “Buying too much car is like negative compounding!”
Less Ownership Stress and Guilt
According to Dogen, paying over 1/10th 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 1/10th of your income on a car makes ownership and driving (and even parallel parking) stress-free.
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