If you’re reading this right now, my guess is that you’re a car enthusiast. The liquid running through your veins is two-parts petrol and blood. If that’s the case, you’re not alone, as yours truly has the same Type P blood type. We love cars and everything to do with them. But, as much as our hobby brings us a great deal of joy, it’s a possibility that it’s also bringing us a great deal of ruin. This is because cars may be the single worst financial investment possible.
That’s right, buying the thing we love most is most likely a horrible idea. Obviously, this isn’t true for everyone and every car, but it is true for the large majority of Americans. The median household income for the United States is $50,500. The average cost for a new vehicle in 2014 was $31,252. That means that the average brand new vehicle costs roughly 61 percent of the average household income. Someone spending 61 percent of their income on a car is destined to be in financial ruin, and quickly.
There is a common rule of thumb when buying a car, called the 1/10th Rule. It’s very simple, only buy a car that costs 1/10th of your gross annual income. So if your gross annual income is $50,000, then don’t spend more than $5,000 on a car. Now, that may seem extreme, but that kind of frugality can help tremendously in the long run. Because it isn’t just the initial cost of the car that must be factored in. Insurance, maintenance, gas and depreciation are all factors in purchasing a car. These added costs can break someone who spends most of their monthly earnings on a car payment.
This is a tough pill for many of us enthusiasts to swallow, as we read so many websites filled with reviews of exotic hypercars, so we desire something similar. Cars are emotional purchases, there are no two ways about it. I always go back to my Camry Theory, that the Toyota Camry is as much car as you could ever actually need, but hundreds of thousands of people buy BMWs and Mercedes’ and Porsches every year because they simply desire the extra luxury or performance or both, in most cases. Point being, most people overspend on cars because they simply desire more than they can afford and end up in over their heads.
But I also think there is another reason, aside from desire, that causes people to overspend on their vehicles — lack of education. People simply don’t know that there are millions of used cars costing less than $10,000 that can offer inexpensive, reliable and, often times, fun transportation. There are many people who do not realize the caliber of automobile that floats around Craigslist and eBay and the like. There are so many different kinds of car from many different automakers that can be had for little money yet still provide years of reliable and enjoyable motoring. The few that come to mind are the Fifth or Sixth-gen Honda Accord, MKV or MKVI Volkswagen Golf, Fifth-gen Nissan Maxima and the E36 BMW. All of these cars are reliable, reasonably inexpensive and very fun to drive.
With cars like this out there on the market, there seems like no reason to overspend on an automobile. The money saved, if you were to purchase by the 1/10th rule, could be invested and grow substantially over the course of many years and by doing so, one day you could buy the car you’ve always desired.
So the automobile can both bring us enthusiasts with joy but, if not purchased responsible, can also bring us disaster in the long run. But if you buy smart now, and make a little nest egg for you and your family, later down the line you’ll be able to buy the car on the cover of Car and Driver magazine.