1/10th Rule — Why We Should Listen To It

Car Tips, Interesting | May 21st, 2015 by 41
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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

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.

110thrule car buying 2015 chart

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.

41 responses to “1/10th Rule — Why We Should Listen To It”

  1. Mike N. says:

    I agree with the general idea, but 1/10 is probably unrealistically low for most people. 2/10 (20% is more realistic). Even so, under that rule a typical $50,000 BMW should only be purchased by someone making over $250,000 a year (i.e. someone who’s almost a 1%’er).

    Another related measure is your monthly payment should be no more 20% of your monthly income. That’s when leasing and long(er) loan terms become attractive, as the prices of the cars have increased well beyond the 20% rule for most people.

  2. mckillio says:

    It’s a great idea and how most people should look at cars but good luck talking my wife into this.

  3. Reino-five-five-oh says:

    Ha! This just made me laugh. While I agree that most consumers are overextending themselves to get into the car they want, this list is just too constrictive. The 435i should only be driven by those making $200k-$250k? In reality most of those drivers are barely in the $50k-$75k group.

  4. Yeoman says:

    This is a joke, right? The only rule I’ve heard similar to this is that your monthly payment should not exceed 10% of your monthly gross income, which is more in line with reality.

  5. jason bourne says:

    This rule would apply only if the cars were 1/10 of what they cost. ;)

  6. Kaisuke971 says:

    We should bring that 1/10th rule but put instead annual income multiplied by the average number of years people keep their car.
    Not that would be interesting and actually pretty fair.

  7. Mike Vella says:

    Hmm. I’m pushing 50, make a good living and have bought many cars for myself since I was 19 (and together as a married man), and I’ve not really come close to the 1/10th rule.
    No financial ruin on the horizon, either.. If I stay on track, I should be able to retire at 59.

  8. petraman says:

    I guess it depends what your priorities are. I’d rather live in a modest house (I do) and drive a much nicer car (I don’t… yet) that I know hasn’t been abused, and has been taken care of mechanically and aesthetically. I am not someone that deals with hand-me-down problems from POs. I drive a car (purchased new) that’s about 1/3 of my income and I’m looking at a (new) car that’s about 90% of my income. Now, if you’d like to talk to me about how I’m burying myself in a financial hole, let me walk you through all of my investments and savings. No, a new car will never be a wise financial decision, but if numbers were all I lived my life by, I’d be driving a Camry like you said. I’d probably also be eating Mac and Cheese every night and live in a trailer park. Yuck.

    Sorry, there’s more to life than numbers.

  9. Airkrd says:

    I was under the impression that the 1/10th rule meant your monthly payment and insurance should be no more than 1/10 of your monthly take home pay. This is still very restrictive but does offer a much more reasonable car than the chart above. Someone who takes home 5000K a month is probably making 70-80K a year before taxes. With the 1/10th rule than this person can spend no more than $500 dollars a month on a car. Let’s say for arguments sake, you’ll need to spend about $100 a month on insurance that leaves you with $400 a month to spend on a car. To stay under $400 a month on a 48 month loan, you have a budget of 22-23K. That will get you a well equipped new Honda Civic or a well equipped 4 cylinder low milage, 2-3 year old Honda Accord. This is much more car than the above chart would allow for someone making 70-80K. I’m in the 100-150K range and I drive a well equipped V6 accord which I bought new in 2006 when I was making around 100K. In a few years I should be in the 150-200k range I plan to replace the Honda with a new BMW, maybe an M2, and I’ll be well under the 10% of take home. I’m still able make all monthly expenses, put money in savings, retirement, my child’s college fund and pay for vacations. So why shouldn’t I buy a car that I can afford, enjoy and still live a fiscally responsible life. By the chart above I’d have to be in the 500K to 1 million a year income level to afford an M2, assuming they’ll run about 55-60K.

    • Mike Vella says:

      Yea, this sounds more like it.
      My wife has our 428 as a lease and I have a CPO X3 and combined payments with insurance we’re under 10 percent of take home monthly.

  10. NightWriter says:

    Spending within one’s means is certainly good advice, and a lesson more people need to heed. But this rule of thumb is nonsense. The more money you make, the more flexibility you have in how you can spend it. For example, going from $150k to $170k would yield about another $1k/month in income (after taxes), which could easily cover the typical lease payments on a $70k car…even though the chart above would suggest you could afford only a $17k car. It comes down to your priorities and your budget.

  11. JB says:

    You know in China, a lot of people are taking home less than 100k CNY, but they still have to spend 130k for a Mazda 3. The 1/10 rule just does not apply…

  12. A. O. says:

    @We should bring that 1/10th rule but put instead annual income multiplied by the average number of years people keep their car.@

    Yep, and also should be remembered that the actual value of a car after these years is not 0 USD/EUR. A car is not just an emotional purchase, it is a relatively big one.

  13. petraman says:

    If people listened to this “advice,” this blog wouldn’t exist and neither would the used car market.

    • Yeoman says:

      Pretty much.. who was the genius who approved this story for a BMW blog of all places?

        • TIGER says:

          Man don’t mean any disrespect, I actually enjoyed this article. But in the past month or two the blogs quality has gone down, too many hypothetical posts, YouTube video commentary for some reason, and less actual BMW news. Just thought I’d give some feedback.

          • Horatiu B. says:

            There are only that many BMW news. We need to diversify. Some posts are meant to draw opinions, comments. I respect the feedback but I actually feel we do more quality articles. And for a wider demographic

      • petraman says:

        What kills me is the same author just wrote an article about how important enthusiasts are for helping companies sell cars. How can I recommend a new BMW if I don’t know any millionaires?

        • Horatiu B. says:

          What kills me is that no one sees that we DID NOT come up with the 1/10th rule. As the image shows, it’s a study done by others. An the 1/10th rule “existed” for a while. All we did was put it out there. The 1/10th rule is the smart financial choice, but clearly many of us do not follow that or any other financial rules.

  14. Max says:

    Oh man this is absolutely wrong.
    Example: Lets say you earn 150k, so you can easily safe 20k/year, means after 3years you can buy a new 60k 5series for example. After owning it 3 years the cars value maybe is approx. 30-35k, but you already safed at least another 40k for buying a new one, so you have 70k now for buying a new one again. And remember, 4 years free maintenance at BMW. This list sucks, I would really like to see the 150k person with a Honda :D

  15. Stephen Garrett says:

    Wow. Coming from someone is actually IN the car business, this is a crock of shit.

    First off, banks determine who gets loans and in what amount based on the likelihood of them getting their funds back. In other words, lenders don’t give loans on cars people can’t afford. Not prime ones, anyway.

    Secondly, WHO made this rule? And what % of your annual income are you supposed to spend on clothes? Food? A home? Leisure activities? Most people blow way more money on shit that is far less important than a car. I’ve seen people who smoke two packs a day walk away from upgrading their 1991 hoopty with a bajillion miles and bungee cords keeping the bumper on to a new car over $20 a month.

    Lastly, I don’t think people are aware of how little money goes on cars these days. A $10,000 family car, as the rule suggest a household earning 100K should buy, is an awful family car. It’s going to be old, and therefore less safe and efficient, and need more maintenance; it’s going to have a lot of miles, and therefore need more maintenance and have a shorter lifespan, or it’s going to be a cheap vehicle, without enough room/features needed. Or some combination of those things. 10K buys a 6yo, 100K mile Camry. The loan duration would already be so short it push the payment to that of what a new car would be. And for those making 50K, the average? Hell, I would put myself in 5K car to daily drive, let alone the rest of my family. I value my life a little more than my money.

    Here’s the deal- the price of a car is virtually irrelevant. You can lease Car A that costs 10 grand more than Car B for the same monthly payment. You can have the same monthly payment on Car C, which is 8yo and has 130K miles, as Car D, which is brand new and $15,000 more. So is it REALLY smarter to pay the same monthly expenses for a car with no warranty, that needs more maintenance, that is less safe and efficient? Sounds like some sketchy math to me.

    Truth is, it’s all about priorities. Most people know what they can, and are willing, to spend on a car. I’ve always spent WELL above 10% of my annual income on my cars. Since I was 16. And guess what? Now, @ age 27, I STILL have nice vehicles, money in savings and invested, and my family and I are still able to do and get the things we want. We’re in a lot better shape than LOTS of people I known who make more than us, and spend a lot less on cars.

    While it IS smart to always make sure you are living within your means, there is NO one-size-fits-all rule for what % of your income you should spend on a car. I’ve seen the people who spend 10% on their vehicle. Even 5%. You know what they do with the left over? they buy a boat and a cabin they visit once a year at best, or they drink and gamble it all away at worst. Like I said, priorities.

    • Max says:

      True words.
      Funfact: with 150-200k I can buy an M3 every year and would still be able to life like a lot of other people :D

  16. Yeoman says:

    Not to mention I wouldn’t be making a penny without reliable transportation to my job.

  17. 2sfhim says:

    I don’t agree with this, at least it doesn’t apply at all where I live. Some of my neighbours own a Porsche or an Aston Martin V12 Vantage. These cars should be in the 1000k-1500k income according to the table. But 500k-1500k is the price of the flats where they live… Their income is much lower.
    And according to the table my family should own only one Toyota Prius whereas we have a full option minivan and a VW Golf.

    • Reino-five-five-oh says:

      Are you in London? I ask because I just traveled there last year and I was shocked to see the amount of high end sports cars just sitting out in driveways. I thought L.A. had some nice cars, but nothing like London.

      • 2sfhim says:

        I’m not in London. Actually the Aston Martin was an exception among my neighbours, most people own more “normal” cars like Bmw, Mercedes, Audi, Volkswagen, Mini, Fiat, Peugeot, Citroën, Toyota, Nissan… I know there are many sports cars in London but I think it is often because of the Qataris and the Saudis. It’s the same in Paris near the luxury hotels.

  18. Guest says:

    This is an amazing article and a great piece of advice. Truth may piss you off but most people don’t know how to live within their means. Mark Zuckerberg drives a Golf.

  19. William C. says:

    So, given that the average household income for Italy in 2014 was 20000 € (about 22000$ at the actual change) we all should go by bike, walk or use public transport. I think this rule is too restrictive, in fact BMW of Italy would close in a couple of months if everyone respected this (maybe not, because a lot of Italian politicians would have continued to use our money to buy things such as luxury cars ..but that’s another story).

  20. Horatiu says:

    The numbers are realistic. But no one really follows them because we all want more than we can afford :)

  21. […] 1/10th Rule — Why We Should Listen To It 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 … Read more on BMWBLOG (blog) […]

  22. The 1/10th rule is such a brilliant personal finance guideline for car buying :)

    A car is one of the biggest wealth killers for most people out there. It is absurd the median household income of $52,000 should buy the median after-tax price of a car at $32,000. The opportunity cost of not investing the money over a 10-20-30 year period is huge.

    The 1/10th rule can also bee seen as a motivation to earn more to buy what you want.

    Best,

    Sam
    http://www.financialsamurai.com

  23. […] When I bought my first car last year, I did a lot of research. I read over and over that people should spend 1/10 of their gross annual income on their vehicle. This rule is everywhere online. […]

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