One Rule for Car Buying Gains Traction

When it comes to buying a car, how much should you spend? According to financial advisor Sam Dogen, the answer is as little as possible. One of the worst decisions you can make is to focus only on the monthly payment, especially if it’s stretched out over many years. This approach can lead to paying far more than you should for a depreciating asset.

Instead, Dogen recommends a strategy called the 1/10th rule. This rule suggests spending no more than 10 percent of your gross annual income on a car. For instance, if you earn $42,000 a year, you should spend no more than $4,200 on a vehicle. If your annual income is $60,000, your car budget should be $6,000.

Writing for CNBC’s Make It, Dogen explains that adhering to this rule can help you better manage the total costs associated with car ownership, including insurance, maintenance, and fuel. This method allows you to maintain a comfortable financial cushion and allocate more money toward savings and investments, significantly improving your overall financial health.

Dogen believes following the 1/10th rule can lead to a less stressful life. By keeping car costs low, you won’t constantly worry about how to afford car repairs or payments, granting you greater financial freedom. You can focus on more meaningful financial goals.

However, finding a car within 10 percent of your income can be challenging. In March this year, dealerships had a limited supply of older, high-mileage vehicles priced below $15,000. According to Kelley Blue Book, the average used car was listed at $25,540 during the same month. Even a 2016 to 2017 minivan with 80,000 miles costs around $15,000 to $16,000 today.

If sticking to the 1/10th rule seems impossible, consider the 20/4/10 rule. This alternative strategy involves putting down 20 percent of the car’s price, financing the vehicle for no longer than four years, and ensuring that your total car expenses (loan payment, insurance, and fuel) do not exceed 10 percent of your gross income.

Following these guidelines can help you make smarter car-buying decisions that align with your financial goals. By minimizing car expenses, you can allocate more resources to savings, investments, and other essential areas of your life, ultimately leading to better financial health and less stress.