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I buy the cheapest entry-level car that is cheap to run and runs like iron (like a Toyota or Mazda). Zero financing if needed,keep it forever. I've had two cars in the last 20 years and am totally car-dependent where I live. A Mazda for 11 years (170,000 miles) and now a Toyota Matrix for nine years and counting. It never occurred to me to consider it a "proper" amount related to income. I also find that "rule" about engagement rings absolutely ridiculous (but do admire the diamond industry for all the BS it's hoodwinked women for over the years).
Financing a car is (imo) dumb. Why owe money on a depreciating asset? Eat the cost and eliminate the risk.
I'll tell you what's dumb. Plunking down 30K on a car when you could've invested that money elsewhere. Suppose I qualify for an interest rate of 1%. If I finance the car instead of buying it with cash, I'll be paying interest. But now I can take that 30K and invest it on something that gets me a 5% rate of return. Or suppose I buy the car with cash, and a few months later, I lose my job or my kid needs braces. Gee, that 30K might've come in handy. Too bad I blew it all on a car. So much for eliminating risk. A big factor in whether you finance is the interest rate you're charged. I would never borrow at a rate of 8%, for example. And there's always an opportunity cost with making any large purchase.
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Originally Posted by MeInDenudinFL
No, it is not. It is your income that lets you save an X amount and hence let you buy car Y. Therefore, income and car price are related and it is a fair question to know how they are related or how much of your income (whether you saved it or pay through finance) are you willing to spend.
Thank you. Finally someone who gets it. People keep saying you should save up until you have enough money to buy the car. But guess what? A lot of people don't have that option. Suppose you just graduated from college and are getting ready to start your first job. Maybe you're fortunate enough not to have student loans to pay off. But unfortunately, public transportation isn't an option because of where you live and where the job is. So you have no choice. You need a car. Problem is you don't have any savings. This is why it makes perfect sense to have some sort of guideline on how much to spend on the car. You can't just total up your other expenses and say I'll spend whatever's leftover on the car because, for the moment, you don't know what your expenses will be outside of things like rent. This is how a lot of people get in over their heads. They underestimate how much things cost, but they've committed to buying a car that was more than they can handle. Imagine if someone had pulled them aside early on and said "don't go over X%."
I'll tell you what's dumb. Plunking down 30K on a car when you could've invested that money elsewhere. Suppose I qualify for an interest rate of 1%. If I finance the car instead of buying it with cash, I'll be paying interest. But now I can take that 30K and invest it on something that gets me a 5% rate of return. Or suppose I buy the car with cash, and a few months later, I lose my job or my kid needs braces. Gee, that 30K might've come in handy. Too bad I blew it all on a car. So much for eliminating risk. A big factor in whether you finance is the interest rate you're charged. I would never borrow at a rate of 8%, for example. And there's always an opportunity cost with making any large purchase.
In theory you're right. The problem comes with the risk. You finance the 30K at 1% and then you lose your job and can't cover the payments...oops your 30K car is only worth 20K now and you can't sell it to cover the difference. And that's assuming that you actually are making 5% (where on earth are you making 5%? I'd love to know) after taxes and really investing that money. Now if you're saying you have 30K already extra in the bank and you're choosing to invest it over paying cash...well you could in theory still lose that money in your investments so the only place its safe is in a Money Market which...isn't even making 1% if you only have 30K. And lets face it, there are very few people out there who finance a car due to their investment strategy, most people just want more car than they can afford.
BTW - the 30K I estimate we'll spend (again every 12-14 years) is in addition to a fully funded emergency fund (not making anywhere near 5%) which would easily cover any of your scenarios.
I buy the cheapest entry-level car that is cheap to run and runs like iron (like a Toyota or Mazda). Zero financing if needed,keep it forever. I've had two cars in the last 20 years and am totally car-dependent where I live. A Mazda for 11 years (170,000 miles) and now a Toyota Matrix for nine years and counting. It never occurred to me to consider it a "proper" amount related to income. I also find that "rule" about engagement rings absolutely ridiculous (but do admire the diamond industry for all the BS it's hoodwinked women for over the years).
If more people thought like this ^^^^ the U.S. would not be in nearly as much trouble as we are.
In theory you're right. The problem comes with the risk. You finance the 30K at 1% and then you lose your job and can't cover the payments...oops your 30K car is only worth 20K now and you can't sell it to cover the difference. And that's assuming that you actually are making 5% (where on earth are you making 5%? I'd love to know) after taxes and really investing that money. Now if you're saying you have 30K already extra in the bank and you're choosing to invest it over paying cash...well you could in theory still lose that money in your investments so the only place its safe is in a Money Market which...isn't even making 1% if you only have 30K. And lets face it, there are very few people out there who finance a car due to their investment strategy, most people just want more car than they can afford.
BTW - the 30K I estimate we'll spend (again every 12-14 years) is in addition to a fully funded emergency fund (not making anywhere near 5%) which would easily cover any of your scenarios.
Last summer, I was employed. My company had been bought out and I knew that my job would be coming to an end, though I didn't know when exactly. I started looking for a new job, but wasn't having much luck. I had also gone into savings mode, setting aside money in case I was going to be out of work for awhile. I made up my mind that if I found a job and felt reasonably confident that it would last, I would pay off my car loan. While I was also hoping to use that money for a down payment on a house and the interest rate on the car was very low, I still thought it would be great to not owe money on the car. Then my job ended. I couldn't find work and had to rely on my savings. Finding a job took longer than I had hoped, but I did find one. Only problem is that I ate up a lot of my savings. Now imagine if I had paid off the car back when I was working. I would've had a lot less money saved up to get me through the days I was unemployed. Each month, I hoped I would finally land something. But months would go by where I didn't even get interviews. Each month, I paid the monthly car payment. I was just so happy that I had that safety cushion. Sure, not having that car payment would've been nice, but I don't think I would've lasted as long as I did had I paid off the car. So the point is that you have to sometimes pick the option that isn't ideal because the future is so uncertain. If I had paid off the car, I bet I would be kicking myself later because I would've needed that money for things like food or rent.
Well yes, but I'm not suggesting spending your emergency fund to pay for a car. Im suggesting saving in addition to an emergency fund. Our car fund is totally separate from our emergency fund, with severance our efund would last over a year, probably closer to two. Then of course we could always tap our Roths or sell that paid for car.
Suppose you just graduated from college and are getting ready to start your first job. Maybe you're fortunate enough not to have student loans to pay off.
You can't just total up your other expenses and say I'll spend whatever's leftover on the car because, for the moment, you don't know what your expenses will be outside of things like rent. This is how a lot of people get in over their heads. They underestimate how much things cost, but they've committed to buying a car that was more than they can handle. Imagine if someone had pulled them aside early on and said "don't go over X%."
If this is your philosophy going into it and you are insisting on there being some 'rule' about how to do things, my 'rule' about spending money I don't have is spend the least amount of it possible, period.
Then save until you can purchase a quality product that you can afford.
Now imagine if I had paid off the car back when I was working. I would've had a lot less money saved up to get me through the days I was unemployed. Each month, I hoped I would finally land something.
So the point is that you have to sometimes pick the option that isn't ideal because the future is so uncertain. If I had paid off the car, I bet I would be kicking myself later because I would've needed that money for things like food or rent.
Well, your whole thing is not ideal, because ideally, you only pay off the entire car IF your emergency fund is also fully funded.
I totally get what you are saying. I would pay the entire mortgage off on my house right this very minute, but it would eliminate my savings and just leave me with my retirement and emergency fund.
That's not comfortable or wise in my opinion - I would have to start from ground zero and I have a very low interest rate on my mortgage. That is why I prepay every month, though.
People have been conditioned to see debt as a bad thing. But that isn't always the case. Individuals and businesses borrow all the time, even when they have the cash already. What matters is whether you're taking on debt that you can manage. When I bought my car, I had the money to pay for it all up front. But I had to weigh the pros and cons of doing so. How much would I pay in interest? How confident was I that I'd have a steady income for the next 5 years? Would I need that money for something else?
For someone starting out, building a good credit history is important. Maybe the only thing you ever had to worry about was a credit card. Now you're out in working world, looking to buy a house. Lenders want to see what kind of debt you can handle. Which do you think looks better? A guy who's only had to worry about a credit card with a $5000 limit? Or a guy who, in addition to the credit card, could also handle a $30000 car loan? The latter demonstrates to me that he can handle a larger debt. But a $1000 credit card debt doesn't even approach a $200000 mortgage. Taking on a car loan is one way to build up your credit rating, which helps you later on when you're ready to buy a house.
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