2 Rules for Car-Buying and Maintaining Wealth

One of my favorite things to do is to study the behavior of the American “middle class.” A class that often complains about having little money but – at the same time – manages to enjoy the luxuries of a high-class lifestyle.

Everyone should be able to plug their iPhone5 into their BMW 6 Series. Regardless of income level, this is our right.

At least, this is how it appears…

The Rant and The Reason

Given the various jobs I’ve held within the field of personal finance, I’ve gotten a first-hand look at this (ir)rationale.

Example 1:

What’s the first thing a person will do when they overdraw a checking account?

Rather than closely examining their budget, they will first blame their bank for processing debits before credits (not true).

Second, they will place their brand new $499 phone on the table.

The $200 monthly cell phone payment came out quicker than expected 🙁

Example 2:

After accumulating a massive savings of $400, the waiter living “paycheck to paycheck” claims “I hate my car, I need a new one.”

The 2008 model just isn’t doing it for him anymore.

Plus – the monthly payment will be “cheaper.”

These are two examples (among thousands) that I used to witness daily. But you don’t really need my personal experiences to expose this phenomenon.

According to the US Census Bureau, the average household income is a hair over $50,000. That seems awfully low when you look at all the nice cars on the road.

So what am I getting at?

I want to share 2 rules that you can use to decide “what kind of car you can afford.”

If you truly want to build wealth and grow your net worth, these 2 car-buying tips will get you there.

How can someone purchase a car AND maintain their net worth? The two are typically viewed as mutually exclusive; but they don’t have to be!

Rule #1

You should only finance a car if you have the full amount in your savings.

If you want to purchase a car for $10,000, you need to have AT LEAST $10,000 in your savings. If you only have $3,000 in your savings, you have no business buying a $20,000 car.

And when I say “savings,” I mean savings. Not your 401(k). Not equity in your house. I’m talking liquid cash money you can use to pay off the car if need be.

“What if I need a car to drive to work and I have no money in savings?”

Try public transportation.

Rule #2

You should only buy a car that costs 1/10 of your annual income.

If you make $40,000/year, you should limit yourself to buy a car costing $4,000. If you have your eyes on that aforementioned BMW 6 Series, you better make $760,000/year.

Conclusion

These 2 rules may sound a little extreme to most, but I promise they will work. The exclusion of a car payment from one’s budget does many fine things to one’s net worth. My car (valued at $3800) does everything I need.

It’s extremely tempting to look like a baller. 

But don’t just “look” like one…be one.