The Basics of Financial Management: The Top 10 Car Rules
One of the biggest money drains on a family’s budget; car costs. The old loyal car is the machine that makes your life that much simpler. It can take you from point A to point B in a flash, but at what costs will you pay for that convenience. If you do not know how to handle this money pit based on smart money management then you have arrived at the right time and right place. This advice is going to leave you wondering if having a car is worth it because it takes such a big chunk out of the budget. For a quick example add up the money you spend in a month to maintain the nice old dune boogie and write it down. All of the categories below should not add up to more than 15-20% of total monthly income. If when you add it you are at 30% when compared to income some changes must take place because it is not financially smart.
I have heard a few horrid stories of 20 something year olds who drive a car with a 500 dollar loan payment, 250 insurance, 200 in gas, 150 in cleaning costs, etc. That is $1100 hundred bucks going to waste month after month to drive in style. This young person should be earning $7 grand a month in order to effectively afford those high car expenses I just mentioned. (7,000 x 15% is 1050)
Just imagine if you invested that $1100 a month for a year, it adds up to $13 thousand a year. That is a sizeable emergency fund or initial investment amount that can grow year after year. Let’s assume that person drives 1250 miles per month or 15K annual miles. The cost per mile is .88 cents per mile. (This is not even including additional service fees / depreciation) If you add up the total costs it will be closer to 1.10 cents per mile driven. (I don’t know about you, but I don’t have an extra 15-20 thousand lying around to throw away on a piece of machinery)
Car Expenses Categories:
Car Note (Loan)
Car Insurance
Gas
Maintenance
Accessories
Cleaning
The Top 10 Car Rules:
Do not purchase a car that is more than 20% your annual income
Do not get a gas guzzler unless you can easily afford the gas bill
Do not let all the expenses for the car including maintenance exceed 15% monthly income.
Do not get a car to impress others (Getting a SUV that is 100% X annual income-not smart)
Do not get a New Car unless you are willing to lose 5 grand + in depreciation
Do not get a navigation package (cell phones can give you the same service for free)
Do not get car dealer financing or a Lease (Pay for it all in cash is best)
Get a used car if you are still building Wealth (Under the Radar Millionaires always buy used)
Never go to Car Dealer’s for service (Find a reliable/trusted Mechanic)
If you have a car loan, pay extra every month to eliminate the debt
Ok if you follow the car rules above and never break them, I believe you will be better off than 90% of the drivers on the road. Why you ask, because people are not making the right choices when it comes to a depreciating thing like a car. They overextend themselves and completely erode their monthly cash flow by breaking all the rules above. For example why pay 2500 extra to get a navigation system when you can easily set up the smart phone or standalone gps to get you where you need to go for free.
That kid that just graduated college wants to show off and get a BMW or Mercedes that equals 100% of his income. At that rate it will take him 7-8 years to pay it off plus a ton of interest. The time will come when you can truly afford a luxury car, and that time will happen when you do two things. Increase income and or save the complete amount in a car fund to not take out any car loans. The rules are made to protect you and help you grow your knowledge regarding financial management. If you follow these car rules you will have the ability to grow your money and not hurt your chances at retiring early. By taking all the extra money you are now saving due to smart choices you can invest it and watch it grow.
Comment if you have any suggestions to add to the top 10 car rules?
PS: Car Leasing is the worse car rule you can ever break!
Rich Uncle EL
I bought my car in 2008 and spent too much money on it. I paid of the loan two years early and I vow to drive the car until it no longer runs. I will never take out a car loan ever, ever again. However, I do have my oil changed at the dealership…
That's awesome, keeping a car for at least 10 years is very smart.
Fully agree with you, Nice rules , Also it is very good to buy a car which 20% less than annual income, it is best way to control your spending and not overloading your budget, Thanks
Protecting that cash flow is the best way to go. Thanks for the comment Sam.
Currently have one car in the household. Started debating if/when to get another, but since the girlfriend and I carpool to work – think we're going to try and hold off a little while longer. Was debating if I should lease or buy – but definitely will look into buying used, like with my first!