How much should you spend on a car? 10k? 20k? 30k? 50k+?
I was reading at article on financial samurai saying that you should spend a maximum of 10% of your gross annual income on a car purchase so if you earn 50k you spend 5k if you ear 100k you spend 10k and if you earn 500k you spend 50k.
The logic behind this is because you are spending a small amount on a car purchase it frees up more money to invest so you will reach financial freedom quicker.
If reaching financial freedom as quickly as possible is an important goal for you then follow the financial samurai’s advice. Great site by the way!
Before I read that article I remember reading on bold and determined where he says you should only spend 10% of your net worth on a car purchase and ever since I read that it makes a lot of sense to me.
For example if you have less than 100k net worth the car you buy will be 10k or less.
If you are worth 500k then go ahead and buy a 50k car.
If you’re worth 1 million then get a 100k car.
Want a brand new 500k Ferrari? Well be worth 5 million first.
This makes a lot of sense to me because it won’t destroy your finances and it’s congruent to your lifestyle.
I see a lot of young guys driving around in 50k cars (particularly the Mercedes CLA AMG pictured^) and they are worth 50k or less. The car says you are successful but you either rent or have no savings/investments or you have a massive mortgage because you only put the minimum as a down payment.
Now what if you’re worth 1 or 2 million and you buy a 500k brand new Lamborghini Huracan? People will wonder why your house is only worth 500k and you drive a 500k car. Or why you don’t have what the really rich people who drive those cars have. It won’t be congruent to your lifestyle and you might find the car stressful when you get bills for it since you don’t have all that extra wealth to back it up.
So that’s why I like this 10% rule. Of course there is no right or wrong way to live and you can do as you wish but keep this rule in mind. I will follow it.
So if you want that 30k car at least be worth 300k first. That way a lot of your wealth is in savings/investments/home equity which will benefit you financially (freedom)
Good luck guys