Frugality Check: Are You Spending 5% Of Your Net Worth Or 10% Of Your Income On Cars?

[feh]

Keeping the car a very long time doesn't fully justify for overpaying.

Car A. Brand new Toyota Camry fully loaded out the door for 33k
Car B. 3 Year old fully loaded Camry with 30k miles for 20k

You keep both cars for 12 years. Assuming the life of this car is 250k miles(most likely being a Toyota).

Car A. 2750/year
Car B. 1666/year

So you are paying more than 1k/year just for that initial new car smell. Sounds like a luxury premium to me. If you have a negative or a small net worth, I don't think you have 1k/year to waste on a new car smell.

In your example, car B is driven for 15 years and car A is driven for 12, so not a fair comparison. Additionally, when I've shopped used cars the last 2 purchases, the depreciation wasn't nearly as severe as in your example.

We buy new cars around the $20K price point. Three year old used cars of the same model could be had for about $15K, and in that case I don't know how the car was treated.

I'm not saying there isn't any premium for purchasing new, but in my case, it isn't as extreme as you are portraying.

Car A. Brand new for 20k
Car B. 3 Year old car for 15k

Car A lasts 12 years. Car B lasts 9.

Car A. 1666/year
Car B. 1666/year

[Nutria]

This kind of mentality maybe a little extreme, but definitely goes against the conventional thinking of how one "deserves a NEW car" because of how hard this individual have worked.

Falsely assumes that people buy new cars only because they think they deserve a new car.

We bought a new minivan because we didn't want anyone else's problems. We bought a used Camry (2010 in 2016) because that's all our kids need.

[Nutria]

Purchasing a NEW car is the worst investment one can make.

You also falsely assume that car purchases are investments. Not so. They're expenses.

[Singuy]

Falsely assumes that people buy new cars only because they think they deserve a new car.

We bought a new minivan because we didn't want anyone else's problems. We bought a used Camry (2010 in 2016) because that's all our kids need.

I am saying how it goes against the mentality of just because you worked hard you deserve a new car. This is just one mentality when trying to justify buying of a new car..not that this is the ONLY justification for buying a new car.

[Singuy]

In your example, car B is driven for 15 years and car A is driven for 12, so not a fair comparison. Additionally, when I've shopped used cars the last 2 purchases, the depreciation wasn't nearly as severe as in your example.

We buy new cars around the $20K price point. Three year old used cars of the same model could be had for about $15K, and in that case I don't know how the car was treated.

I'm not saying there isn't any premium for purchasing new, but in my case, it isn't as extreme as you are portraying.

Car A. Brand new for 20k
Car B. 3 Year old car for 15k

Car A lasts 12 years. Car B lasts 9.

Car A. 1666/year
Car B. 1666/year

A 12 vs 15 year old car makes very little difference when it comes to resale and reliability (Lexus or Toyota). Also in my example I specifically wrote "fully loaded". Fully loaded really jacks up the MSRP base price. You can walk out paying 30k on a Honda Civic if you load it up. These fully loaded features however is worth penny on the dollar when you purchase used. On normal Japanese reliable cars, you end up losing the most to depreciation on the options. On German cars, you lose the most money on almost every aspect of the car.

[corn18]

I own three cars that I bought new for a total way over any of these recommendations. Wouldn't do that again, but it's nice they are paid off. Very depressing watching the depreciation hit my NW every year. Next car will be new and nice, but I have the cash set aside for it already.

[scfr]

As others have pointed out, there are problems with the charts. The main one being that the 2 charts don't necessarily align. For my household they certainly don't. There's a big difference between the types of cars listed on the line next to income and the types of cars listed on the line next to net worth. We're driving above our income but below our NW. But that's because we've had decades of living below our means. So, age (years saving) is not factored in to the Financial Samurai charts.

Having said that, I think the big takeaway of the articles is that vehicles can be a big drain on net worth and financial independence, and with that I certainly agree. Financial Samurai definitely favors investing (real estate, stocks, mutual funds, etc.) over spending on vehicles.

There is one more thing, and I may not be able to explain it well, but I'll try. When making a major purchase, for those who are able to clearly delineate between wants and true needs, after the "what do I need?" and "can I afford this?" questions have been answered, some of us try to come up with a formula or calculation to determine what is a reasonable amount to spend and how that fits in with our overall net worth and financial picture. I don't know if that is what Financial Samurai was trying to do with his posts about car-buying "rules," but it seems like it to me. I went through the same exercise when we purchased our last house, when I set the budget for our next car purchase, and when I set the cap for a 2nd piece of real estate that we are planning to purchase. So, if that is the mental exercise that led to Financial Samurai writing those articles, I appreciate it.

I enjoy reading Financial Samurai. That doesn't mean I always agree with him, but I think he pushes the envelope on conventional personal finance thinking and provides food for thought.

[Singuy]

As others have pointed out, there are problems with the charts. The main one being that the 2 charts don't necessarily align.

I think they don't align because NW takes time to accumulate. If you have 3 million but making 100k/year in your 60s, you probably can buy Maserati without thinking it's a financially poor decision. Buying this Maserati when you have a net worth of 0 but making 100k/year is just stupidity on steroids.

You are suppose to use the income chart for early parts of your life, and then net worth chart for the later part of your life is my takeaway.

[scfr]

I think they don't align because NW takes time to accumulate. If you have 3 million but making 100k/year in your 60s, you probably can buy Maserati without thinking it's a financially poor decision. Buying this Maserati when you have a net worth of 0 but making 100k/year is just stupidity on steroids.

You are suppose to use the income chart for early parts of your life, and then net worth chart for the later part of your life is my takeaway.

That would make sense. But it's hard for me to imagine someone who makes 100k/year and has accumulated a 3M net worth going out and buying a Maserati. By the time they've reached that point, there is going to be a deeply ingrained frugal/practical mindset. I'm not saying it could never happen, but it's just not something I can imagine. I think such a person would still consider it a financially poor decision when compared to the other options of what they could do with their money.

What I CAN imagine is them deciding it's OK to splurge on the leatherette seats or the GPS for the Civic/Accord/Camry/Prius. Heck, maybe both.

[disneysteve]

We bought a new minivan because we didn't want anyone else's problems.

I've never really understood this mindset. Most serious problems tend to occur within the first couple of years.

The last new car we bought was in 1996. It was recalled 5 times in the 4 years that we owned it before being destroyed by a fire caused by a manufacturing defect.

Ever since then, we've only bought used and have never had an issue whether it was a 20K+ purchase or a 5K purchase. I bought my last car used and drove it for 14 years. I bought my current car used. I've had it for over 4 years and it is now 11 years old.

[LivingAlmostLarge]

sometimes you don't want the headache. And keep the car 20+ years.

[Singuy]

That would make sense. But it's hard for me to imagine someone who makes 100k/year and has accumulated a 3M net worth going out and buying a Maserati. By the time they've reached that point, there is going to be a deeply ingrained frugal/practical mindset. I'm not saying it could never happen, but it's just not something I can imagine. I think such a person would still consider it a financially poor decision when compared to the other options of what they could do with their money.

What I CAN imagine is them deciding it's OK to splurge on the leatherette seats or the GPS for the Civic/Accord/Camry/Prius. Heck, maybe both.

I think most Chinese people are willing to save all their lives just so they can go all out and display their wealth(saving abilities) to the public. I rarely see a Chinese buy a stupid expensive car or house when they have no money..but I see them buying stupid expensive cars/house after they have saved enough and do have money. It's not unheard of to have a Chinese family to have a Maserati parked in the driveway and still save their ass off on themselves (like watering down soap).

Americans just do it backwards...they rather buy something stupid without money because of the lack of patience.

[tripods68]

I guess it depends how people use their vehicle or purpose, for work, measure, or both. But nobody has point out about owning a vehicle there is huge tax benefit ALSO, not necessarily an just expense. Especially if you a business owner, or work for a company based on your job duty, there could be tax benefits in depreciating and operating your vehicle, include car registration and portion of your lease car payments when filing tax return. Sometimes, car depreciation will be offset by tax benefits with little or no impact in net worth. Just keep this in mind.

But i'm no tax expert, check with your tax advisor.

[GoodSteward]

My vehicles brought me 21,000 miles in write-offs this year due to pastoring 90 miles from where I live, as well as having members live at a distance from our church. Amazing how fast this stuff adds up.

[Nutria]

My vehicles brought me 21,000 miles in write-offs this year due to pastoring 90 miles from where I live, as well as having members live at a distance from our church. Amazing how fast this stuff adds up.

$11,340. But how much was spent on fuel and maintenance?