Cash Affordability?

[maat55]

50% of income seems like a lot. Personally not sure but if this is the case then how are so many people affording two Honda Accords or Accord and CRV? Those are each $25k and yet do people really earn $100k to make each person driving one feasible?

I haven't heard the 50% rule, what I've heard not only from Dave Ramsey is if you save you can afford anything. You can have a jag, you can have a lexus, if you save the cash for it.

DR says that when you have a million dollars, then you can buy a new car. Now, this can be cretiqued as being impossible for the auto industry, but the idea is to invest less in car than people normally do.

For a family earning 60,000, that would mean two 15,000 cars. As the income comes down, the cars get scarce. What I stated above about assets is what he says about car ownership. Your also, by his plan, are to invest 15% before you save for autos. You will rarely here Dave say a person can afford a jag.

[disneysteve]

50% of income seems like a lot. Personally not sure but if this is the case then how are so many people affording two Honda Accords or Accord and CRV? Those are each $25k and yet do people really earn $100k to make each person driving one feasible?

Those folks are living beyond their means buying, or more often leasing, cars that they really can't afford. I think the 50% rule is too high. Should be even less than that.

[gekkoplus]

A realistic figure could be -

Debt + Car = (Total gross income - Taxes - 401k) / 2

So if your gross income=100K, taxes=30K, 401K=15K and no debt -

(100K - 30K - 15K) / 2 = 55K / 2 = 27.5K

If you have a annual debt of 10K, then maximum you should spend on car = 17.5K

How's that? Of course this is plain simple generalization of a complex problem, and may not work in a few cases.

[disneysteve]

For many here on this board will think I pay too much for my home (36%) as I am going over the rule of thumb 25-30%.

Actually, I think that rule of thumb is 28% home, 33% (or maybe 36%) total toward debt. So if you are otherwise debt-free, you are probably within, or very close, to that rule of thumb, which I still think is a good one.

But you make a good point about priorities, something we talk about often around here. If your priority is your home and you are willing to forgo or limit other things like vacations, fancy cars, dining out and such, that's fine. You are saving, tithing, funding your retirement and otherwise sound like you have all your financial ducks in a row. Nothing wrong with that at all.

The problem arises with the person who might be spending 35% on their home, 10% on travel, 35% going to taxes and insurance, and 20% to vehicles, entertainment and miscellaneous spending. That adds up to 100%. Savings - zero. Retirement - zero. Emergency Fund - zero. In fact, the total often adds up to greater than 100% when credit card debt gets added to the mix. Those are the folks that are heading for trouble.

[maat55]

I respect an individuals desire to invest more in home and drive much cheaper cars. I myself, due to not investing well at a younger age, prefer to prioritize investing, house then car. My wife prefers house, car, then investing.

I think the percentage for spending on cars should depend on age and how well on track you are for your other priorities. ( EF's, home and retirement)

[disneysteve]

I respect an individuals desire to invest more in home and drive much cheaper cars.

Actually, that is a more sound plan. Historically (recent past aside), homes are appreciating assets while vehicles are depreciating. It makes a lot more sense to spend your money on something that will grow in value.

[LivingAlmostLarge]

What about wanting it all? House, car, investments, etc? It just seems when you are responsible you can't have it all. There are always more responsible uses of money.

[disneysteve]

What about wanting it all? House, car, investments, etc? It just seems when you are responsible you can't have it all.

I don't think that's true. It is just a matter of prioritizing and making sure the more important things are taken care of first. Fund the EF. Contribute to the retirement plan. Set money aside for your next car and vacation and children's education. Learn to live on what's left after the important needs are met.

About 20% of our gross income goes to savings. Another 25-30% goes to taxes and health insurance premiums. That means we actually live on just 45-50% of our gross income. Could we be saving and investing even more and living on less? Sure. There are luxuries in our budget that we could cut out: cable, Netflix, dining out, travel, etc. but we have found a balance that let's us "have it all" while still being responsible.

[maat55]

What about wanting it all? House, car, investments, etc? It just seems when you are responsible you can't have it all. There are always more responsible uses of money.

I remember reading in The Wealthy Barber, As long as you invest at least 10% of your income, it doesn't matter how badly you spend the other 90%. But I will have to disagree to some extent.

[LivingAlmostLarge]

I read that as well and quite few others say as long as you are saving 10% then the rest should be covered. But the 90% doesn't seem to be quite enough sometimes. Maybe in the future?

[disneysteve]

I remember reading in The Wealthy Barber, As long as you invest at least 10% of your income, it doesn't matter how badly you spend the other 90%. But I will have to disagree to some extent.

I don't think the 10% figure is enough. I'd say at least 15% and preferably higher. As I said, we save at least 20% (more like 22% or so currently I believe) and I really don't care a whole lot about exactly how the remainder gets spent. As long as all the savings goals are being met, I don't see that it really matters what percent goes to food, how much goes to travel, what gets spent on entertainment, etc.