19 Comments
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Jacob M
What do you consider a "major" repair? I've seen too many people throw away a good used car when it just needed some work, therefore spending $20,000 on a newer car instead of $700 to fix their current car. A Toyota Corolla is an excellent choice and should last a LOT longer than 100k miles as long as you maintain it. If you're mostly putting on highway miles, it should easily go for 300k unless you get very unlucky. But cars do need maintenance (oil changes, tires, timing belts, suspension, brakes, etc.) and driving 20k miles per year is going to cost you. A different thing to consider is how you can reduce the amount that you drive. 20k miles a year is a good chunk of money, but also quite a bit of time that you could be spending doing other things (41 eight-hour work days, assuming an average speed of 60 MPH!) How much is your time worth? Consider moving closer to work, if it's commuting mileage.
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Felicia
This is okay advise but not universal advise. My husband bought an 2003 Miata new. It's a 'flashy' car. He had it until last year (2017) and he was loath to get rid of it becasue he loved every minute he was in that car. LOVED it. We would have repaired it if we could but the frame was rusting out so it was time to let it go. Sometimes, when one can afford it, getting something one loves trumps getting something that is only practical. If one spends a lot of time in a car, then getting one that is a joy to drive is worth the extra price in sheer quality of life. Also, buying used in cash is almost always a better option than buying new when one is younger. I have had a LOT of cars over the years and always buy used in cash. I don't go into debt over a car if I can help it. And I don't get too attached. It's actually kind of fun to change cars every 5 years or so. Right now I have a Mini Cooper S and my husband has a Mini convertible. We are having a blast driving! Yes, we could have gotten a more 'practical' car for the same money, but we bought both used in cash, so no debt accrued and we both just love our cars. At our age (39) we have the money for something fun and yet still paid under 6k for each car with less than 85k miles on each. It's worth it.
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Jacob M
If you read the book, you're doing exactly what he suggests - spending money on what you love (assuming you also save elsewhere.) I've owned nine different cars in the past five years, including a Corvette and a Mustang Cobra. I buy them used near the bottom of their depreciation curve (paying cash), keep them until I get bored with them, and generally sell them for nearly as much as I paid. My 2000 Miata is my favorite, and I too will have a hard time letting go of it...
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Flinch
10% of gross... to cover everything? This is advice for people who already have money. For somebody pulling in near median income [say, $3k a month], and have the $300 figure cover all the incidentals on top of a note... they have no business whatsoever buying a car on credit.: Go buy a hoopty right now [cash only] that runs and doesn't burn a quart every other fill up, and start making payments to yourself [earning interest instead of paying it] and buy a new car when you are ready with zero financing. So let's cut to the chase: the real method of I'll Teach You to be Rich is... write a book and collect residuals, but do not under any circumstances follow the "advice" in print.. Just repackage it with a few tweaks so it doesn't look like a Suze Orman cut and paste job - she's half baked as well.
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DB9
I couldn't agree more!
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Joe
- A "hoopty" is GOING to burn oil....period. It is probably going to leak oil, power steering fluid, transmission fluid, and pretty much everything else. - A "hoopty" is not necessarily better at fuel mileage. - A "hoopty" is going to require constant maintenance -- if you don't have the ability to perform said maintenance, be prepared to shell out some serious $$$. - Buying an REASONABLY affordable and RELIABLE car right now is a good way to build credit, stay safe, and even save money in the long-run.
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Michael
Does she buy 10-15 pairs of shoes each YEAR? Or each month? Because to buy 10-15 pairs per month she'd have to have $5000 each MONTH to spend. I don't want to nitpick but this is a column about sound financial decisions...
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Noah
Another way to look at a car purchase is in terms of an estimated life cycle. If you are the type to keep a car until it is unusable and to be sold as parts/scrap calculate out the realistic estimated service life in terms of the total miles you will get out of it. Look at how much you pay of the car (after taxes, initial registration/title fee, and total interest) as see how much the purchase cost will be per mile of the estimated life. If this is a car that has a purpose of getting you to point A and B and is nothing special (i.e. not something collectable that is just an adult toy) why not consider the cost in terms of requisition/disposition as any manufacture would do for it's tooling/heavy-equipment. You can get more advanced and factor in gradually increasing estimated maintenance cost as the vehicle gets older as well for the vehicle over the total life-cycle. When comparing a new vehicle to a used one both being the same make/model with with the used vehicle having 30k miles on it. Lets say the total estimated life for the vehicle is 250K miles total, for the new car you are looking at the total cost over 250K miles, however for the used car it will be over a span of 220K miles as 30K of the estimated life cycle is gone. Or you could says the used car with 30K miles on it has already used up 12% of it's estimated total life-cycle. Anyways the point to all this is usually you find a used car with reasonable mileage tends to be the better deal. However there are exceptions, the most notable for a popular vehicle in the United States is a small Toyota 4x4 truck. This may seem odd but a used 1 or 2 year old excellent condition Toyota Tacoma 4x4 truck with low mileage and clean title usually has a higher per mile total life ownership cost than one purchased new.
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Bob
I think this is great advice, but you need to give appropriate examples. Your example of a 20/4/10 rule is way off base. $24,000 with a 4 year note is going to cost over $500 per month. Then you add in about $100 in gas a month and roughly another $100 in repairs you need to make about $86,000 not $50,000.
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Machtyn
On the Shoes anecdote, that's not $15,000 per year, that's $15,000 per MONTH. If she's buying 10 - 15 shoes a month at $300 - $500 a pair... that's an illness. That's wear-those-shoes-two-days-buy-a-new-set type of purchasing. But, whatever, her money.
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Marina
15 pairs of shoes at $500 each pair is $7,500, while 10 pairs at $300 each pair is $3,000. So yeah, buying that many pairs of shoes is going to run a bit more than $15,000 a year. And what exactly is meant by "she loves shoes"? Sounds like she simply loves BUYING shoes! I've got a pair of shoes I love (well, like a lot, anyway). Bought them for about $250 several years ago. Used them regularly, because, well, I like them a lot! Now they need new soles, so I'm going to take them to the best shoemaker I know of. Because I really, really like these shoes and I want to keep them for as long as possible. Also, fixing the shoes I already own and like saves me from having to buy new shoes (which will be more expensive than resoling the old ones) and I'd risk not finding any I really like much.
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JH
As the article mentions, you don't really need to negotiate anymore--you just need to get dealers to compete over you. This is extremely easy and can be done mostly over e-mail, especially if you're interested in a mass-market vehicle that isn't popular anymore (e.g. just about any 4 door full-size sedan). Set a timeframe and pick the lowest price. Also make sure to spend just as much time researching and selling your current car too. Unless it's an absolute clunker and near inoperable, you're leaving thousands of dollars on the table by trading it in to a dealer. Taking the time to make a decent advertisement and preparing all your records goes a long way and puts you way ahead of most sellers. If you have all the records and price it right, you can get people competing for your car and you might get offers above your list price if you tell people you have multiple people waiting to look at the car. Use Kelly Blue Book as a baseline, but spend some time looking at facebook marketplace and craigslist ads and recording the prices of comparable cars to set your own price. Most people have terrible ads, so post as many relevant pictures and provide as much information as possible. Sell it in a nice area too and you will have people flocking to you. If you set a good price, have all your records, clear headlight lenses, and it's in fully operable condition, you won't have a problem attracting buyers since information is the biggest question mark when it comes to used cars.
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Frank Footer
I eat a lot of frankfurters. that being said, how can I get a good new car on $500 a week gross? that's $2000 a month or so. I have to pay rent. I can't cheap out on food, cause then I'd be eating nothing.
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fredjohnson
Wow. Been 20 years since I've borrowed money to finance a car and spouse and I have owned 6 SUV's and cars in that time. All brand new. We just start saving for the next car right after we buy the last one. Interest on a car loan sucks.. Can't even deduct it on taxes. I don't drive cars till they die. Too much hassle with repairs, worry about breakdowns and outdated tech and safety on the car. New always gives you the latest safety tech and it's worth it to me. Reliability of new is worth it too.
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AE
The advice is good, but the number of variables involved probably make the analysis overly complex to serve as an effective basis to make an actionable decision to buy at a given level. Perhaps more useful is the old rule-of-thumb, which is basically equivalent to the full breakdown of costs, that the price of a car should not exceed about half of one's gross income. So, for example, if you make about $50,000, then a good maximum would be around $25,000, regardless of the financing applied. A similar old rule-of-thumb is still useful for houses bought with a mortgage, which is that the total price of a house should not exceed about three times income. For the $50,000 case, this would be around $150,000 (generally with a 30-year mortgage). Note that some financial planners, especially in the wake of the 2008 crash, now recommend trying to keep the ratio to under two times income (e.g., $100,000 with a 15-year term).
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Tyler
No, you should pay for your car with cash. If you are borrowing money, you cannot afford it by definition.
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James
I don't like the 4 year rule when I'm given the chance to pay 0% apr for 5 or 6 years. Yes, I know people will comeback and say "but to get the 0% you have to pay more for the car." No, you don't, not if you are a good negotiator and find a dealer desperate enough.
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joeconn4
What if you're paying cash for the vehicle? How does that affect the 20/4/10 rule? Any guidelines on what % of income one should spend if paying cash? I saw "50% of annual income" in the comments - why?
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Stacy
I like the planning aspect of this but I wonder what changes, if anything, for someone who drives a lot. I drive over 20k miles a year, most of that for work. I'm currently driving a '14 Corolla bought new that now has over 75k miles on it. After coaxing used cars along for years (we retired our previous car at 10 years and 142k miles when it needed a major repair) we went new this past time figuring that we might as well get all of the"good" years out of the car and keep it as long as possible. After a few years, though, I'm not sure the price of new was worth it when the car will likely have 100k miles on it and starting to have issues at 5 years old.