The 10% Rule Financial Samurai has about cars

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For a long time I have been following the comments on Financial Samurai’s post titled: “The 1/10th Rule For Car Buying Everyone Must Follow”.  It’s a fantastic post about minimizing how much you spend on your car in order to be able to invest and afford other things in life. Most cars depreciate and the exceptions are not probably not the vehicles FS is referring to.  Sure, you could buy a 1960’s Shelby Mustang, park it in your garage, take it to a few car shows and watch it appreciate in value, but that is one of the exceptions.  But reality is that our Civic, F-150 or Rav4 isn’t going up in value as we rack up >15k miles/year commuting to work and running to the grocery store.

FS’s post stirs up a lot of controversy though. On the anti-10%er side you have statements such as:

  • If you only make $30k/year a $3k car isn’t dependable enough and you’ll end up losing your job if it is breaking down all the time
  • I’m a car guy, so I’m going to buy what I want because it’s the thing I love the most in life.
  • I spent $50k on my car and make $50k and I’m doing just fine, this rule is stupid

One thing people point out in the comments that is missing from the actual article is his related “The Net Worth Rule For Car Buying Guideline”, which justifies spending 5% of your net worth on a vehicle.

Personally, I agree with both.  I view most of the objections to the 1/10th rule as people being defensive about their own spending habits and/or an unrealistic opinion of the dependability and safety of an older car.

For most people their car(s) represent the second largest purchase(s) they make in life, with a house typically being the largest. It is possible to still build wealth without buying a home and even with spending 100% of your annual income on a car.  The point of the article is not to say it is impossible to do so, but instead to point out that it is not taking the fast route to financial independence.

Vehicle Safety

For those who are stuck on safety, I agree that an older car is typically (not always) less safe than a newer vehicle.  The IIHA or NHTSA is often the go-to source for this information.  This article by Consumer Reports sums up this NHTSA research paper well.  Basically, the “newer the better”, with 3-7 year old vehicles only being a 10% difference from the newest vehicles on the market.  The largest flaw with this is that it’s a blanket statement about vehicles safety based on production year.

Vehicle safety features often begin their life as optional features on models, where the consumer has the choice whether to pay for them or not. Safety features that are now standard were, at one point, optional upgrades.  ABS, side airbags, blind spot monitoring, Automatic braking, or Forward collision warning as examples.  Some may still be optional, I honestly do not know.  But, what I do know is that age of vehicle, although an indication of safety, is not the only indication of its safety rating.

Many people advocate for buying as new of a vehicle as possible, which could end up making your choices be an entry level 2020 Honda Civic (MSRP of about $23k).  Where you could have otherwise bought a 2015 BMW 5 series for about $17k from a dealer.  I am not advocating for either of these vehicles, personally I lean towards Jeep Grand Cherokees as my balance of safety, features, and price.  The high end vehicles tend to drop in price drastically over the years and typically have a lot of those optional safety features that are now standard and causing the newer vehicles to be “safer than old vehicles”.

Dependability

The irony in the comparison above is that I would not choose the BMW above because of their reliability ratings. But it does not change my argument that you can buy a fantastic, high end, used vehicle with as many or more safety features as an entry level vehicle for less money.  But the true dependability argument is that older vehicles break down more than new ones.  Again, as an average this is true, but it is not a guaranty… just those BMWs earned their reputation right?

I wrote a post about how I resolved the issue of having older cars be more dependable: How to make a POS car reliable. It was how I resolved the issue of knowing I would be doing repairs occasionally and still needing to get to work and live the rest of my life.  I was also choosing to drive vehicles that were over 10+ years old, often with 150k+ miles on them. Sometimes costing as little as $1k, like the ’93 Eagle Talon.  The benefit of these old cars is that you simply do not care about them, they are nearly disposable.  It is definitely on the side of the more extreme options, but it worked for me and fit my life and skills.

Believing that a $5k vehicle is not dependable is a bias believe in what is an acceptable amount of “undependability”.  All things mechanical and electrical break.  This goes back to averages again, on average newer vehicles break down less, but they are not immune to being in the shop or having recalls.  I would personally avoid any first year model of a vehicle or design and lean towards a 3+ year old vehicle that is perhaps 3rd or 4th year model where the kinks have been worked out and I can research what kind of problems the car tends to have. The benefit of buying an older vehicle is that you can find out what kinds of problems are common for the car.  For instance, my year of Jeep Grand Cherokee is known for the ignition switch to cause problems, but not in a catastrophic way… the vehicle keeps running but accessories stop functioning.  The fix is a new $80 ignition switch and about as much in labor.  For me, that is perfectly acceptable, I have not yet had any problems with it, but I’m prepared for it if it does.

I do not want a hooptie

This response and attitude is just ignorance on what is available in the market.  Check your local craigslist or facebook marketplace and you will find a lot of options for great vehicles in the $4-6k range. If you take an honest look, you will find that you can get a great car for this price and it’ll easily last you 2-3 years with minimal maintenance.  You just have to overlook the non critical things that will break or are broken.  I have had plenty of vehicles that ran great, but had small things wrong that I just didn’t care about. The switch to roll up or down the back passenger windows from the drivers seat didn’t work, the passenger rear door lock had to be manually locked/unlocked, the rear speakers didn’t work so I the radio only played on the front speakers. My personal disregard for the “little things” is a bit more than what others might be able to bare… personally I didn’t even care if the paint on the exterior was fading or even peeling.  I was willing to drive some hoopties if it meant I was able to invest heavily and drive whatever I wanted in the future.

 

1/10th and 5%

Although I am “high income earner” now, I wasn’t always.  I choose to have the sum of the values of the vehicles I drove to be under $5k even when I was making $70-80k/year and had a negative net worth.  Today, my most expensive vehicle cost me $8k and the sum of all my vehicles is both less than 1/10th of my income and less than 5% of my net worth.

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