[This post is part of the Financial Rules of Thumb series. Check out the rest here!]
I’ve heard the financial rule of thumb: “All Vehicle Payments should be Less than 15% of your take home pay.”
The Upperline: I don’t think it really matters whether you buy a new or used car, or what percentage of your take home pay it costs.
I think it’s far more important that you know
-How much you’re spending
-What your goals are
-If this spending supports your goals.
This feels like a rather unnecessary rule of thumb to me, and it reminds me of the reason I think people don’t often visit financial planners.
Jude’s theory – People don’t visit financial planners because they think they’re going to be told they can’t spend money on something important to them.
Yet here’s the thing. It’s YOUR money. You work hard to earn it, and I think you should spend it on whatever you like, as long as you’re conscious of the choices you’re making and you understand the tradeoffs.
From a pure dollars and cents standpoint, there’s probably some value to the two rules above. Problem is, I rarely meet people that make purely numbers-driven financial decisions. If you’ve got your finances well under control, and are saving the amounts you want for your goals, and the car of your dreams is going to cost you 20% of your take home pay, then who is to say you shouldn’t spend that money?
If your car is important to you because you –
a) have a long commute
b) always wanted a nice car
c) any other reason you can think of –
then I think that’s exactly what you should spend your money on, as long as you can afford it within your overall household spending.
Some other things to think about:
- Once you’re done making the payments on a car (or any other loan), continue paying that money to yourself. You’ve got the payments built into your budget, so start directing that money towards a new goal.
- Leasing a car isn’t an inherently bad decision. I can hear some financial planners cringing as I type this. If you want to try out a new car before you buy it, don’t drive a ton of miles, and like new cars, then leasing has a lot of pluses (including some nice tax features if you own your own business). I’m particularly fond of lease takeovers, where you can assume a lease from somebody that wants to exit a lease. Swapalease.com is a personal favorite.
What financial tips would you give somebody thinking about buying a car?