The uncontrolled appetite for extravagant and flashy cars is wreaking havoc on the financial lives of many Americans, according to a leading personal finance expert.
Sam Dogen, blog author financial samuraihas devised the “one-tenth rule,” according to which households should spend no more than 10 percent of their annual income on a car.
It means that someone who earns $50,000 a year before taxes should only spend $5,000 on a car, regardless of whether it is new or used or whether they buy it with cash or take out a loan.
Dogen’s logic is that cars are rapidly depreciating assets that come with a host of unforeseen additional costs, such as insurance, maintenance, and parking tickets.
On top of that, spending too much on a vehicle ties up money that could otherwise be invested elsewhere, like the stock market, and generate significant returns.
Pictured is a new 2024 Ford F-150, which would cost around $70,000 excluding dealer markups. That’s almost the gross income of the average US household.
The ‘tenth rule’ was devised by Sam Dogen, author of the blog Financial Samurai
The automobile is a status symbol at the heart of American culture, and a system of marketing agencies, financial institutions, insurance companies, and auto manufacturers work together to maximize how much people spend on them.
He said the easy access Americans have to auto loans today is emblematic of the housing market before the 2007-2008 financial crisis.
Last month, a 28-year-old wedding photographer told DailyMail.com about the financial ruin she found herself in after GM Financial, the financial services arm of General Motors, gave her an $84,000 loan to buy a Chevy Tahoe.
“The dealership told me they could take me out with the car in an hour.” “He didn’t act like it was something I should be worried about,” she said.
Dogen noted that the average price of a new car is $49,000, but the average household income is $76,000.
“A typical household doesn’t have to buy a new car, even the average used car costs around $28,000, so it’s crazy,” Dogen said.
He said he came up with the one-tenth rule in 2009, when the government introduced the Car Subsidy Rebate Scheme, more commonly known as “cash for clunkers”.
The program was designed to encourage Americans to trade in old cars and buy new ones.
“I thought it was the worst financial decision ever made to encourage people to trade in their old, perfectly good cars,” he said. “I think spending money on cars is probably the biggest killer of personal finances in America.”
Pictured is a 2014 Toyota Corolla with 247,000 miles. It’s on sale at CarGurus for $5,600
Dogen, a former investment banker, lives by his own rules. He said that in 2005, while earning a base salary of $250,000 as CEO of Credit Suisse, he purchased a 2000 model Land Rover Discovery for $8,000. He drove the car until 2017 and traded it in for $2,000.
“I think it’s very doable,” Dogen said. “There’s nothing wrong with buying a $7,600 second-hand car.” He suggested that a used Toyota Corolla or Honda Civic would be suitable for the vast majority of people.
Used Corollas from the early 2010s with less than 200,000 miles frequently sell for less than $7,000.
Dogen said his rule was also designed to encourage people to focus on making more money to buy the things they want rather than stretching their current budget.
“Almost no rich person you know will spend more than a tenth of their gross income on a car,” he said.
