20% Rule... Thoughts?

[Manifold]

I've been having many sleepless nights on whether I should be spending so much money on a new 2016 Civic at my age and income level.

I came across this article:

http://breakfree.me/how-much-car-can-you-afford-the-20-rule/

That talks about the 20% rule and how you should only spend 20% of your annual income on a vehicle purchase. If I were to follow this rule it would mean I'd never be able to afford a new 2016 Civic and would have to go for something pretty used...

What is everyone's thoughts on this?

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[hondo]

I think that's way too simplistic. Everyone's budget is different, as are their transportation requirements. If the bank doesn't think you can make the payments, you probably wouldn't get the loan. One thing to keep in mind is that even though a car the second largest purchase most people will make, it's not an investment. It will lose value and cost you money on the way down.

The first question you should ask is if you need to buy a car at all. If you have a car that runs fine and are just looking to upgrade, you have to ask yourself is the extra expense worth it.

Then you should ask yourself what do you need the car for? Do you have a family? Do you need to go off-road? How much car do you really need? Once you know what your basic needs are everything above that you can trim back to fit your budget.

What is your budget? It's more than just your annual salary. If you have savings, how much of it are you willing to part with for the car? Do you have enough at the end of the month to make the payments? You can use an auto loan calculator to help you figure out how much car you can afford.

If you don't have enough money for a car that meets basic needs, maybe a used car is more appropriate. If you can comfortably make the payments, you will have to decide how much you are willing to pay for the features you want above the basic needs.

Of course there is also leasing, which can make financial sense depending on your situation. Run your numbers and figure out how much of a financial hit it will be and how it will affect you. While driving a new car feels good, being in good financial health feels even better. I hope this helps.

 

[haztorks]

I was waiting for the author to mention his secret trick that you can buy for $14.99 at the end. There are so many factors that go into how much money you "should" spend on a car. The article does not say why you should only spend 20%, and cash, on a vehicle. I think it is trying to draw some parallels to millionaires' buying habits as justification for this. Once you get to a certain point of wealth, you try and hide it from the public, not show it off. Plus, most millionaires care about their cars about as much as the rest of us care about our dishwashers.

 

[t3hub3rk1tten]

The article is awkward, but 20% is a good rule. I went with ~10% after taxes on a 5-year term loan for my Touring. Add another 2.5% for insurance, and then maintenance will eventually be a percentage or two. Even though I could have gotten away with a shorter term loan I can save the extra cash for a down payment on a house.

If money is even close to a problem, you should not buy a Civic anytime soon. Wait until the middle of 2016 if you can. Then do your research, shop around, email every dealer nearby, and put the work into getting a really good deal.

 

[Manifold]

The article is awkward, but 20% is a good rule. I went with ~10% after taxes on a 5-year term loan for my Touring. Add another 2.5% for insurance, and then maintenance will eventually be a percentage or two. Even though I could have gotten away with a shorter term loan I can save the extra cash for a down payment on a house.

If money is even close to a problem, you should not buy a Civic anytime soon. Wait until the middle of 2016 if you can. Then do your research, shop around, email every dealer nearby, and put the work into getting a really good deal.

You bring up a good point, because for me I would be making a cash purchase rather than financing. Meaning I'm taking a bigger hit upfront, but will have only gas, insurance, maintenance for the rest.

So in the first year I'm far exceeding 20% (ouch!) but in subsequent years it would be much less.

 

[hondabuildquality]

11 years ago I was a 19-year-old that had 2 jobs and a part time college course load. My car broke down (yet again) and I needed to buy a new one, fast, and I was only making a little over $20,000 per year.

I purchased a brand new 2005 Honda Civic EX Coupe, which set me back over $16,000.

That 20% rule might be a good rule of thumb for some, but for me this was one of the best purchases of my life.

First of all, the new Civic drove well. I don't mean it could accelerate or corner like a sports car, but compared to the old beater I had, this thing was smooth, refined, solid and gave me confidence.

It had a sunroof, a slick shifting stick, and it looked good, too, especially with the alloy wheels.

Also, it was safe, reliable, and could serve as a place to sleep when I needed it to.

So back to the economics. I was at the time 19 years old and only made about 20k/year, but I had been working since I was 12 years old, and despite bad luck with my first used car purchase, I had enough money saved up to pay for most of the car.

My situation was only made possible by the fact that I rented a shared room in my friend's house for $200/month. We were all ski bums, well, everyone except for me. I also worked at the ski resort over the winter, but was the only one actually trying to put myself through college, too.

I didn't spend nearly that much money on alcohol and food as my friends. I quit smoking, that saved a lot, too. My only expensive hobby was snowboarding during the winter, and I could do that for free.

So I was able to afford it, and not only was I awarded with a great car, 11 years later I sold that car for $6,750. So over that time period, I was able to own an excellent, brand new car for well under $100/month.

Never had any problems with the car. Only work I ever did was routine maintenance.

Not too bad, eh?

Point is everyone's situation is different, and there are not magical rules granted down by the universe about how you should manage your own finances. 20% is maybe a good ballpark rule of thumb for the average person, but remember the average person has one ovary and one testicle.

 

[takemorepills]

When I was younger, I was prob over the 20% rule every time I bought a car. I was always in debt. And by 20%, I mean car payment, insurance and registration (in AZ it's expensive..or was).

I stopped buying new cars for a long long time. At least...20 years now! I just bought a new car a few weeks ago. On my income alone, not including my wife's, my total cost to own a car is now at 5%. Good credit and cheaper insurance pushes the cost down a lot. And as you get older, hopefully you earn more.

After the experiences I had when I was older, I wish I would have been more fiscally wise. Some people will try and help you justify buying the car, but honestly we Americans are horrible with money. Don't be offended, it's true and I can be horrible with money also. But in those 20 years since my last new car purchase, I have owned some freaking awesome <$6,000 cars! If you are patient, you can find awesome cars for cheap. We put 200k miles on a 1997 Maxima I bought with 100K (300K total) and that car was so damn reliable. I also had a few Honda and Subaru cars that did us very well. And I have my 1987 Prelude Si from 1995, that car never needed anything aside from normal maintenance.

What I am trying to say is, don't talk yourself into it if logically it doesn't seem right. When I was car-poor, I actually ended up not enjoying the cars as much.

 

[jk147]

I am going to be frank here, if that is the case you should not get a car in that price range. Never look at the monthly payment as a deciding factor but how much you are paying for a car overall. Stretching a car loan out to 72 months on a high % interest rate while having a low monthly payment is not wise. I see this a lot when you don't put down 20% and try to stretch out the payments. Always look at the final payoff amount first and then decide.

There are a lot of great used cars out there.

 

[GAVZDAD]

but remember the average person has one ovary and one testicle.

Some people might not have got that one, but I lost a mouthful of crackers when I read it.

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