An uncontrolled appetite for extravagant and flashy cars is wreaking havoc on many Americans’ financial lives, according to a prominent personal finance expert.
Sam Dogen, author of the blog Financial Samurai, has devised the ‘one-tenth rule,’ which stipulates households should spend no more than 10 percent of their annual income on a car.
It means somebody making $50,000 a year before tax should spend just $5,000 on a car, regardless of whether it’s new or used or whether they buy it in 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 like 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 generating significant returns.
Pictured is a new 2024 Ford F-150, which would cost around $70,000 excluding dealer markups. That is almost the gross income of the median US household
The ‘one-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 automakers work together to maximize how much people spend on them.
He said the ready access Americans have to auto loans today is emblematic of the housing market before the financial crisis of 2007 to 2008.
Last month, a 28-year-old wedding photographer told DailyMail.com of the financial ruin she found herself in after GM Financial, the financial services arm of General Motors, issued her $84,000 loan to buy a Chevy Tahoe.
‘The dealer pretty much told me they can get me out the door with the car within an hour. He didn’t act like it was something I should be concerned about,’ she said.
Dogen pointed out that the median price of a new car is $49,000, yet the average household income is $76,000.
‘A typical household has no business buying a new car, even the average used car is around $28,000, so it’s crazy,’ said Dogen.
He said he came up with one-tenth rule back in 2009 when the government introduced the Car Allowance Rebate System – more commonly known as ‘cash for clunkers.’
The program was designed to incentivize Americans to trade in old cars and buy new ones.
‘I thought it was the worst financial decision ever to encourage people to trade in their perfectly fine old cars,’ he said. ‘I think spending money on cars is probably the number one personal finance killer in America.’
Pictured is a 2014 Toyota Corolla with 247,000 miles. It is listed for sale on CarGurus for $5,600
Dogen, a former investment banker, lives by his own rule. He said that in 2005 while earning a base salary of $250,000 as an executive director at Credit Suisse he bought a 2000 Land Rover Discovery for $8,000. He drove the car until 2017 and traded it in for $2,000.
‘I think it’s very feasible,’ said Dogen. ‘There’s nothing wrong with buying a $7,600 secondhand car.’ He suggested a used Toyota Corolla or Honda Civic would be fit 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 earning more money to buy the things they want instead of stretching their existing budget.
‘Almost no rich person you meet will spend more than a tenth of their gross income on a car,’ he said.
