Lazy Man and Money

How Much Should I Spend on a Car?

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Everyone has tried to figure out how much they should spend on a car at one point or another. We bought our last car around 5 years ago. We’re hoping to keep it another 8 to 10 more years, so hopefully, I won’t have to ask about it again for awhile.

We bought a Subaru Forester because it was cheap and perfect for a growing family, New England snow, a muddy dog, and the beach sand. We bought an Acura MDX, because the family grew bigger, my wife’s commute is longer, and the luxury makes a difficult day bit better.

However, yesterday, I came across a Tweet that made me think:

Now obviously it makes sense that people with negative net worth still need to have a car. However, I had never thought about tying the amount of car to net worth. It didn’t seem to make sense at first.

Then I thought about it in terms of my own money journey. It seemed to fit, but maybe it was a little low. Here are some examples:

Net WorthCar Price (5%)
$300,000$15,000
$500,000$25,000
$800,000$40,000
$1,200,000$60,000
$1,500,000$75,000

What I like about this is that it seems to curb lifestyle inflation. I think that was intention of the advice, but I don’t know where it originated. Besides the error, for low/negative net worths, it was too strongly worded for me. I rarely like to give advice by telling people what to do. Instead, I like to just explain what I’m doing and why I’m doing it. Your situation may be different, but maybe by following along with my thinking, you’ll be able to adapt it to your own.

So let’s pretend that I feel like buying a $75,000 luxury car. I look at the chart and see that it matches up with a $1.5M net worth. I’m not a fan of buying expensive cars, but if you have a 1.5M net worth, a $75,000 car is probably going to work out.

I decided I’d try to make the advice a little better by eliminating the negative/low net worth problem and making it more flexible (removing the “never” language). So I went with:

It was kind of a quick thought and while it is better, it’s not all that great. I think it keeps the flavor of the original advice which is all I was trying to do.

However, what if I tried to do more? What if I tried to come up with a very good answer for…

How Much Should I Spend on a Car? (Formula 1)

I think any formula is going to be doomed to failure. Nothing is going to work for everyone. People value things differently. For some, like my wife, a car could be one of the few luxury they car to spend money on. For others, like myself, a car is a convenient way to get from point A to point B.

It’s very hard to find “universally accepted” advice in personal finance. At the same time, if we can help a bunch of people with a rule of thumb, why not give it a shot?

With that in mind, I came up with three concepts that I wanted to be part of a rule of thumb:

Net Worth

As I mentioned above, I like the idea of incorporating net worth. It can be used to give license to people who have done a great job saving. It can also be used as a check to stop you from buying too much car.

Negative/Low Net Worth

We have to incorporate something that allows everyone to buy transportation. It might not be great transportation, but we can’t say, “Sorry, you can’t have a car to make money.”

Income

If you are making a lot of money, but just starting out a career with low net worth, you should be able to get a more expensive car. If you are low income, a lower priced car is going to be a better fit.

I fired up my spreadsheet program and created my first formula. It was:

$5000 + (10% of income) + (4% of net worth (0 if negative)) = Max Spending

Since I’m still trying to figure out how to write a calculator for WordPress here’s a table of what that formula might look like:

IncomeNet WorthFormula
$25,000$0$7,500
$50,000$0$10,000
$75,000$0$12,500
$100,000$0$15,000
$125,000$0$17,500
$25,000$25,000$8,500
$50,000$25,000$11,000
$75,000$25,000$13,500
$100,000$25,000$16,000
$125,000$25,000$18,500
$25,000$50,000$9,500
$50,000$50,000$12,000
$75,000$50,000$14,500
$100,000$50,000$17,000
$125,000$50,000$19,500
$25,000$100,000$11,500
$50,000$100,000$14,000
$75,000$100,000$16,500
$100,000$100,000$19,000
$125,000$100,000$21,500
$25,000$250,000$17,500
$50,000$250,000$20,000
$75,000$250,000$22,500
$100,000$250,000$25,000
$125,000$250,000$27,500
$25,000$500,000$27,500
$50,000$500,000$30,000
$75,000$500,000$32,500
$100,000$500,000$35,000
$125,000$500,000$37,500
$25,000$750,000$37,500
$50,000$750,000$40,000
$75,000$750,000$42,500
$100,000$750,000$45,000
$125,000$750,000$47,500
$25,000$1,000,000$47,500
$50,000$1,000,000$50,000
$75,000$1,000,000$52,500
$100,000$1,000,000$55,000
$125,000$1,000,000$57,500

That’s a long table, but hopefully you can find some numbers close to your own to get a quick estimate. If you need more rows at the end, that’s a good “problem” to have.

As you can see, everyone can buy a car of some kind. If you make more money, you can buy more car. If you’ve had a history of saving and growing your net worth, you can buy even more car. We can play around with the numbers some, but I’m thinking that income should possible be a bigger factor. Since these numbers are estimates, I’ll let you experiment on your own. Please let me know in the comments if this produces a good estimate for your own financial situation.

How Much Should I Spend on a Car? (Formula 2)

Something doesn’t sit well with me on that first formula. It doesn’t factor in other expenses.

If you make $125,000 a year, but spend almost all of it on housing, child care, student loans, etc. you aren’t going to have much left over for a car. On the other hand, if don’t have any of those expenses (limited property tax on a house already paid off), you are going to be able to afford more car.

So rather than just use income by itself, I decided to come up with numbers of income – necessary expenses. My working formula is:

$5000 + (50% of (income – necessary expenses)) + (4% of net worth (0 if negative)) = Max Spending

Here’s another rough table using several income minus necessary expenses numbers:

Income - ExpensesNet WorthFormula
$0$0$0
$4,000$0$800
$8,000$0$1,600
$12,000$0$2,400
$16,000$0$3,200
$0$25,000$1,250
$4,000$25,000$2,050
$8,000$25,000$2,850
$12,000$25,000$3,650
$16,000$25,000$4,450
$0$50,000$2,500
$4,000$50,000$3,300
$8,000$50,000$4,100
$12,000$50,000$4,900
$16,000$50,000$5,700
$0$100,000$5,000
$4,000$100,000$5,800
$8,000$100,000$6,600
$12,000$100,000$7,400
$16,000$100,000$8,200
$0$250,000$12,500
$4,000$250,000$13,300
$8,000$250,000$14,100
$12,000$250,000$14,900
$16,000$250,000$15,700
$0$500,000$25,000
$4,000$500,000$25,800
$8,000$500,000$26,600
$12,000$500,000$27,400
$16,000$500,000$28,200
$0$750,000$37,500
$4,000$750,000$38,300
$8,000$750,000$39,100
$12,000$750,000$39,900
$16,000$750,000$40,700
$0$1,000,000$50,000
$4,000$1,000,000$50,800
$8,000$1,000,000$51,600
$12,000$1,000,000$52,400
$16,000$1,000,000$53,200

Is this calculation any better? It’s certainly a little more complex. I’m not so sure because it’s harder for me to test. I don’t have a good set of numbers to plug in. This is where I could really use your help. If you could let me know in the comments I’d appreciate it.

Final Thoughts on Car Spending

Just before publishing this, I decided to do a little reading to see what the experts say. Many suggested using a debt percentage and limiting your debt overall. I didn’t like getting into that because sometimes there’s good debt and bad debt. It’s reasonable to consider it though.

At the end of the day, the estimate is just that… an estimate. There are things you can do to get more value for your dollar when spending on cars. Here are some tips to save money on cars and how to save money on gas.

3 More Ways to Save Money on Your Car Expenses

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I recently published the article 4 Ways to Save Money on Car Expenses, but I had some more ideas pop into my head while I was in the shower. It seems like everyone I know has those “A-ha” moments when showering. I usually don’t think too much about the cost of the hot water in shower, but I’m going to think about it less if it keeps giving me good ideas..

So with that in mind here are 3 more ideas to save money on your car expenses:

  • Go to a mechanic, and avoid the Dealer – I’ve found that the most expensive repairs for cars come from the car dealership themselves. I don’t know what it is, but it feels like every fix costs at least $1200. Alternatively, when I use my local mechanic the price is almost always $300. He goes through and shows me the old part and what happened to it. It’s such a big difference to be able to see the damage and understand where things went wrong.
  • Maintain Your Car – This may fit with the above, it should go without saying that you need to do the standard maintenance on your car. Oil changes can be done simply yourself. However, if you go to one of the quick oil places, be careful of the overpriced priced high-pressure sales tactics. I feel like there’s almost aways an air filter that needs replacing. I’ve found that usually parts dealers such as Mister Auto have much better prices.
  • Save Money on Gas – That article used to be one of my most popular articles. Nowadays gas is historically cheap. In fact, oil is so cheap it seems like they are giving it away. I know, I’ve been “catching the falling knife” by dollar cost averaging into buy more and more oil stock.

    Don’t let it fool you though. For those with long commutes the cost of gas will still add up. The tips in this article can still save you a significant chunk of change.

If you missed it in my previous article, housing and car costs account for around 50% of the average person’s expenses. That means that there’s typically a lot more room to save here versus say, your tomato soup budget. You get a lot more bang for your frugality buck when you focus on the big expenses.

4 Ways to Save Money on Car Expenses

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Did you know that housing and car expenses add up to about 50% of the average person’s spending? Over time, smart choices in those areas could be the difference between living paycheck to paycheck and have a million dollars in the bank. Today, I’d like to cover a few ways to save money on the car expense side of the equation.

  • Buy at the Right Time – At luck would have it, the best time to buy a car is at the end of this month. December is when many dealer want to move the old models to book money to close out the year. In addition, there’s not a lot of competition people are focused on the holidays. It’s not like they are going to give cars away, but you might be able to shave a thousand or two on the final price.
  • New or Used? – Deciding between whether to buy a new and used car can make a difference in costs. I used to recommend that people buy used cars letting others pay for the big depreciation. However, in recent years, I’ve noticed that the discounts on cars a couple of years old were minimal. Maybe dealers realized that people were using this tactic to avoid buying new cars.

    I try to figure out how much a car is going to cost per year and use that a starting point. I make an assumption that a car should last around 12 years. So a new $36,000 car is about $3000 a year. If a car is already a couple of years old, it might only last 10 more years. I’d want to try to get it less than $30,000. Otherwise, I might as well get a new one.

  • Get an Affordable Loan to Start With – It always helps to have a good credit score. After that, you’ll want to shop around and look for the best rate on a car loan. Fortunately, credit rates are still low. As long as you look like a responsible borrower on paper, you’ll should be in great shape.
  • Choose the Right Car – This is an obvious one. There’s a big difference in price between our Subaru Forester and our Acura MDX. The Forester is good for muddy dogs, the beach, and trips around town. The Acura MDX is a better option for longer trips where we focus on comfort. If you can get by with a Forester-level of comfort, you can save a lot of money.

Cheapest Cars to Own

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I was reading an article the other day, how the proposed California bullet train would be a bargain in travel. The price to go 438 miles would be $86 or around 20 cents a mile. Other cheap trains are usually around 25 cents a mile, but a mid-range one can be 50 cents a mile (Amtrak’s Acela is a good example).

I don’t take a train to many places, but this got me thinking, “How much does a car cost per mile?” The IRS makes it clear that you can deduct 57.5 cents per mile for business use. That’s a rough starting point, but we know that car prices and gas mileage varies widely.

What I really want to know is what is the cheapest car to own. Pretend I wanted to be as frugal as possible and didn’t care about anything else, what should I get? The easy answer is some used piece of junk that will hopefully last a couple of years from someone who just wants to get rid of it. I had an old school teacher who would do that. He’d never get an oil change, because it simply wasn’t worth it. I’m not going to take the easy answer, because finding a used car cheap and reliable is going to depend on the gems in your local area.

I really like the cost-per-mile metric as it gives you a way to compare to the bullet train and other forms of transportation. I did some searching on the web and of course one of my favorite personal finance gurus Clark Howard has it covered. He points out research in 2014 from Consumer Reports that says the Toyota Prius and the Honda Fit were the cheapest cars at around 40 cents a mile. The most expensive was a Ford F-250 which was a $1.16 per mile to run.

Think about driving 15,000 miles in each. Would you rather pay $6,000 a year for your car or $17,400? Obviously they are completely different cars, but unless you have a lot of truck-stuff to do, you can give yourself the equivalent of a before tax raise of $15,000 by going with the cheaper option. That’s not only serious cash, but it is “fund your early retirement” kind of cash.

If you drive a lot, there’s some great math on Green Car Reports. They take the cheapest cars with very, very good gas mileage and create a “Cost per MPG” to give you something would certainly be extremely frugal. The winner was the 2015 Mitsubishi Mirage CVT which costs $14,805 and gives you 40 MPG. I worked up a little spreadsheet on that and it will cost you around 27 cents a mile for the car and gas… assuming you drive 15,000 a year. That’s using a 5-year average. If you hold on to it for 10 years it gets down to 17 cents a mile. None of this includes insurance, but that would presumably be cheap on such a cheap car.

Car and Driver has a nice list of cheapest cars to own as well. Their top bargain is the Nissan Versa 1.6 Base which costs around $10,000 and gets 29 MPG. Using the same assumptions as I did with the Mitsubishi Mirage above, the Nissan would be around 24 cents per mile. The initial low cost saves you more than you’d save on gas unless you drive more than the 15000 miles a year.

There really should be an easy calculator that allows you to enter your driving habits and gas prices in your area to give you some kind of real cost of operation. I have to believe it exists on the internet, but I couldn’t find it. In any case, that bullet train looks like a pretty good deal, but a car becomes the better option if you have multiple people to transport.

TrueCar Reviewed: We Bought a New Car

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I may have teased it a few times in the last couple of weeks, but we bought a new car. The Jeep with 125,000 has had enough problems that we no longer feel we can depend on it. I might feel differently if it was just me, but with one young child, and another on the way, we have to a premium on reliability. I saw this day coming and back in August picked the best luxury SUV for us. That luxury SUV was an Acura MDX. Why a luxury SUV for this frugal guy? Well, it would be the wife’s car and she’s earned a luxury car for the first time in her life. I also subscribe to the Clark Howard school of personal finance… you can have the frugal car and let the wife have luxury one.

As far as luxury SUVs (with 3 rows) go, the MDX is one of more reasonably priced ones in the low $40Ks. The category has a lot more than 70K SUVs in it than I thought. After having driven the Acura MDX for a couple of weeks now, I have to say that it is an extremely awesome car. That’s subjective and certainly related to my previous experience. If you drive complete junk, any new car will seem incredible, right?

We were under a time-crunch to buy the new car, we need two cars to function. The planning we did back in August really paid off as we didn’t need to test drive multiple cars. We coud just jump right into the negotiations.

I’ve been reading a lot about the TrueCar buying service and decided to give a try. It works a little like LendingTree if you are familiar with them. You put out a request for a car, mark off some dealers in your area and they come back with quotes. TrueCar’s website gives you a great idea of what price to expect before you even place the request. In my experience it is very favorable price in comparison to just going to dealer and negotiating yourself.

Here’s how it went down for me. The base Acura MDX with all-wheel drive (must have for New England snow) has a MSRP of $45,185. TrueCar’s website estimated that they could save me $1,926 of that and for an Estimated Dealer Price of $43,259. When I went to a dealership in August, they said they had no flexibility on that MSRP because it is a newly designed model and in great demand. It could have been typical dealer BS, but that’s what they told us.

My feeling is that it couldn’t hurt to get the TrueCar quotes and… worst case scenario use them as leverage in negotiations with non-TrueCar dealerships. A dealership can’t stick to its guns on a MSRP of $45,185 when I’ve got quotes around $43,259, right?

There were three TrueCar dealerships in my “area”… Boston, Connecticut, and New Hampshire. As you can tell they have a fairly wide area. The first quote came in at $43,544 and the second quote came in at $43,038. That $43,038 was pretty exciting to us. I like the idea of getting $2000 off of MSRP without having to actually negotiate for it. A day later the last quote came in… $41,998! I should mention that all quotes were our preferred color, they didn’t bait and switch us with that.

Obviously, we went with the dealer that offered us the $41,998 price, which is lower than the factory invoice price $42,211 according to TrueCar. (Though Edmunds says that the factory invoice is $41,911.) It seems like a great deal by any measure.

The dealer did add a $399 destination charge, but I think they all would have done that? I don’t know. In any case, it was still a very fair price considering the amount of work I put in to negotiate it… zero.

TrueCar itself has a few whitelabel sites. For example, Consumer Reports has a car buying service and while it looks like they built it themselves, it really is just TrueCar behind the scenes. My favorite bank, USAA, also has a car buying service that uses TrueCar as the back-end. USAA was offering a 0.64% discount on their already great financing for using the TrueCar service. The end result is that we got a 60-month loan at a 1.35% interest rate. That’s not too shabby, right? Imagine what it could have been if I paid MSRP and used the dealer financing… yikes!

As we were completing the paperwork on the deal, I asked the salesman what he thinks of the TrueCar service from a dealership perspective. He said (paraphrased), “Quite honestly, it’s not that good of a deal for us. The prices are very low and we have to pay TrueCar for each car we sell. I don’t know how long we’ll continue to be a part of it.” I suspect that the draw is to bring in customers like our family, who went in and bought a car very quickly. We normally wouldn’t have driven to that dealership, so that’s increased volume. However, I can see how they’d lose money from the locals who would use the dealership anyway, but get the TrueCar quotes to save themselves a grand or two.

I’m not going to feel sorry for the dealer. In the end, it’s their choice and they can quote whatever prices they want. Instead, I’m just going to enjoy the good price and hope that TrueCar is around in 12 years when we’ll probably be looking for a new car again.

Do you have any experience using the TrueCar buying service? Let me know in the comments.

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