An uncontrolled appetite for extravagant and flashy cars is wreaking havoc on the financial lives of many Americans, according to a prominent personal finance expert.
Sam Dogen, author of the blog Financial Samuraihas devised the ‘one-tenth rule’, which stipulates that households should not spend more than 10 percent of their annual income on a car.
It means that someone making $50,000 a year before taxes should spend only $5,000 on a car, whether it’s new or used, whether they buy it with cash or take out a loan.
Dogen’s logic is that cars quickly depreciate in value, which is accompanied by a large number of unforeseen additional costs, such as insurance, maintenance and parking tickets.
Furthermore, spending too much money on a vehicle ties up money that could otherwise be invested elsewhere, such as the stock market, and generate significant returns.
Pictured is a new 2024 Ford F-150, which would cost approximately $70,000 before dealer fees. That’s almost the gross income of the average American household
The ‘one-tenth rule’ was coined by Sam Dogen, author of the blog Financial Samurai
The car 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 it.
He said the easy 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 about the financial ruin she found herself in after GM Financial, General Motors’ financial services company, gave her an $84,000 loan to buy a Chevy Tahoe.
“The dealer pretty much told me they can get me out the door in an hour. “He didn’t act like it was something I had to worry about,” she said.
Dogen pointed out that the average price of a new car is $49,000, while the average household income is $76,000.
“An average household has no interest in buying a new car, even the average used car costs about $28,000, so it’s insane,” says Dogen.
He said he came up with the one-tenth rule in 2009 when the government introduced the car allowance scheme, known as ‘cash for clunkers’.
The program was intended to encourage 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 good old cars,” he said. “I think spending money on cars is probably the biggest personal finance killer in America.”
Pictured is a 2014 Toyota Corolla with 247,000 miles. It’s for sale on CarGurus for $5,600
Dogen came up with the one-tenth rule in 2009 when the government introduced the car allowance system – better known as ‘cash for clunkers’.
Dogen, a former investment banker, lives by his own rules. 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 possible,” Dogen said. “There’s nothing wrong with buying a $7,600 used car.” He suggested that a used Toyota Corolla or Honda Civic would suit the vast majority of people.
Used early 2010 Corollas with less than 200,000 miles often sell for less than $7,000.
Dogen said his rule was also intended to encourage people to focus on making more money to buy the things they want, rather than stretching their existing budget.
“Almost no wealthy person you meet will spend more than a tenth of their gross income on a car,” he said.