November 11, 2020
Cars will drain your wealth.
In 2019, Americans were spending about $773.40 per month on their vehicles, or $9,281 annually.¹ That’s like owning a tiny house whose value nosedives the instant you buy it!
That’s not even counting the opportunity cost of throwing that money at a car. How much could that cash grow if it were invested or saved?
That’s why you should follow this simple rule for guarding your wealth from a car.
It’s called the 20/4/10 rule, and it’s composed of three parts. Let’s explore them one by one.
Start with at least a 20% downpayment.
Committing a hefty downpayment to a car curbs how much you’ll lose in interest later down the road. It’s always best to cover as much as you can up front with cash.
Finance the car for no more than 4 years.
How long would you want to dump money into an “investment” that doesn’t grow in value? Not long! Keep your financing period short and sweet and then get back to saving for your future.
Dedicate no more than 10% of your income to car expenses.
Your cash flow is a powerful wealth building tool if it keeps, well, flowing. Don’t let a car divert it somewhere else that it won’t grow and won’t build wealth.
Remember, this is not a bulletproof strategy.
You might be facing substantial mortgage or credit card debt obligations that make it difficult to afford the car you want. It’s always a good idea to meet with a licensed financial professional before you commit to buying a new vehicle.
¹ “Average American Now Spends Nearly $800 A Month On Their Car,” Angel Sergeev, Motor1.com, Sep 13, 2019, https://www.motor1.com/news/370609/average-american-monthly-car-spendings/#:~:text=More%20precisely%20%2D%20%24773.50%20a%20month.&text=According%20to%20the%20AAA%20research,equals%20to%20%24773.50%20a%20month.