The ‘One-Tenth Rule’: How Overspending on Cars is Ruining Americans’ Financial Lives

Are you someone who dreams of driving a flashy new car, but worries about the financial implications? According to personal finance expert Sam Dogen, you’re not alone. In fact, Dogen believes that many Americans are wreaking havoc on their financial lives by indulging in an uncontrolled appetite for extravagant and flashy cars.

Dogen, the author of the popular blog Financial Samurai, has devised a simple rule to help people navigate the tricky waters of car ownership. He calls it the ‘one-tenth rule,’ which stipulates that households should spend no more than 10 percent of their annual income on a car. This means that someone earning $50,000 a year should aim to spend just $5,000 on a car, whether it’s new or used, and whether they pay in cash or take out a loan.

The rationale behind Dogen’s rule is that cars are rapidly depreciating assets that come with a slew of additional costs like insurance, maintenance, and parking tickets. By overspending on a vehicle, individuals are not only tying up money that could be better invested elsewhere, but they are also putting themselves at risk of financial strain.

Dogen points out that the average price of a new car is $49,000, while the median household income is $76,000. This misalignment highlights the disconnect between what people can afford and what they are actually spending on cars. Dogen believes that the easy access to auto loans today is reminiscent of the housing market before the financial crisis of 2007 to 2008, and warns against falling into the same trap.

To illustrate the feasibility of his rule, Dogen shares his own experience of buying a used Land Rover Discovery for $8,000 while earning a base salary of $250,000. He drove the car for over a decade before trading it in for $2,000, proving that it is possible to own a reliable vehicle without breaking the bank.

Ultimately, Dogen’s rule is designed to encourage people to prioritize their financial well-being and focus on earning more money to afford the things they want, rather than stretching their existing budget to its limits. By following the one-tenth rule and opting for a more affordable vehicle like a used Toyota Corolla or Honda Civic, individuals can avoid the pitfalls of overspending on cars and set themselves up for a more secure financial future.