How much you can afford?

Used/Non-Luxury Brand Vehicles:

• Dave Ramsey says to pay cash and never finance a vehicle.

  • Dave Ramsey’s general rule is that the total value of all your vehicles (anything with a motor in it) should never be more than half of your annual household income. 

• The Money Guy says to use the 20-3-8 Rule.

1.    Put down 20%

2.    Aim to pay it off in 3 years

3.    Don’t let the car payment (principal interest and maybe even tags and insurance) be more than 8% of your gross income. (Use net income if you want to be more conservative.

• If married – this should include all vehicles added together, not just for each car.

• Follow the 20-3-8 rule regardless of interest rate.

• Do not let your monthly car payments be more than your monthly investments.

• Budgetdog advised to use the 20/4/10 rule.

  • 20% down payment

  • No longer than a 4-year loan

  • Spend no more than 10% of your monthly income on transportation expenses.

Brand New/Luxury Brand Vehicles: (Do NOT Fake Success!)

• Dave Ramsey recommends never buying a brand-new vehicle, but he said if that is something you desire, then you should wait until your net worth is more than $1 million.

  • Dave says most who buy a new car end up feeling like their car owns them.

• The Money Guy state that buying brand-new/luxury brands vehicles is not financially smart from a depreciation standpoint, but they say it is not totally out of the question. They say if you have enough margin in your finances where you will not sacrifice your other savings and investments, then it might be okay to purchase the brand-new/luxury brand vehicles.

  • However, they say these should be purchased 12-month-same-as-cash.  If you cannot pay them off in 12 months, then you are faking success and should not buy brand-new expensive cars.

  • They state buying a brand-new/luxury brand car would fall in The Money Guy’s Order of Operations Step 8.

Note: 2020 flipped most things upside down, including the auto market. After the 2020 lockdowns, some were able to purchase brand-new vehicles cheaper or very close to the same price as used vehicles which included newer technologies and new car warranties. This is not typical, though, and the point is to ensure your vehicle is not hindering your financial growth and journey. Make sure you are doing your homework before you decide to buy.

Tip: Get insurance quotes before you buy. This will help give an idea of that cost before you purchase the vehicle to help ensure you can actually afford it.

The best time to buy a car depends on who you want to pay the depreciation.  Most depreciation happens in the first few years, so are you willing to take that hit?  From a depreciation standpoint and per Brian Preston (The Money Guy Show), the best time to buy a car would be between years 3-6.  

Food for thought – If you bought a vehicle that is 5 years old, it’s like getting a vehicle at a 60% discount. (This was before 2020/2021 vehicle prices.)

Leasing (a.k.a. Fleecing)

Consumer Reports said, “The most expensive way to operate a vehicle is to lease it.”

 An auto lease is a contract where you pay monthly installments to drive a vehicle for a set amount of time (usually two to three years). Dave Ramsey states that it is basically a glorified rental car. He also says the average interest rate on leasing is 14.2% (per 2019).  However, since leasing isn't technically seen as a loan by the Federal Trade Commission, this means the dealer isn't required to give the breakdown of your monthly payments like a car loan. So, you will probably have no clue what your interest rate is or how much the lender added on top to make a profit.

Auto dealers make more money on a leasing contract than they do on the sale of the car.

Your lease payment will include:

• the dealership’s profit

• the cost of interest

• the loss of value of the vehicle while you are driving it

You will be paying them profit while also paying interest and covering the loss of the value of the vehicle.  The dealers are not losing money on these deals. 

Leasing is also known as fleece, fleeced, or fleecing.

Fleece = “to obtain a great deal of money from (someone), typically by overcharging or swindling them.”

Synonyms = deceive, trick, dupe, exploit, rob, and bamboozle.

It means you got a really bad deal.

 Per the Money Guy Show:

• Brian Preston said he would never suggest someone lease a vehicle unless they are filthy rich and will not be financially impacted by stupid financial decisions.

• Bo Hanson said if a person was going to purchase a vehicle every couple of years anyway, then leasing might be better, but it's still not a smart financial decision because buying and driving a vehicle for a long time is the best financially.

(Again, 2020 was the exception to this rule. Due to the inflationary period, some individuals were able to return leased vehicles and make money out of the deal. This is not the standard, so be very careful if you decide to go with leasing as you will more than likely be the one losing out on the deal.)

Tips for the Buying Process:

• Research is your friend.  The more research you put in, the more car for your money you can get out.

• Don’t let their scarcity games play games with your brain, like when they say they have someone else looking at this same car.  That will get you to buy on emotions. 

• Don’t let them start the conversation by asking “How much do you want your monthly payments to be?”, as the dirty little secret is, they can make almost any car fit into your monthly budget.

• Buy at the end of the month or year.  The month with the biggest MSRP discount is December.

• Ask for extras.  Last bargaining chips you can use.  (ex. floor mats or other add-ons, oil changes or other services, swag, etc.)

• Pay someone to do the work for you.  (Costco, Credit Unions, etc.)

• If you find a car you like at a dealership, search online for that vehicle at other dealerships. This can help ensure your getting the best price.

• Search other lots outside of your area. Also, some dealerships might offer delivery of the vehicle for a reasonable price.

Know that there are 3 separate transactions going on when purchasing a vehicle; the purchase price, the trade-in, and then financing.

Be sure to negotiate these separately.

#1 Know the purchase price

MSRP (Manufacturer’s Suggested Retail Price)/sticker price = the recommended selling price automakers give a new car.

Brian Preston from the Money Guy show said it stands for “Manufacturer’s Sucky Rip-off Price”.  Never pay this price.

Dealer’s Invoice price = price that appears on the invoice that the manufacturer sends the dealer; however, it may not be the effective price the dealer paid.

Make sure they are telling you the “Drive-Out” or final price that you will pay.  Not the price before all the fees are tacked on as a lot of the fees are negotiable.  (Dock fees, freight fees, advertising fees, or sells fees, etc.)

Also, be sure to ask for the extras.  (example: floor mats, oil changes, etc.)

Get it all in writing, so they don’t change anything on you.

*Be sure you negotiated the purchasing price completely before you move on to the next steps.

#2 Know the value of the car you may be trading in

This is an area you might be able to use to squeeze a better deal when buying a car.  If they will not knock off any more of the purchase price of the vehicle you are buying, they might agree to give you a little more in trade-in to get you where you want your purchase price to be.

*Again, be sure you negotiated this step (the trade-in value) completely before you move on to the next step.

#3 Financing versus paying cash (This should be the last step in the process.)

Be sure to check other outside agencies or banks to see the rates their offering before you go to the dealership to finance a vehicle.

Financing a vehicle is the dealership’s major income maker, so if you’re paying cash, never let them know that until you have agreed on your purchase price.

10 years ago, you might have gotten a better deal if paying in cash, however, nowadays dealerships have pretty much turned into banks.  With this, they can sometimes give you more incentives if you finance the vehicle through them as they will get paid more per vehicle if it is financed through them.  This is because they get paid more through financing than they do just selling the car to you.

Brian Preston (The Money Guy Show) said that when he bought his wife’s vehicle that he was planning on paying cash for, the dealer gave him a cheaper price IF he financed the vehicle through them and promised to keep the loan open for two months before paying it off so the dealer could get his incentive or money for opening the loan.