Vehicles Gone Wild

Quote

“Don't go broke trying to look rich.” - Norm Wage

Vehicles Gone Wild

This isn’t the first time we have discussed buying a car or truck, and it won’t be the last.

Vehicles are a vital part of life, and can absolutely wreck your finances if not approached properly. It’s not uncommon to hear the phrase “just pay cash” when financially savvy people talk about getting a new car.

But let’s be honest here…

Paying cash isn’t an option for some. Maybe you just graduated college, and have a beater that keeps giving out. You need a new whip or you face getting fired before you even get to that new job.

Unfortunately, since you have been battling the outrageous cost of college you haven’t been able to stash much in savings.

There lies the problem. You don’t have enough cash on hand, but without a doubt need a new ride.

Introducing, the 20/3/8 rule.

The method to finance a car, without setting your finances on fire. This is a guideline I learned from one of my favorite podcasts The Money Guy Show (highly recommended).

Whether you are a fresh college graduate or someone who just doesn’t have enough savings at the moment, the 20/3/8 rule will keep you honest on your next vehicle purchase.

Let’s break it down. Since we’re writing this in Texas we’ll be using a truck for the example. 🤠 

20 - 20% Down

The first part of the equation is putting 20% down. So if that shiny new F-150 is $40,000, you need to try and put down a minimum of $8,000.

To quickly figure this out take the cost of the vehicle and multiply it by 0.2.

Congrats nerd, you understand the first rule.

3 - Pay It Off In 3 Years

When you go to finance your new (or new to you) truck, your loan should be for 36 months. Let’s ballpark it and say you get a 5.0% interest rate on this loan.

That means your monthly payment will be $959 after putting $8k down.

Something to note here. Getting a longer loan to decrease your monthly payment and give more flexibility if things get tough is not a terrible idea. For example, if you stretched this loan out to 48 months the monthly payment would drop to $737.

There is just one rule when you do this. Still plan on paying it off in three years. Double-check, but most auto loans don’t have an early payment penalty.

8 - Less Than 8% Of Your Income

The final rule is that you should spend less than 8% of your gross (before taxes) income on this snazzy F-150. Doing some reverse math here. To afford the $959 per month payment you would need to be making $144k before taxes.

At $144k your monthly income would be $12k putting your payment of $949 just below the 8% mark.

You might be thinking, holy crap, that’s a lot of money. You’re not wrong, but it puts into perspective the number of people who are likely in over their heads when it comes to their vehicle payments.

Here is a table below showing what you can “afford” based on your income and the 8% rule.

Conclusion

The harsh reality. If you have more money going to your vehicle each month, than you do to your investment and retirement account, you have it wrong.

Luckily, you somehow stumbled across this email and are now aware of the 20/3/8 rule.

Of course, this is just a benchmark. If you are somewhere near this, it’s not necessary to go sell your car on craigslist (a story for another time).

All in all, don’t let your vehicle payment run wild.

Till next time, Cade.

Cade's Finds

Auto Loan Calculator - Handy tool you can use to run the numbers on your next vehicle purchase.

The Robinhood Effect - Cool article on how Robinhood has gamified its platform for the investor.

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Nothing in this email is intended to serve as financial advice. Do your own research. Thanks for reading, if you have any questions, comments, suggestions, etc. about the email don’t hesitate to send me a reply.