Does the salary to car value ratio actually mean anything?
Discussion
Hi,
Looking at car forums in the USA, there is a saying "if you cannot afford to buy it twice, you cannot afford it". Is there any real wisdom in this if you're buying a car outright with cash? I'd say this makes sense when it comes to maintenance e.g. if you need to buy new tyres and it wipes out your monthly wage completely with no slack, then you can't afford it. My technique is to divide up yearly running costs (say yearly tyres, insurance, tax, everything else) by 12, to know what the car costs monthly and ensure that it is not a lot.
Similarly, is there any meaning or reason why people say you should only buy a car that is 1/4 the value of your yearly salary? If we all follow that, we'd all be driving some really old cars! If you're earning 30k in your first year of work and starting from scratch, I would not buy a car 30k car, regardless of depreciation or not. If I have been earning 30k for 20 years and still am, with plenty of money in the bank, that is different. It does make it hard to swallow buying a car that pricey, but I don't think it means anything and does not take into account running costs (which on some high value cars, can be low). Even then, if the car will depreciate like a rock, I would not buy it.
Thoughts appreciated!
Looking at car forums in the USA, there is a saying "if you cannot afford to buy it twice, you cannot afford it". Is there any real wisdom in this if you're buying a car outright with cash? I'd say this makes sense when it comes to maintenance e.g. if you need to buy new tyres and it wipes out your monthly wage completely with no slack, then you can't afford it. My technique is to divide up yearly running costs (say yearly tyres, insurance, tax, everything else) by 12, to know what the car costs monthly and ensure that it is not a lot.
Similarly, is there any meaning or reason why people say you should only buy a car that is 1/4 the value of your yearly salary? If we all follow that, we'd all be driving some really old cars! If you're earning 30k in your first year of work and starting from scratch, I would not buy a car 30k car, regardless of depreciation or not. If I have been earning 30k for 20 years and still am, with plenty of money in the bank, that is different. It does make it hard to swallow buying a car that pricey, but I don't think it means anything and does not take into account running costs (which on some high value cars, can be low). Even then, if the car will depreciate like a rock, I would not buy it.
Thoughts appreciated!
These rules of thumb are exactly that - rules of thumb.
If you are 25, earning 50k, single, no dependents, paying 300pcm on rent, you can afford to spend more on your car than if you are 50, earning 50k, paying 800pcm on a mortgage, two kids, a stay at home wife, and have 10k in credit card debt.
The rules are also different depending on how you choose to finance - your monthly payments on a lease or a pcp will be lower than if you buy on personal loan or in cash, but ultimately you'll be spending more. Depends on how much importance you put into driving a new motor.
If you are 25, earning 50k, single, no dependents, paying 300pcm on rent, you can afford to spend more on your car than if you are 50, earning 50k, paying 800pcm on a mortgage, two kids, a stay at home wife, and have 10k in credit card debt.
The rules are also different depending on how you choose to finance - your monthly payments on a lease or a pcp will be lower than if you buy on personal loan or in cash, but ultimately you'll be spending more. Depends on how much importance you put into driving a new motor.
I couldn't afford to buy my car twice, but I can afford the lease cost associated with 'owning it'. I don't want to own it. I don't want to have the unknown financial responsibility of a depreciating asset. I want to know exactly what it'll cost me for 2 years and if I'm happy with the price, I'll pay it. I owned my last car and it stung me come trade-in time because the market is constantly shifting. If the market shifts with my lease car, I don't take the hit.
That and I like to change my car often.
That and I like to change my car often.
Jonno02 said:
I couldn't afford to buy my car twice, but I can afford the lease cost associated with 'owning it'. I don't want to own it. I don't want to have the unknown financial responsibility of a depreciating asset. I want to know exactly what it'll cost me for 2 years and if I'm happy with the price, I'll pay it. I owned my last car and it stung me come trade-in time because the market is constantly shifting. If the market shifts with my lease car, I don't take the hit.
That and I like to change my car often.
Agree. I wouldn't mind buying a second-hand car that has taken the hit on depreciation and will depreciate slowly. But every car does depreciate differently I guess.That and I like to change my car often.
Has anyone paid 90-100% of their yearly salary on a car and not regretted it or struggled with finances?
Some people get off on cheap motoring - i know a guy with a £1M house, mortgage paid, another £1M in investments that he earns more than a living from. He shops at Aldi and drives a £500 Peugeot. He is more proud of the money he saves than the money he has.
At the other end I have young graduates at work on a decent salary who barely make it through the month because of a huge car payment.
So both within the limits of "affordable" but very different extreme situations!
Never heard the "buy it twice" rule before, but i have always assumed a generous repairs/maintenance budget that essentially allows me to write off the car to a breaker every 2 years, just so long as i get 2 years without the engine or gearbox falling apart I am financially sound. If it does happen I would buy another car and try to sell the broken one for spares/repairs.
At the other end I have young graduates at work on a decent salary who barely make it through the month because of a huge car payment.
So both within the limits of "affordable" but very different extreme situations!
Never heard the "buy it twice" rule before, but i have always assumed a generous repairs/maintenance budget that essentially allows me to write off the car to a breaker every 2 years, just so long as i get 2 years without the engine or gearbox falling apart I am financially sound. If it does happen I would buy another car and try to sell the broken one for spares/repairs.
Z064life said:
Agree. I wouldn't mind buying a second-hand car that has taken the hit on depreciation and will depreciate slowly. But every car does depreciate differently I guess.
Another trap people fall into with second hand cars, is that if they're 3-4 years old, they think they will now depreciate in a linear manner. My car lost £500 in 3 months by depreciation when I was thinking about selling. The month after, I decided I was going to sell. It lost a further £2,000 in that month. Depreciation isn't linear and it can really hurt, even on second hand cars. And this wasn't on a new plate release either.Personal circumstances are too variable for this rule of thumb to really mean much, plus as we get older different things are more important.
Before I was married, had kids or owned a house I bought a car which cost me around 25% of my annual salary back then.
Now I'm married, with kids and own a house I am willing to spend about the same amount on a car (much more and I wouldn't be happy with the debt). My salary has increased substantially since the above example, so using what I paid back then this would now be around 10% of my salary.
So I've gone from spending 25% on a car down to 10%. Many years ago my holidays would have been long weekends camping somewhere, now they are family holidays costing a bloody fortune!
Before I was married, had kids or owned a house I bought a car which cost me around 25% of my annual salary back then.
Now I'm married, with kids and own a house I am willing to spend about the same amount on a car (much more and I wouldn't be happy with the debt). My salary has increased substantially since the above example, so using what I paid back then this would now be around 10% of my salary.
So I've gone from spending 25% on a car down to 10%. Many years ago my holidays would have been long weekends camping somewhere, now they are family holidays costing a bloody fortune!
I like to buy older cars that were once very expensive.
Earnings-wise, I do alright (thanks for asking), and the way my cars look tend to reflect that, as a happy coincidence, rather than by design.
Only car beards such as my good self (and you lot
) would know that I'd paid a fraction of the original list price of the car when new.
In fact, a significant portion of the pleasure I derive from being a "car guy" comes from knowing I'm getting seventy-odd grand's worth of enjoyment from a car that cost me circa £5k.
Earnings-wise, I do alright (thanks for asking), and the way my cars look tend to reflect that, as a happy coincidence, rather than by design.
Only car beards such as my good self (and you lot
) would know that I'd paid a fraction of the original list price of the car when new.In fact, a significant portion of the pleasure I derive from being a "car guy" comes from knowing I'm getting seventy-odd grand's worth of enjoyment from a car that cost me circa £5k.
There is a lot of very wealthy people out there with zero interest in cars so they don't feel the need to sink money into them, Plenty of millionaires driving bangers that just "do the job" Its not compulsory to spend as much as you possibly can on a vehicle. There are also plenty people with a massively negative net worth or who are low earners, still even claiming tax credits driving brand new financed/leased premium cars. The availability of cheap finance means a persons car is no longer a barometer of anyone's financial status or income.
The car park at many workplace can now often seem inverted, In companies where there is no company car scheme you get senior managers driving sub £3k cars and some of the lowest paid at the same workplace rocking up in brand new premium vehicles.
The car park at many workplace can now often seem inverted, In companies where there is no company car scheme you get senior managers driving sub £3k cars and some of the lowest paid at the same workplace rocking up in brand new premium vehicles.
I bought a car which cost the equivalent of 7 months after tax salary.
At the time i thought nothing of it but now i kind of regret it.
However i now have a low mileage car with warranty intact, second owner and im hopefully going to keep it a long time so shouldent cost a lot over its lifetime.
I did not want a monthly payment.
At the time i thought nothing of it but now i kind of regret it.
However i now have a low mileage car with warranty intact, second owner and im hopefully going to keep it a long time so shouldent cost a lot over its lifetime.
I did not want a monthly payment.
Tucker1 said:
There is a lot of very wealthy people out there with zero interest in cars so they don't feel the need to sink money into them, Plenty of millionaires driving bangers that just "do the job" Its not compulsory to spend as much as you possibly can on a vehicle.
Nothing screams "old money" more than a ropey old LR Disco V8 and a Volvo 244DL parked outside a 35 bedroom castle. It's crap if you ask me, what with finance available.
If you were to lust for a £50k car, your salary was £50k per year and there was no such thing as finance, your monthly earnings would not permit you to save £4166 per month over the year to purchase it. You'd have to save and, presuming you have rent/mortgage to pay, a social life, want to eat, go to the gym aka have a life, therefore it may take you 3yrs to save this amount in cash if you were strict enough to pocket £1388 per month and button other aspects of your life down.
With finance, and on £50k per year, it's not unreasonable (in fact it's pretty easy on a £50k salary which I'd class as generous, and way above average) for someone to save £12000 over the year (£1000pm) and still have a life and house. Therefore with this deposit and finance combined, you could quite easily buy that £50k car over monthly instalments over the next 4yrs at a manageable monthly rate, or absolve all association with depreciation with a PCP and even more attractive monthly instalments.. There's then enough fat for all running costs
There's a reason why there are so many high end cars on the road now.
If you were to lust for a £50k car, your salary was £50k per year and there was no such thing as finance, your monthly earnings would not permit you to save £4166 per month over the year to purchase it. You'd have to save and, presuming you have rent/mortgage to pay, a social life, want to eat, go to the gym aka have a life, therefore it may take you 3yrs to save this amount in cash if you were strict enough to pocket £1388 per month and button other aspects of your life down.
With finance, and on £50k per year, it's not unreasonable (in fact it's pretty easy on a £50k salary which I'd class as generous, and way above average) for someone to save £12000 over the year (£1000pm) and still have a life and house. Therefore with this deposit and finance combined, you could quite easily buy that £50k car over monthly instalments over the next 4yrs at a manageable monthly rate, or absolve all association with depreciation with a PCP and even more attractive monthly instalments.. There's then enough fat for all running costs
There's a reason why there are so many high end cars on the road now.
Z064life said:
Zoobeef said:
In 2011 I spent £27250 on my Noble (earning around £26k at the time.
Now I earn just under £10k more, still own it but race a vx220 also.
Do you regret spending that %age on a car in any way?Now I earn just under £10k more, still own it but race a vx220 also.
Zoobeef said:
No, I had about £45k in the bank so it was only a portion of it. Also its gone up in value considerably so it was a good investment.
I'm planning something similar with another car, difference is, while the car holds its values fairly well, it will not go up to make any significant profit after selling it.I'd have more than half the value of the car left in my account if I do buy so I won't be stretching, but struggle to justify the purchase! (But not financially, just a lot of people say not a wise move but for no real reason). Running costs are fine.
Edited by Z064life on Monday 26th June 14:21
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