Being into cars is an expensive hobby.
Not only are cars themselves expensive to buy outright, but in between running costs, insurance, maintenance and servicing loans (if you have your car on finance), you can end up spending a good chunk of your yearly income on your ride.
According to the US Department of Labor, the average vehicle costs US$10,742 per year to own and operate. When you consider that the average salary in the United States is $56,310, that’s a lot of money.
But what about vehicles that are above average? Performance cars, offroaders, luxury or vintage vehicles… How much do you need to be making if you want to afford your dream car?
Humphrey Yang, a former Merrill Lynch financial adviser whose matter-of-fact money videos have earned him viral success on social media platforms like TikTok (where he has over 2.6 million followers) has broken it down, using the new BMW M3 as an example, assuming you’re getting the car on finance and using a clever financial trick called the ’20/4/10 rule’. [Watch below]
In case you missed it, the 20/4/10 rule works like this:
- Put down at least 20%
- Finance the vehicle for no more than 4 years and
- Keep your total monthly vehicle expense – including principal, interest and insurance – under 10% of your gross income.
For a $69,900 car, $181,740 seems excessively prudent – and hard to achieve – but it’s worth remembering that 1) the BMW M3 is a high-end performance car, they’re not meant to be cheap and 2) the whole point of the 20/4/10 rule is to give yourself contingency (and ultimately save you money in the process).
As Lifehacker puts it, “having at least 20% saved up beforehand lets you pay off the car sooner, and with more manageable payments. Keeping your financing term short limits the amount of interest you’ll pay, and allows you to drop costly comprehensive insurance coverage sooner.”
“Finally, keeping your monthly expenses at less than 10 per cent of your income gives you a little more flexibility if you’re hit with an unexpected bill or lose your job.”
Of course, Yang’s video assumes you have no savings. If you’re making $181,740 a year, you can probably afford to set some savings aside and just buy your dream car outright after only a few years of saving – which is ultimately a less risky or complicated option.
If you don’t want to take out a loan or save for years, there are other ways of getting into your dream car, such as a novated lease – but good luck trying to get one of those going with your boss for a Ferrari…