How Much Should You Spend on a Car? Dave Ramsey’s Rule
Understand Dave Ramsey's guidance on responsible car spending to align your vehicle choices with your financial goals.
Dave Ramsey, a financial expert, offers guidance on vehicle purchases, emphasizing a debt-free approach. His recommendations are designed to help individuals build wealth and achieve financial peace. This article explores his perspective on car spending, focusing on his “50% asset rule” and strategies for debt-free car ownership.
Ramsey’s Approach to Vehicle Purchases
Dave Ramsey’s philosophy on vehicle ownership centers on avoiding debt for items that rapidly lose value. He views cars as depreciating assets, meaning their value decreases significantly over time. A new car can lose at least 10% of its value in the first month, 20% within the first year, and approximately 60% over five years. This rapid decline makes car payments a hindrance to wealth building, as money is tied up in an asset that continuously loses value.
Car payments divert funds that could be invested or used to pay down other debts, thereby delaying financial freedom. Ramsey’s advice prioritizes long-term wealth accumulation and financial stability over the immediate gratification of purchasing a new vehicle with a loan. A car should align with financial goals and contribute to overall financial peace.
The 50% Asset Rule
A core principle in Dave Ramsey’s advice for car purchases is the “50% asset rule.” This guideline states that the total value of all depreciating assets you own, including vehicles, should not exceed 50% of your total net worth. Net worth is calculated by subtracting your total liabilities from your total assets. For example, if your total assets are $200,000 and liabilities are $100,000, your net worth is $100,000. Under this rule, your depreciating assets should be no more than $50,000.
This rule emphasizes that a disproportionate amount of wealth should not be tied up in items that consistently lose value. Depreciating assets, unlike investments or real estate, do not contribute to long-term wealth growth; instead, they consume financial resources through depreciation and ongoing expenses. The rule encourages individuals to regularly assess the current market value of their vehicles and other depreciating assets to ensure they remain within this financial boundary. Adhering to this guideline means car purchases should ideally be made with cash, entirely avoiding debt.
Strategies for Debt-Free Car Ownership
Achieving debt-free car ownership, in line with Ramsey’s principles and the 50% asset rule, involves several practical strategies. The primary recommendation is to save up and pay cash for a vehicle. This approach eliminates interest payments and the financial burden of a monthly car loan, which averages around $700. By saving money that would otherwise go towards a car payment, individuals can accumulate funds to purchase a vehicle outright.
Buying used vehicles is another important strategy, as new cars experience significant depreciation immediately. Used cars, especially those a few years old, have already undergone the steepest part of their depreciation curve, making them a more financially sound purchase. This allows buyers to acquire a reliable vehicle at a lower cost, preserving more of their net worth. Prioritizing reliability and practicality over luxury is advised, ensuring the vehicle meets essential needs without unnecessary expense.
Budgeting is crucial for saving funds and managing the total cost of ownership. This includes the purchase price and ongoing expenses like insurance, maintenance, and fuel. Researching vehicle costs, including market values and common repair expenses, helps in making informed decisions. By setting a realistic budget and consistently saving, individuals can avoid car debt and maintain financial flexibility.