Money Monday: Use the 20/4/10 Formula to Keep From Being Car Rich and Cash Poor

Does it ever feel like everyone around you is driving a new car? Don’t get jealous. More often than not, people truly can’t afford the new wheels they’re sporting. New research reveals that median-income households can afford the average-priced new car in only one of twenty-five major American metropolitan areas.

TrueCar.com estimates the average new car will now set you back $31,252. According to Interest.com’s 2014 Car Affordability Survey, this is beyond the reach of many households. In only one major US city – Washington, DC – could the median-income family comfortably afford the costs associated with purchasing the average new car.

“What this research indicates, more than anything, is that a lot of Americans are spending too much money on their cars,” explains Mike Sante, managing editor of Interest.com.

In order to keep from becoming car rich and cash poor, many financial experts suggest that you follow the 20/4/10 rule. When purchasing a vehicle, you should put down at least 20% of the purchase price of a new car and finance for no more than four years. Finally, no more than 10% of your gross income should be spent on total transportation costs including car payments and insurance.

But, to truly make sure that your wheels are not robbing your wealth consider these tips as well:

The next time you’re tempted to purchase a new car, ask yourself if you really need it. Most cars today last well over 10 years and can provide low cost transportation for years after they’re paid off. It’s the advertising industry which has a yearning for a new car every 4 to 5 years.

Does your family need two cars? I know the idea of only having one car in a family sounds like sacrilege. But, could you manage with only one? Keep in mind all the fun things you could do without an extra car payment.

Do you need a luxury car or one with all the bells and whistles? Do you want to sport an impressive ride or build an impressive retirement account? While the average new car today will set you back nearly $31,000, there are still plenty of affordable and reliable models that can be had for much less than that. A common saying goes,

most luxury car drivers aren’t rich, and most rich people don’t drive luxury cars…

BMWK – Remember, a car is a depreciating asset. Don’t let what you drive rob you of your chance for financial security.