It is easy to get carried away when you walk into a car showroom and see a wide choice of gleaming automobiles in front of you, which is why so many people could do with remembering the much-talked about 1/10th rule, so that they don’t get tempted to go over their car buying budget.
Searching for your car online at somewhere like www.GMTAutoWest.com will allow you to browse without perhaps feeling as much pressure, but it still makes plenty of sense to show some discipline and learn how to apply the 1/10th rule to your car buying budget.
You do the math
The 1/10th rule applied to your car buying budget is a really simple mathematical rule that is easy to apply but can make a huge difference to your finances.
In basic terms, you should limit the amount you spend on purchasing a car to a figure that equates to a maximum of 1/10 of your gross annual income. Putting this into an example figure, if you earn $40,000 a year, you should not spend any more than $4,000 on the car.
When you start to crunch the numbers on the car that you are currently looking at, it should certainly make you think twice if you calculate that the car that you are thinking of buying will cost what is the equivalent of 50% or more of your gross salary.
The 1/10 rule is a great discipline that makes a lot of sense in creating a financial ceiling that should mean your car purchase is affordable to you, and it helps you to realize when you are about to spend way more than you should on a set of wheels, given your annual salary figure.
Think about the bigger picture
Although the calculation itself is pretty easy to understand and apply to your car buying budget, there are other very good reasons in addition to the purchase price that make the 1/10th rule a good one to follow.
If you pay too much for your car and squeeze your cash reserves or monthly finances to do so, there are several scenarios that could make you regret not showing as much restraint as perhaps should have.
Paying more for your car may well mean that you have to pay higher insurance costs and there may also be higher maintenance costs involved too. Keeping your ongoing motoring costs under control and in proportion with your income is often influenced by the amount you pay for your car, so be sure to work out all the figures, including estimated maintenance costs, so that you know exactly what your car is truly costing you each month and year.
Living up to the price tag
Although you may not necessarily notice or even think that you could be influenced by such a phenomenon, it is a possibility that if you ignore the 1/10th rule and buy a high-end car that is and looks expensive, you could end up spending more money in other areas as well.
There is a school of thought that suggests you may feel the need to live up to the price tag of your shiny high-end car, so you feel the need to dress more smartly while driving your car, and even pay more for things like valet parking so that you car is looked after, rather than parking somewhere for free.
Blowing your budget on a flash car might just make you spend more in other areas in order to maintain the image and feeling of luxury, which is ok if you have the income to cope, but not so wise if you end up spending more in other areas as a result of busting the 1/10th rule in the first place.
Most of us like a nice car and there is absolutely nothing wrong with that of course, but you should remember that in most cases, you are buying a depreciating asset.
This fact alone makes the 1/10th rule very persuasive. The more you pay for your car, the more noughts you might be potentially adding to the amount you lose between what you originally paid for the car and what you eventually sell it for.
There is very little you can do about the fact that your car will lose value over time because it is a depreciating asset, but you can limit the damage by once again remembering why the 1/10th rule makes such a lot of financial sense.
Caitlin Gill is a working Mom who takes personal finance seriously, and always researches a high-end purchase carefully being committing. She enjoys sharing her personal finance tips online, and has recently started writing articles to help others.