How Strict is the 20/3/8 Rule When Purchasing a Car?

March 20, 2023

When is it okay to break the 20/3/8 rule? In this highlight, Brian and Bo give insight on if it is ever okay to break the 20/3/8 rule.

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We have a question, they asked, “How lenient are the guys with the 20/3/8 rule if I plan on holding my car for its entire useful life?” He says, “I’m referring to Corollas and Civics here, not Jaguars and Land Rovers.”

Oh, is that the end of it? We should probably go over what the 20/3/8 rule is too. Well, here’s the question, I have a clarifier for. Yes, let’s talk about it, then you can go over. I think a lot of people, because if Sergio is probably wondering if he, because the question, if you’re talking about Corollas and other things because really realize this whole thing is to be about discipline, we don’t want your eyes and your ego to be bigger than what your wallet can afford. That’s really why we have 20/3/8, and a lot of people have a sticking point that we have three years, and I’m going to tell you, I’m very rigid on the fact that I think you should pay off the car within three years, but I am flexible if somebody’s offering you the same interest rate on a four-year loan or five-year loan as the three-year loan. Take them up on that. I mean, I’m okay with you having that way if you’ve got an emergency. I like having flexibility, but I still want this car paid off within three years. You’re saying if the interface is the same, it’s okay to take the five-year payment, but then you need to do the math to calculate what the three-year payment should be. I think that’s a fine strategy, but you are saying we’re pretty strict on 20/3/8. Like even if you’re going to drive it for 10 years, it doesn’t make sense to finance it for five, even if you’re going to have it for the whole useful life because all that car is doing is depreciating. It’s just becoming less and less and less and less valuable, and so you’re kind of throwing the money away on interest for a depreciating asset. That’s why we love you getting out of the car debt inside of three years. Now his actual question was how lenient are you on it?

We love if you pay cash for cars. If you want to not do 20/3/8, if you want to do a hundred zero, we’re totally okay with that. There is nothing wrong with doing it more aggressively than this. But when you stretch 20/3/8, we wouldn’t stretch it the other way. We wouldn’t put less down or finance for longer, have it be a bigger chunk of your income, because a true financial mutant doesn’t need to do that, right? A car should be a utilitarian asset until you reach the level of financial success or become a preferential asset. Right? I mean, that’s what the very first car that you bought, Brian, wasn’t it? It wasn’t a Tesla, it wasn’t a nice car, it was something that was functional for you and your family, and then you graduated into the nicer things.

Yeah, and I also think it’s important. Let’s catch everybody up. 20/3/8 is 20% down, you don’t finance a car for longer than three years, and you don’t want your car payments because we’re already giving you some grace in the fact that there are a lot of other pundits that say you have to pay cash 100. We know that reliable transportation to get to your job, so you actually can save and start building wealth for the long term might require you to have reliable transportation. So we don’t want the car payments to exceed eight percent of your gross income. And then don’t forget, if your investments are less than your car payment, you are doing it wrong. I’m talking about your monthly investment should exceed your car payment. But it is interesting to me, Sergio, my daughter, we went on a cruise for Christmas, and they had a game show Price is Right. Now, my youngest daughter is just Gaga for Price is Right, and we’ve been going on YouTube and watching, who’s the host, is it Drew Carey? No, we’re watching both. But Bob Barker, we’ve been going back to 1975 episodes. Cars in 1975 when they’re in the showcase showdown, $3,000. That’s why now when you watch The Drew Carey version, cars that are these entry-level vehicles, it’s not uncommon for these things to be $26,000 or $27,000.

Sergio, the only reason that I am going to take a hard line on this is that car manufacturers realize that some of us get caught in a certain type of car, but they want to squeeze as much out of you as possible. So they will have the base level and then the other prestige level, or they’ll have the platform level. They’ll name them all these different things, but I want you to keep yourself honest because you’ll be like, “Yeah, it’s a Corolla,” but if you’re buying the Platinum version of the Corolla, whereas maybe your budget should have you buying the LX version of the Corolla, pay attention to those things. I know that makes us have a hard line, and I like giving as much flexibility. I’m the most grace-filled person out there, but this is one of them because cars are napalm for your financial future. I have to kind of take the hard line with it. Yeah, to play a little devil’s advocate to Sergio, because I empathize with, like, okay, here’s the rule, how much could I go, but I feel like 20/3/8 already is some leeway. It is because that was refreshing to me when I met you guys because so many other people who give you smart or more conservative financial advice, like pay cash, pay cash, pay cash, and then all of a sudden, it’s like, “Oh, we could get a more reliable vehicle but still do it in a smart financial way.” Yeah, well, so I like 20/3/8 for that reason.

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