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In this highlight, Brian and Bo talk about what qualifies as a luxury car, expand on the rules, and treating yourself.
Want to know what to do with your next dollar? You need this free download: the Financial Order of Operations. It’s our nine tried-and-true steps that will help you secure your financial future.
Next up, we have a question from Daniel. It’s an interesting one. Daniel asks how strict the rule is about only buying a Tesla with cash. He mentions that they’re in their late 30s and almost done with the Financial Order of Operations (FOO), except for upgrading their house. However, Daniel is hesitant to pull from the bridge account for a “cheapish” Model 3.
This question about luxury cars and what qualifies as a luxury car comes up frequently. Let’s clarify one thing: the rule for luxury cars is not necessarily about paying in cash. It’s about having the car paid off within one year. So, while the general car purchase recommendation is to spend 20/3/8 of your gross income, luxury automobiles should be paid off within a year.
Now, let’s address the specific case of a Tesla Model 3. Does it fall within the 20/3/8 rule or the one-year payment requirement? This question tugs at my heart a bit because I love my Tesla. I’ve owned both a Model 3 and a Model Y, and I particularly love the versatility of the Model Y with its power liftgate and higher seating position. But here’s the thing. When it comes to cars, we need to remember that they are generally not appreciating assets. In fact, they usually depreciate in value. Many people worry too much about what their neighbors think, assuming that driving a fancy car will make them more successful or likable. But the truth is, nobody really cares.
We want to ensure that you don’t make a huge mistake. The goal should be to have dependable and safe transportation. Instead of focusing on luxury cars like Teslas, BMWs, or Mercedes, which should come later in step eight of the Financial Order of Operations, consider bridging the gap with reliable options like Honda Accords or Toyota Camrys. Cars can be detrimental to your financial life, and we want you to avoid compromising your future by rushing into buying a Tesla before you have maximized your 401(k) contributions or reached the goal of saving and investing 25% of your income. Don’t skip steps. It’s important to prioritize building your investments and reaching a critical mass before indulging in luxury purchases.
While Tesla offers great vehicles and financing options, I still consider the expectation to pay off the car within 12 months, similar to paying in cash. Daniel, you mentioned pulling funds from your brokerage account, which is like taking soldiers off the field. It’s better to plan ahead, build up cash reserves specifically for the Tesla purchase, rather than depleting your brokerage account. I encourage you to set a date on the calendar, perhaps 24 months from now, when you expect to reach step eight of the Financial Order of Operations. That’s when you can celebrate and reward yourself with the Tesla Model 3 or Model Y. Don’t skip steps or neglect your financial goals. Stay committed and reach step eight before indulging in luxury purchases.
