Can I Buy a New Car? (I Make $240,000 as a 25-Year-Old)

Transcript

Squeaky Sauce has a question for both of you. I make around 240k as a 25-year-old, whoa! I know, so there’s some opportunity here. Let’s see what he says. I would like to get a RAV4 hybrid, which is about 40K, but can I afford this? I just can’t seem to justify this with the opportunity cost I have with investing, and I would appreciate some guidance. Thanks so much!

So, first of all, there are a lot of people who say, “Oh my gosh, Squeaky Sauce, you make a gazillion dollars and you’re so young!” I want to give Squeaky Sauce some compassion here because here’s what people have recognized. Squeaky Sauce knows how powerful his or her dollars can be, right? If you hold onto the wealth, it multiplies. Squeaky Sauce is only 25 years old, and that $40,000 he or she could use to buy this RAV4 hybrid could turn into X number of dollars by the time he or she gets to age 65. Squeaky Sauce knows it’s a 44 multiplier on those dollars – that $40,000 gets multiplied 44 times over by the time they get to retirement. So, they struggle with it. They’re thinking, “Man, can I do that? Is there an opportunity cost? How do I know if I can afford it?”

So, what I think we ought to answer, Brian, is if someone’s thinking about buying a car, how do they know they can afford it? One thing that immediately comes to my mind is, “Okay, are you saving 25% of your gross income?” Whether you make $250,000 a year or $25,000 a year, am I saving 25% for the future? Once you start doing that, once you’ve hit that threshold, especially when you’re young, above and beyond that, you get to choose what you do with your dollars. You get to choose, “Do I save more? Do I invest more? Do I let my lifestyle increase? Do I give more?” Fill in the blank, so long as you’ve crossed that first threshold.

Now, back to Squeaky’s question: Can I afford it? Is $40,000 for a car an appropriate purchase for me? I mean, I’m curious to know your answer, Brian. It’s a hybrid number. Is it a luxury car at $40,000 for a 25-year-old? Is that luxury or not luxury? Where do you factor into the equation? And then, if I am going to buy it, if I’m Squeaky, how do I approach buying a car? What are some of the things I should think about?’

Yeah, I think, you know, because you’re setting me up to talk about 23A, but I want to come back before I talk about 23A. I think Squeaky Sauce has to think about what’s the end game, what’s the “why?” Maybe that’s too hard to ask for a 25-year-old because if you’d asked me at 25 when I thought I was gonna retire, I told you 50. Now, here I am right around the door from 50, and I’m not anywhere close to retiring because I’m having too much fun. But I do think it’s one of those things where Squeaky Sauce should start playing around with the numbers of knowing what he’s actually saving for. If you go check out learn.moneyguy.com, we have the “Know Your Number” course. You can quickly run some scenarios and figure out if I’m probably a 65-year retiree, a 60-year leave the workforce, or a 45 to 50-year-old. Those are gonna have two different answers. If you are 45 to 50 years of age and you think you’re gonna leave because you’re in this hyper-income situation, maybe that comes with extra stress and other things, then you’d probably need to be saving 40% or even beyond. That’s why I don’t want to just say, “Yeah, go buy it because you make a lot of money,” because I think that’s what a lot of people’s temptation is. You kind of have to begin with the end in mind and know exactly what the “why” is. But once you figure out your retirement, how that fits in with the “know your number,” if you are somebody who’s leaving the workforce probably 55 and beyond, then I think this is a step-eight decision, okay? Meaning that I think that you probably could, of the financial order of operations, once you get past the 25, rock and roll. Because I just want to make sure that Squeaky’s not skipping the saving for the foundation. Now, look, if you’re also… I don’t know which city they live in, I don’t know what the transportation… I do give a lot of grace on 23.8 because I want you to have a dependable car to get you to work. Because a lot of people want you to pay 100% cash for cars, we came up with 23.8 because we want you to put 20% down, finance for no longer than three years, and your payments can’t exceed 8% of your income. But this is just to keep you safe, and remember, your investments always have to exceed with your monthly car payments. But this does not mean a forty-thousand-dollar car. Typically, for me, this means like when I graduated college, I went and bought a used Mazda 626 for ten thousand dollars. So, because you can get dependable transportation for 15, 20 grand, it’s not 40 grand. I just want to challenge Squeaky if you have dependable transportation, you’re in this great income situation, let’s kind of get you begin with the end in mind, know what you’re saving for, and this probably is a step-eight meaning you’ve got to get to 25% of your gross income before you go start patting yourself on the back and rewarding yourself with a nicer car. Not that a hybrid RAV4 is over the top, it’s not like you’re trying to go buy a Mercedes or a BMW, but I want to challenge because you’re 25 years old and there’s such a fear for a 25-year-old who’s already making close to a quarter of a million dollars: how sustainable is that? Now, maybe this is something you can do forever, but you just don’t have enough years behind you to know if you get to keep this. So, it’s just that much more important to make sure you build that foundation while you’re in this blessed opportunity where you have all this money coming in.

Now, tell me if you agree with this, Brian, because this is the last piece of information, the last piece of advice I’d give Squeaky Sauce, because I was in a similar situation earlier this year. I bought a truck. I did not necessarily need a new car, but I wanted to, and I understand that there’s an opportunity cost based on my age, based on my multiplier, that those dollars could be better working. So, I wanted it to be painful. I wanted it to hurt a little bit while I could have financed it and done 23.8 because it was not considered a luxury automobile. I thought, “You know, I want this to be painful. I’m just going to pay cash so that it stung a little bit so that I remember”, man, when I make these big decisions, I wanted it to hurt a little bit so that I do it infrequently. Good idea, bad idea? Would you advise Squeaky Sauce to do that, or say, “No, go finance it, three years, 36 months”?

It depends on how far off he is from 25% savings. There are a lot of variable things there. No, I’m not gonna pick up—I came this close! So, y’all, when y’all come for the tour, we ought to take the tour out to the garage so you can see this monster that Bo drives around in, and then you’ll know why I was thinking about picking on him, but I didn’t. I didn’t take it.