When is a Car Considered a “Luxury” Car?

Next up, we have Finn Whiz, which I think is short for Financial Wizards, so this one should be good. He or she says, “What do Brian and Bo consider to be a luxury car? Is it a certain price point or set of brands? 20/3/8 for us implies up to a $3,000 monthly payment, of which we’re saving more than that per month. So, I know, especially some higher-income people, if they did 20/3/8, they could spend a lot on a car. So, how should they be thinking about that?”

So, Finn Whz said they could spend $3,000 a month if they did 8% of their… This is exactly why we put the luxury car rule. Remember, I think there’s… If you’re thinking, I love doing systems and order of operations, hence the financial order of operations being kind of the foundation of the Money Guy show. This is another one of those. 20/3/8 has an order of operations too, and ideal number one is if you can pay cash, you should pay cash for vehicles. Why do we say you should pay cash for vehicles? Because they depreciate like a rock. I know, go back to the pandemic, things were a little weird, but every month I’m getting new data that prices are sinking on used cars, that inventories are growing on new cars. This is not sustainable. What happened a few years ago. So, I wouldn’t assume that you can treat your vehicles as if they’re no longer depreciating. So, they appreciate like a rock. You have to pay to fuel them; you have to pay to maintain them; you have to pay to insure them. These things are just not good.

As I’ve gone on a rant that you guys loved, the nicer you are, the more the nicer car you buy, especially when you get into those European brands. Not talking about you Lexus and Acura owners, but all you European luxury car owners, you are horrible on maintenance. And what’s funny is when we were doing prep for some car content that we’re also going to have coming out, we found out really nothing post-pandemic is depreciating like it has historically except for like the Range Rovers and some of the others because nobody wants those maintenance bombs.

So, I go back to the fact that why in the world, if we know cash is the preferred way to pay for cars, why did we even create a rule like 20/3/8? And the reason is the why is because I’ve been in the situation where I had to get to my J. My wage, my labor was where all my net worth was at at the time, and I needed reliable transportation. I’m not the handiest person in the world even though I grew up in a household with a father and a brother who were mechanics. I just did not have that skill set, so I needed to get there. So, I needed to be able to buy reliable transportation to build the bridge so I could get my labor, my wages to turn into wealth that then would allow me to continue on my journey to financial independence. And the way to do that was to do put together rules like 20/3/8, which requires 20% down so I can get ahead of depreciation. I don’t finance it longer than 3 years so that I know for a fact that I’m going to pay this thing off, and the payments are going to be large enough that they hurt, but they also will be long enough that I can make it digestible. And then 8% of my gross income, my monthly gross income, is to protect me from getting in a situation where I’m letting my eyes and my ego exceed what I should be paying.

But if you’re in a situation where you can afford a $3,000 car payment through 20/3/8, you make a lot of money, and that would once again go right back to the default that you should pay cash because I’m thinking this should be a Corolla, this should be a Civic, this should be reliable transportation to get you to and from your work because you’re in a desperate tight situation. It’s not something that you use to impress your neighbors. In that case, I’d much more rather you have that money going towards your automated wealth creation of investing for the future. That’s why, once again, the rules of 20/3/8 also require your investments to exceed your car payment because I want that $3,000 building your great big beautiful tomorrow.

Yeah, if you can afford $3,000 a month car payments based on your income, you shouldn’t be financing cars anymore. Realistically, if there’s a car that you want and it’s expensive and it’s a $50,000, $70,000, $80,000, $100,000 vehicle, you in your financial situation ought to save for that, to be able to write a check, pay cash for it. If you cannot do that, I would argue the car you’re looking for is probably not something you can afford. 20/3/8 is not applicable in that scenario, just like you said. It’s for reliable transportation.