Dave Ramsey & Purchasing New Car

YabusameYabusame Posts: 172Member
edited June 2011 in Desktop
Hi All,

I've just bought a car so I'm a long way from replacing it, but I'm thinking about my Car Replacement category. How much should I put in there (once I'm debt free) each month?

I remember hearing a DR clip (via the iPad app) in which Dave stated that you should only spend 50% of household income on purchasing a new car. Basically, if you earn £50,000 per year, then spend no more than £25,000 on a new car. OK, that means I can set a goal for my Car Replacement category, but how long should I save for?

Does anyone know how often a car should be replaced, according to Dave Ramsey? Does Dave say it should be every 5, 10 or 15 years (or other)? Can you point me to a clip or article that states this?

Thanks all
Post edited by Unknown User on

Comments

  • PatzerPatzer Posts: 3,794Member, Beta Tester
    Yabusame wrote:
    I remember hearing a DR clip (via the iPad app) in which Dave stated that you should only spend 50% of household income on purchasing a new car. Basically, if you earn £50,000 per year, then spend no more than £25,000 on a new car.

    I'll go out on a limb here and guess that Dave's focus is on getting people to spend less on cars than they do before buying into his system. IIRC, the pound sterling is worth more than the American dollar. My income is over $50,000 per year and I could not justify spending $25,000 on a car. My last new car cost me about $13,000. Your mileage may vary, but I'd regard Dave's guideline as a maximum rather than a requirement.
    Yabusame wrote:
    Does anyone know how often a car should be replaced, according to Dave Ramsey?

    I don't know Dave's time frame. My goal is to be able to buy a new car with cash when my existing car is 10 years old. To that end, I have a budget estimate of how much I might spend on the car, a monthly budget amount, a goal, and a way to tell whether I'm on track.

    If I end up needing a replacement car sooner, I know how to deal with Murphy visits. If my current car lasts longer than 10 years, I can reevaluate my cost estimate at the 10 year mark to see whether I need to keep adding money or budget the funds somewhere else. I have no intention of buying a new car just because 10 years have elapsed and my budget is on track at that time; that purchase would also require a reason that my current car is no longer satisfactory.

    Patzer
  • LunaLuna Posts: 3,533Member, Beta Tester
    You could also reverse the car payment scenario. Say a car payment would be $300 per month. Instead of buying the car on credit and paying it off for the next 4-5 years, you could start putting that amount away for 4-5 years and at the end of that time, you would have enough to pay cash for a similar car. Of course, you may decide that you don't want to part with all that cash, and end up buying a used car for less, paying in cash and keeping a chunk of cash for other uses.
  • DangerPantsDangerPants Posts: 44Member
    This is one area that DR has got me severly brainwashed. I spent 3300 on my last car in cash and its a minivan with only 60,000 miles. Its a good brainwashing though because I wouldn't want a car payment right now. I say buy whatever car you can afford in cash and just remember that if you can live with less, do... the more money you have leftover the richer you are. Cars are needs but spending too much is a want.
  • TrevorTrevor Posts: 727Member, Beta Tester
    I don't follow Dave Ramsey very closely, but from what I have seen I am very surprised that he would suggest that much of a percentage for a new car. I am assuming that you mean a new car to you and not a brand new car because I also think that he suggests buying used.

    I would also suspect that he would say that you drive a car until it can't drive anymore. I have only owned two cars in my lifetime. Both were financed and purchased new. I drove the first one for 18 years until I had to repair it to often and then five years ago I bought my second second. I am tempted by newer cars, but I paid the loan off in full last year so I would love to build up enough money in my car replacement category so that I won't have to finance again. With the money I have available for that category, I would probably have to drive the car for another 20 years to save up enough if I want to buy another new car.
  • lynaea1234lynaea1234 Posts: 46Member
    There is a woman I work with who told me recently she has never financed a car. She said her father bought her first car and she repaid him (nice huh?) with the caveat that when the 'loan' was paid off she continued to make the same payments into a savings account so she could purchase her next car with cash. Essentially she can now afford a 'new' car every 5-10 years because she is consistently making 'car payments'. If only all our parents gave such good advice!! In any case this sounded so good it is my plan for my next vehicle, I will probably have to finance some of it but once that is paid off that same amount is going into a Car Savings category.

    Shannon
  • dpandslemmendpandslemmen Posts: 196Member
    Yabusame wrote:
    I remember hearing a DR clip (via the iPad app) in which Dave stated that you should only spend 50% of household income on purchasing a new car.

    I think you must have mis-heard Dave Ramsey. He has said several times that you should not own boats, cars, motorcycles, etc. whose value exceeds 50% of your annual income. He has also said several times that unless your have a net worth of a million dollars or more you should not buy a brand new car, you should buy a 2 year old or older, let someone else take the butt kicking in depreciation.

    So unless Dave happen to be talking to a multi-millionare in the clip you are referring to, you must have mis-understood him.
  • YabusameYabusame Posts: 172Member
    Hi everyone,

    First things first... thanks for all the replies. Dpandslemmen was correct, I had forgotten that DR had mentioned that the total value of transport owned (car, speed boats, motorcycles, etc) should not exceed 50% of annual income. I was thinking about my original question during a fitness session and I guess I forgot what DR actually said. Thanks for that reminder.

    OK, so all transport owned should not exceed 50% of annual income. How does that deal with depreciation?

    Let's see if I've got DRs suggestion correct: I own a motorcycle (which is depreciating) and a car (which would be traded against another car). If I subtract the original cost of the motorcycle from 50% of my annual income, I have a number that equals what DR would recommend as my MAXIMUM spend on a replacement car. Example (numbers are fictitious):
      (Annual Salary / 2) - Motorcycle Purchase Price = Maximum Spend for Car
      (£50,000 / 2) - £10,000 = £15,000

    Following DRs plan, if my motorcycle purchase price was £10,000 then, according to the above calculation, I now have a maximum of £15,000 to spend on a car. Of course, I have to subtract the amount I would get from my current car as a trade-in which would then give me a total of how much cash needs to be saved.

    How often does DR suggest replacing the car? Or doesn't he care how often just so long as my total owned transport does not exceed 50% of annual income?

    Am I correct in thinking that the purchase price is part of the calculation and not the current value?

    As an aside, I have only ever bought a new car once. The first car I owned (20 years ago) was brand new and that was because my parents pushed me into it. Every car since has been used. Most have been paid in cash though my most recent was on a credit card (transferred to 0% APR) because I was in a car accident and my car was written off. Obviously, I wasn't planning to replace my car so soon so I had no replacement funds in place at the time.

    Don't worry folks, not planning on buying a replacement car just yet, just wanting to get my head around DRs recommendations and see how that would fit into my budget and overall plans. Its funny what you start thinking about when on a 5 mile speed march :D
  • dpandslemmendpandslemmen Posts: 196Member
    Yabusame wrote:
    Hi everyone,

    First things first... thanks for all the replies. Dpandslemmen was correct, I had forgotten that DR had mentioned that the total value of transport owned (car, speed boats, motorcycles, etc) should not exceed 50% of annual income. I was thinking about my original question during a fitness session and I guess I forgot what DR actually said. Thanks for that reminder.

    OK, so all transport owned should not exceed 50% of annual income. How does that deal with depreciation?

    I think Dave Ramsey's whole point here is not to tie up a large percentage of your income in items that lose value as they age.
    Yabusame wrote:
    How often does DR suggest replacing the car? Or doesn't he care how often just so long as my total owned transport does not exceed 50% of annual income?

    I have not heard him give an actual schedule or say to replace your vehicle after XX number of years. I do remember him saying most of the time it is cheaper to fix than replace, but there comes a time where the hassle factor of consently getting the car repaired out ways the expense of getting a different used vehicle.
    Yabusame wrote:
    Let's see if I've got DRs suggestion correct: I own a motorcycle (which is depreciating) and a car (which would be traded against another car). If I subtract the original cost of the motorcycle from 50% of my annual income, I have a number that equals what DR would recommend as my MAXIMUM spend on a replacement car.

    I guess that my be one way to mathmatically represent Dave Ramsey's "rule of thumb". I would suggest that you not consigntrate too much on the Dave Ramsey math but if you have a goal (or need) to have a Motorcycle in X number of years, or if you feel your current vehicle will no longer be road worthly in X number of years, then you could start working a replacement budget now. For example if average vehicle in your area is £15,000 and you estimate that you will need to replace your current vehicle in 4 years (or 48 months). Then you could budget £313 a month to set aside to pay cash for the Vechile. You could continue to save until you reach £15,000 and then if the Current Vehicle 4 years from now does not need to be replaced you can just let the money sit there until such time that it does.

    I do not believe there is necessaryly a right or wrong solution here. But the fact that you are thinking about this ahead of time is great.
  • LunaLuna Posts: 3,533Member, Beta Tester
    It's true about thoughts that come when exercising. I have some brilliant thoughts while out on my bike rides, but it's pretty hard to write them down at the time, so I let them be and if I remember them great, if not, it was part of the process and that's okay, too.

    Glad you figured out the car replacement issue. The discussion was quite educational for me. I have not read much DR, but will go to the library soon to check out his book. Heaven's, I wouldn't actually buy it!
  • bosynabbosynab Posts: 28Member
    Yabusame wrote:
    How often does DR suggest replacing the car? Or doesn't he care how often just so long as my total owned transport does not exceed 50% of annual income?

    I think he would care how often you replace a car. It depends where you are in the baby step. I'm pretty sure he'd be upset if you were using the 50% rule if you are still in baby step 2 (paying off debt). He probably wouldn't want you to replace your car unless you're just finished baby step 3 (fully funded emergency fund), otherwise he'd just tell you to buy a $1000-$2000 car that will suffice to get you around. That's the general impression I've gotten from listening to his show.

    And to be honest, Ramsey is great, but he is using general guidelines and it might not fit your situation. You should think about financial decisions based on your unique situations.

    I think the following questions may help you (at least it helped me)
    1) Are you still in debt? If so, can you really afford a $10-15K car or should you buy a $5-6K car?
    2) Do you really need a car (or is it just something you want)?
    Where I live, I can actually get by without one. I've started walking and talking public transportation and I'm surprised how much I like it (because I enjoy driving).
    3) Why are you replacing a car? To keep up with the Joneses? Because the car is no longer working/safe/expensive to keep?
    For me I've made up my mind to scrap my car once it needs it's next repair (if it's more than $500). My car is actually worth about $1500 and it's 12 years old! As noted above, for now I'm not going to replace it. If I did need to replace it, I'd look for one that would fit my budget. I think each car and situation is different, maybe you can just keep fixing it (cars after all can last a long time these days).

    In your posts, I believe you just recently bought a new car. I would seriously consider holding on to it for close to 10 years. If you bought a good one, it'll easily last that long. So I wouldn't save for a replacement car and would just tackle my debt (if you had any) or my mortgage.

    If you buy a car, do not buy it on credit (no matter what the interest rate is), buy it with cash. Dave would rip into you for being the car on credit.
  • ajallenajallen Posts: 25Member
    I have always subscribed to the "lets replace the car after three years" mentality with new loans and new finance to go along with it.

    To cap it all off,this last year (before YNAB i might add) I signed up to a balloon finance deal on my (nearly) new Ford Focus. It means that I am tied in to refinancing every three years unless I do something.

    Therefore, I now propose to pay them the Guaranteed Future Value at the end of the three year period (about £3,500), effectively buy the car from them at that point and then keep it.

    I must have had "mug" tattooed on my forehead whilst signing up for this! In fact I know why I did it - I just always assumed a loan is necessary to finance a car. If I need a loan anyway, I may as well go for a deal which appears to give me a higher part ex value at the end. Unbelievable what your thought processes can be before you see the light! :roll:

    Andy
  • dpandslemmendpandslemmen Posts: 196Member
    bosynab wrote:
    And to be honest, Ramsey is great, but he is using general guidelines and it might not fit your situation. You should think about financial decisions based on your unique situations.

    Sometimes I can't get the words out that I want to say, I totally agree with the above statement.
  • YabusameYabusame Posts: 172Member
    All, my original question was so I could learn what DR thinks about replacing a car. It had nothing to do with my own situation at this time. Just wanted to improve my knowledge is all. Of course, everything that is recommended has to be filtered through one's own circumstances.

    Thanks for the responses, I was just wanting DRs take on all this.
  • Turf_HackerTurf_Hacker Posts: 6,373Member, Moderator, YNAB Team, Beta Tester
    Yabusame, while I haven't seen anything on your precise question perhaps this article on Dave Ramsey's site will help: http://www.daveramsey.com/articles/article/articleID/drive-free/category/lifeandmoney_automobiles/

    When it comes to the repair vs. replace question, I think many people use the wrong comparison. Many want to compare the cost of repair to the "value" (i.e., KBB value - pick your favorite of the several provided) of the current (and hopefully paid for) vehicle. I think the right comparison is "how much will it cost to repair the current vehicle" against "how much will it cost to replace the current vehicle".

    I recognize that there are limits to this, especially if the current vehicle starts to experience a greatly increased rate of needed repairs...
  • ishtarishtar Posts: 1,078Member, Beta Tester
    When it comes to the repair vs. replace question, I think many people use the wrong comparison. Many want to compare the cost of repair to the "value" (i.e., KBB value - pick your favorite of the several provided) of the current (and hopefully paid for) vehicle. I think the right comparison is "how much will it cost to repair the current vehicle" against "how much will it cost to replace the current vehicle"...

    I recently went through this.

    My truck (1992 GMC Sonoma, 168,000 miles) had a lot wrong with it.

    Two weeks ago, the engine started acting even stranger than was "normal" for him (his name is Bernie - yes, I name my vehicles).

    When I listed out all the problems, repairs were going to be up in the $2k+ range (heck, maybe in the $5k range, if I tried to fix everything).

    A friend had a car for sale for $1500. Older than the truck, but in good shape and only 58,000 miles.

    No brainer. Bought the car (his name is Stanley).

    I know I'm not in a position to finance a newer vehicle, but I do need some form of transportation.

    Ishtar
  • PatzerPatzer Posts: 3,794Member, Beta Tester
    When it comes to the repair vs. replace question, I think many people use the wrong comparison. Many want to compare the cost of repair to the "value" (i.e., KBB value - pick your favorite of the several provided) of the current (and hopefully paid for) vehicle. I think the right comparison is "how much will it cost to repair the current vehicle" against "how much will it cost to replace the current vehicle".

    More precisely, the financial comparison is between "how much will it cost to repair and operate this vehicle" versus "how much will it cost to replace the current vehicle and operate the replacement." An expectation that there will be ongoing repair needs adds to the operating cost of the current vehicle, and makes the replacement look better.

    Having said that, I don't think I've ever waited until the pure financial answer says to replace. There's an additional hassle factor as an older vehicle becomes less reliable and/or requires more down time for maintenance. I've never been able to put a dollar value on the hassle factor, but it's been the deciding factor in most of my non-emergency (read: existing car is still drivable) car replacements.

    Patzer
  • JaxiaJaxia Posts: 235Member, Beta Tester
    I came across this link on Get Rich Slowly recently:
    http://www.getrichslowly.org/blog/2011/ ... -for-2011/

    It's about Consumer Reports, but I really liked it for its links at the bottom.

    Particularly, this link on when to get rid of a junker car:

    http://ask.metafilter.com/36130/Fix-it-or-junk-it

    And this one on Dave Ramsey's idea of "Drive Free, Retire Rich":
    http://www.getrichslowly.org/blog/2007/ ... tire-rich/

    "You want a brand-new sports car that would normally cost you $475 a month. The car you’re driving now is worth around $1,500. If you take that $475 and pay yourself instead of paying the dealer, you’ll have $4,750 in just ten months. Add that to the $1,500 you can get for your current car, and you can pay cash for a used $6,250 car. That’s a major upgrade in car in just ten months — without owing the bank a dime!

    But let’s keep going. If you kept saving at that rate, you’d have another $4,750 in another ten months. Chances are, less than a year later, you could sell your $6,250 car for about what you paid for it. This means that you can step up again — with cash — into an excellent $11,000 used car just twenty months from today. Not bad!"
  • philospher77philospher77 Posts: 144Member
    All I will say is that this entire thread has me starting a "Car Replacement" category. I just bought a new-to-me car (2006 Scion xB), because of a change in lifestyle (got a second greyhound, and while one may fit in a Celica's backseat, 2 was definitely NOT going to work), so have no plans on changing cars soon, but that means I can start saving smaller amounts now so that when I do need to replace the car I will have the cash to do so. Thanks for poking me into doing this!
  • maryeamaryea Posts: 587Member
    I think the percentage Dave recommends is 25% not 50% but I don't remember whether that is based on your net yearly income or even perhaps monthly income or the gross of either of those?? Anyway, we are saving to pay cash for our next car...we are currently driving an 18 year old very basic Ford Escort which we bought used (2 years old). It runs fine but we'd like a little nicer (more comfortable) car as we want to start making longer car trips and also who knows how long it will run well. We plan on keeping it as my dh's fishing car if it still runs, so we will not have a trade in. We normally buy new vehicles and drive them about ten years, but our last new car was wrecked and we had to go with what we could afford at the time. Since we've had this car we have been busy getting out of debt and building our buffer and EF. We have followed most of Dave's guidelines but we do make our own decisions and though we plan on paying cash, I suspect we will again buy a new car and drive it at least ten years. We will try not to go over 25% of our net income but also suspect we will a little. Right now we only have a little over $6000 in our car replacement fund and are trying to sell some assets to hopefully cover the rest.
  • CletcCletc Posts: 77Member
    Yabusame wrote:

    Does anyone know how often a car should be replaced, according to Dave Ramsey?
    Does Dave say it should be every 5, 10 or 15 years (or other)?

    He doesn't say.

    Which BS# are you in?
  • YabusameYabusame Posts: 172Member
    Cletc wrote:
    Which BS# are you in?

    Hi Cletc, I'm on baby step 2. I was simply asking the original question about purchasing a car because I was day dreaming when out on a speed-walk and couldn't remember what DR recommended. Not planning on buying a new car, though I do have a car for sale.
  • only120xsonly120xs Posts: 164Member
    This is an interesting discussion to me (since I've never read any DR). Obviously, this train of thought lends itself to owning older vehicles...but what if you're the type of person that wants something newer every few years? Obviously you'll spend more money overall, but I'm curious to peoples' opinions of leasing, and perhaps leasing vs. buy 2yr old used & trade up after 3yrs.
  • PatzerPatzer Posts: 3,794Member, Beta Tester
    only120xs wrote:
    This is an interesting discussion to me (since I've never read any DR). Obviously, this train of thought lends itself to owning older vehicles...but what if you're the type of person that wants something newer every few years? Obviously you'll spend more money overall, but I'm curious to peoples' opinions of leasing, and perhaps leasing vs. buy 2yr old used & trade up after 3yrs.

    Either leasing or trading cars every 3 years will result in spending more money than buying a car and making it last for 10 years. The whole idea of replacing the car every 3 years is built on one of two assumptions:

    a) You drive so many miles that you wear out a car in 3 years, or
    b) You get tired of your existing car and want a new/different one frequently.

    In case a), leasing will be extremely expensive because there will be mileage penalties. Your best bet is to identify the least costly car that will last 3 years under your driving conditions, and buy it.

    In case b), you're going to spend a lot more money on cars than Dave would approve of because you simply want to replace them regularly. That's fine if you have enough money and cars are a big priority in your budget; but if you're in that position, I don't have much to say to you. My priorities are different.

    If you want to have a car as transportation, and you're not driving so much that you know it will wear out quickly, the most important thing you can do to hold costs down is keep the same car for as long as possible. My estimation period is 10 years, but I'll be happy if I can make my car last longer than that. Past cars have lasted 8 years (used), 12 years (new), 4 years (used, donated by my parents), 4 years (used, totaled by Bambi's mother), and 5 years (used, later dedicated to daughter's use, and totaled by an uninsured motorist). Each of these cars lasted more than 10 years beyond its model year. I find the idea of trading in a 5 year old car that doesn't have maintenance issues incomprehensible.

    Patzer
  • Turf_HackerTurf_Hacker Posts: 6,373Member, Moderator, YNAB Team, Beta Tester
    For more information about Dave Ramsey and cars, check out http://www.daveramsey.com/articles/arti ... tomobiles/.

    Especially see this article: http://www.daveramsey.com/article/the-t ... tomobiles/

    While you can argue about the exact numbers that should be used (amount to save per month, rates of return, etc), I believe the overall concept is sound. Basically, you buy a super cheap car (with cash!) to get started and save what you would have been spending on a car payment. After about a year, you will have a sizeable chunk of cash you can add to the trade in value of the cheap car to purchase a more expensive (presumably newer and potentially more reliable) and pay cash. Continue to save the same amount you would have been paying as a car payment, and you can periodically purchase a new to you used car. Obviously, the longer you wait in between purchases the more cash you will accumulate.
  • katsmeowkatsmeow Posts: 197Member
    I find the idea of trading in a 5 year old car that doesn't have maintenance issues incomprehensible.

    I think there are other situations. I recall when my son was born...I was driving a 2 seater car. We needed a more family oriented vehicle.

    Basically, sometimes situations and needs change. I bought a Prius a few years ago when I was commuting a long driving distance and liked the gas mileage. It has been a good car and runs fine. But, we now own more dogs than we owned when I bought it and I feel uncomfortable having a vehicle where I could not get a crate in to transport even a couple of dogs. I remember this being a problem for some families the last time we had a hurricane in the area. They had one vehicle that could transport some dogs but the other couldn't so they couldn't transport all of them. So I'm pondering a new vehicle that would meet my current needs (I have semi-retired and now only drive to work once a week so the gas mileage isn't that important). (We won't sell or trade in the Prius...will probably keep it for our son to drive). We won't take out a loan to buy something else. (FWIW, our other vehicle is 6 years old with almost 200k miles on and we have no plans to sell or trade it. The last vehicle we had before that we sold at a little over 200k miles (when we got the Prius). The one before that is now 12 years old and we gave to our other son so generally we do keep vehicles a long time).
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