The 10% Net Worth Rule for Buying Cars
If you're buying a car with cash, the 10% net worth rule helps ensure you're not tying up too much of your wealth in a depreciating asset.
What is the 10% Net Worth Rule?
The rule states that the total value of all your vehicles should not exceed 10% of your net worth. This includes:
- The car you're planning to buy
- Any other vehicles you own
- Trade-ins and current car values
For example, if your net worth is $500,000, you shouldn't have more than $50,000 tied up in vehicles.
Why This Rule Matters
Cars Are Depreciating Assets
Unlike real estate or investments, cars lose value over time - typically 15-20% per year for the first few years. Spending too much means watching a large chunk of your wealth evaporate.
Opportunity Cost
Money spent on an expensive car could be invested elsewhere. A $50,000 car could instead be a $50,000 investment that grows over time.
Wealth Preservation
The rule helps protect your wealth by preventing you from locking up too much capital in assets that decline in value.
Conservative (5%)
For maximum wealth preservation, keep your vehicle value at or below 5% of net worth. This is ideal if you prioritize building wealth over driving luxury.
Safe (10%)
The standard recommendation. Provides a good balance between enjoying a nice car and maintaining financial health.
Stretch (15%)
The upper limit. Only consider this if you have strong income, low debt, and really value your vehicle.
Calculating Your Net Worth
To use this rule, you need to know your net worth. Calculate it by:
Assets (What You Own)
- Cash and savings
- Investment accounts (401k, IRA, brokerage)
- Real estate equity
- Business value
- Other valuable possessions
Liabilities (What You Owe)
- Mortgage balance
- Student loans
- Credit card debt
- Other loans
Net Worth = Total Assets - Total Liabilities
Real-World Examples
Example 1: Young Professional
Net worth: $100,000 | Safe car budget: $10,000
This person should look at reliable used cars in the $8,000-$12,000 range rather than a new $30,000+ vehicle.
Example 2: Established Family
Net worth: $750,000 | Safe car budget: $75,000
This household can comfortably afford a nice family vehicle or even two moderate cars.
Example 3: High Net Worth
Net worth: $2,000,000 | Safe car budget: $200,000
Luxury and performance vehicles become reasonable options at this wealth level.
Common Mistakes to Avoid
- Overvaluing home equity: Don't count your primary residence as liquid wealth for car purchases
- Ignoring total cost: Remember to include sales tax in your calculations
- Forgetting other vehicles: Include all household vehicles in the calculation
- Lifestyle creep: Just because you can afford 10% doesn't mean you should spend it all
Calculate Your Budget
Use our calculator to see how much car you can afford based on your net worth, with options for conservative, safe, and stretch budgets.
Calculate Based on Net Worth