Whats the right way to handle your finances?
1 comments
There is no universal answer, and I think the criteria change somewhat on where you are in your life and your current and short-term expected income brackets.
Generally speaking, a car is never an investment. It's a rapidly depreciating utility assest. However, for some of us a car is also an entertainment item, and we get a large amount of pleasure from owning and driving a vehicle that makes the drive fun.
Some of my rules of thumb (and these sort of have to be adjusted for your location, and inflation over time).
A "basic" salary, meaning you can eek out a not-intolerable living, is equal to 1x your current age. At this income level you can mostly survive without a lot of frills.
A "good" salary is 2x your income level. Here you can often look at buying a modest house and maybe a new or 1 year old reliable middle-class car. At much less than this amount it is probably unwise for you to take on any significant debt.
A salary of 3x your age will generally put you into the upper 5-10% income bracket, and if you manage your funds with a little bit of logic you should be able to make significant contributions to a retirement fund, a savings slush fund, own a decent house and have a luxury(ish) type of car.
For most of us in tech jobs, making a salary of 3x your age isn't difficult or unheard of at all.
If you're going to carry a traditional mortgage, you can probably afford a house that is about 5x your current income level. This is one place, IMO, where if you have a semi-predictable career growth potential you can go to 8x, especially if you're younger and expect your income increases to significantly outpace inflation for the next few years (again, not uncommon in the early stages of a tech career).
If you plan to keep your car for 5-6 years, then .6x-1x your income is usually manageable in terms of a vehicle purchase price, scaling towards the higher end as your salary increases.
As an example:
25 years old, make 50K. That would be about 30K after taxes, or $2500/mo. A .7x car would be a 35000 vehicle. 0 down financing would be 686/mo over 5 years with an average interest rate. A 5x house would be $250,000 (yes, not a lot in some places), which on a 30 year loan with 20% down and taxes/etc. rolled in to the monthly payment puts you right around $1100/mo. So your car and home eat up 1800 of your 2500/mo. Another 250 for utilities and 300 for food, and you're bumping up at about 2350/mo. The other 150 would be for a small amount of savings and incidentals. It's obviously very tight, but the idea is that your salary is also going to be increasing over short time while your major expenses (car, home) stay mostly fixed. Buying a cheaper vehicle (a .6x or $30000 car)(or financing a lesser amount) would be a wise thing to do at that stage if you weren't confident about future job opportunities.
Again, these rules of thumb might not work in San Francisco, or if your career is going to be in the dog grooming industry. But for most non-outrageous cost of living places for someone who has good career potential it is, IME, a good beginning estimation point.
Generally speaking, a car is never an investment. It's a rapidly depreciating utility assest. However, for some of us a car is also an entertainment item, and we get a large amount of pleasure from owning and driving a vehicle that makes the drive fun.
Some of my rules of thumb (and these sort of have to be adjusted for your location, and inflation over time).
A "basic" salary, meaning you can eek out a not-intolerable living, is equal to 1x your current age. At this income level you can mostly survive without a lot of frills.
A "good" salary is 2x your income level. Here you can often look at buying a modest house and maybe a new or 1 year old reliable middle-class car. At much less than this amount it is probably unwise for you to take on any significant debt.
A salary of 3x your age will generally put you into the upper 5-10% income bracket, and if you manage your funds with a little bit of logic you should be able to make significant contributions to a retirement fund, a savings slush fund, own a decent house and have a luxury(ish) type of car.
For most of us in tech jobs, making a salary of 3x your age isn't difficult or unheard of at all.
If you're going to carry a traditional mortgage, you can probably afford a house that is about 5x your current income level. This is one place, IMO, where if you have a semi-predictable career growth potential you can go to 8x, especially if you're younger and expect your income increases to significantly outpace inflation for the next few years (again, not uncommon in the early stages of a tech career).
If you plan to keep your car for 5-6 years, then .6x-1x your income is usually manageable in terms of a vehicle purchase price, scaling towards the higher end as your salary increases.
As an example:
25 years old, make 50K. That would be about 30K after taxes, or $2500/mo. A .7x car would be a 35000 vehicle. 0 down financing would be 686/mo over 5 years with an average interest rate. A 5x house would be $250,000 (yes, not a lot in some places), which on a 30 year loan with 20% down and taxes/etc. rolled in to the monthly payment puts you right around $1100/mo. So your car and home eat up 1800 of your 2500/mo. Another 250 for utilities and 300 for food, and you're bumping up at about 2350/mo. The other 150 would be for a small amount of savings and incidentals. It's obviously very tight, but the idea is that your salary is also going to be increasing over short time while your major expenses (car, home) stay mostly fixed. Buying a cheaper vehicle (a .6x or $30000 car)(or financing a lesser amount) would be a wise thing to do at that stage if you weren't confident about future job opportunities.
Again, these rules of thumb might not work in San Francisco, or if your career is going to be in the dog grooming industry. But for most non-outrageous cost of living places for someone who has good career potential it is, IME, a good beginning estimation point.
Robert Kiyosaki, Author of Rich Dad Poor Dad , seems to use credit to build wealth. I haven't studied his ways nearly as much.
I've been out of college and working for about a year, and I pay all my bills, including my student loans.
But I'm hung up on the thought of taking a small loan to buy a vehicle that I'd love driving. (Because I love driving, its not just point a-b, its the adventure in between, the experience).
Now of course this comes down to my conscience, and my own choice. I just want to hear what you think.
(the psychoanalysis of this will go : "You're just looking for someone else's opinion to verify that what you want is okay to do, thereby shifting the blame if something goes wrong and not leaving you with responsibility in your mind".) Actually I'm looking for a plan of action to get what I desire.
Also, lets touch on personal gratification. How do you judge if you deserve something or not?
Thanks a lot for your time and attention.