Don’t Be Car Poor

By Dr. Jim Dahle, WCI Founder

Once every year or two, I like to rant about one of my personal finance pet peeves: the amount of money people spend on their cars and how it keeps them from building wealth. It's actually not that big of a problem among high-income professionals, especially those who care at least a little about their finances (like white coat investors).

A much bigger problem is becoming house poor, because even doctors these days are struggling to buy the median home in a high-cost-of-living area. I don't know how a new grad in California or New York can afford a $1.5 million home on a $300,000 income. That's a problem without a great solution, and most solutions involve being house poor, i.e. the cost of your housing dominates your financial picture and prevents you from building wealth. By comparison, the avoidance of being car poor is way easier.

In this post, I'm going to talk about a few guidelines that I think are worth following. If you don't like them, I don't care. If you want to break them, I don't care. If you think they're so bad I shouldn't even mention them on this blog, I don't care about that either—but feel free to argue your case in the comments section. This is my rant, and I'm going to tell you what I think.

The Reason You're Poor Is Sitting in Your Driveway

Yes, doctors can often get away with breaking car-related finance rules and still build wealth with their high income, but I am firmly convinced that the reason most middle-class folks don't retire as millionaires is sitting in their driveway. You see, the difference in annual cost (depreciation, repairs, maintenance, insurance, etc.) between churning a nice, new car every three years (whether buying or leasing) and driving gently used economy cars for 15 years is about $5,000 a year. And $5,000 invested at 8% per year for 40 years is $1.3 million. Drive a beater, get rich.

More information here:

My 27-Year-Old Car Will Make Me a Multimillionaire

4 Guidelines for Your Automobiles

Here are four guidelines to which you should pay attention. These rules of thumb might have exceptions, but that doesn't invalidate their usefulness.

#1 Don't Buy New Until You're a Millionaire

It's worth becoming wealthy first in life before you start living like you're wealthy. Front-load your financial life by living like a resident for 2-5 years after finishing your training. However, that advice doesn't change the fact that new cars are awesome. We've bought two in our lives—one in 2016 (when we were multimillionaires) and one in 2023 (when we were financially independent). They smell great and have all the latest features. They will last longer than used cars, and they can be custom-ordered.

However, driving a new car off a lot is a multi-thousand dollar decision. On average, a new car drops in value about 10% the day you take it home. It depreciates by about 40% over the first five years. You get to avoid that when you buy used. If you're not yet a millionaire, that's probably money that you should instead be using to build wealth by paying down debt or investing. There were some weird supply chain issues that disrupted the typical price gap between new and used during the pandemic, but those are pretty much all resolved at this point.

#2 All Things with Motors Should Be Less Than 50% of Gross Income

Like the previous rule, this one is widely promoted by the Ramsey crew, but I think it's a good one. The value of your cars, boats, RVs, dirt bikes, side-by-sides, snowmobiles, and planes should total up to less than 50% of your gross income. Someone making $30,000 a year and driving a $40,000 truck is the very definition of car poor. It's just as bad if a physician household making $300,000 tries to buy and maintain a $120,000 Model S, a $70,000 Sequoia, and a $150,000 wakeboat. Buy a $60,000 used wakeboat instead and pair it with a $30,000 F-150 and a $22,000 minivan.

#3 Never Have a 5-Figure Car Loan

The first rule of personal finance (Finance 101) is not to carry a balance on a credit card—56% of Americans with credit cards (which is 82% of the population) failed this course. The second rule of personal finance (Finance 102) is not to buy cars on credit. Yet the average loan on a USED car is $36,000 to be paid over 68 months. Used! You can buy new cars for less than $36,000. And who wants to be in debt for a depreciating asset for more than five years? I sure don't. I don't even want your medical school loans to last that long.

I ask my kids all the time, “Do you want to earn interest or pay interest?” They get the answer right every time. I'm not sure what other parents are teaching their kids that it seems normal when they become adults to buy cars on credit.

When it comes to a car, your need is generally something like a $10,000 well-used economy car. That will provide reasonably reliable transportation for a few years while you save up for an upgrade. Anything above that is a want. I understand why someone might borrow for something they absolutely need. However, that doesn't mean they should borrow for something they merely want. I know it's hard for some people to distinguish between needs and wants and that yesterday's luxuries have a way of becoming tomorrow's needs. But there's a huge difference between $10,000 and $36,000.

If you have to buy a car on credit, buy something that costs less than $10,000. You'll never have a five-figure car loan, and you can rapidly wipe out any loan you have and then start saving up for the next car.

#4 A Car Loan Is a One-Time Deal

Just like you should never have a five-figure car loan, you should never have a second one. When you pay off that first sub-$10,000 car loan, just keep right on making those payments. But make them to yourself. Start saving up for your next car. If you can make a $500 car payment, you can save $500 a month for your next car. It's the same amount of money, but one of them pays you interest rather than vice versa. Doctors get paid $20,ooo-$50,000 a month. How long should it really take to save up for a new car?

More information here:

The Cheapest Way to Own a Car

Safety Can Be Used to Justify Anything

People will go to amazing lengths to justify breaking the above rules. Perhaps the most common objection is a petition for the additional safety of a newer or nicer car. The problem (or maybe its usefulness) with the safety argument is that it can be used to buy anything. Every year, new cars have a new safety feature that the prior year's model didn't have. It's actually a pretty interesting history. Look at all the features on cars today:

• Wiper blades
• Turn signals
• Rearview mirrors
• Winter tires
• Safety glass
• Seatbelts
• Airbags
• Shoulder straps
• Automatic shoulder straps
• Studded tires
• Collapsible steering columns
• Side marker lights
• Electronic stability control
• Side impact protection
• Antilock brakes
• Third brake light
• Traction control
• Knee airbags
• Blind spot detection
• Lane departure warning
• Automatic braking
• Anti-skid assistance
• OnStar and other telematics
• Window airbags
• LATCH
• Brake assist
• Adaptive cruise control
• Blind spot warning
• Pedestrian warning
• Cross traffic warning
• Back up cameras
• Forward collision warning
• Lane-keeping assist
• Active head restraints
• Automatic high beams
• Diesel engine exhaust braking
• Tire pressure monitors

There will be something new next year too, I assure you. Are you going to justify a new car just to get one or two of these features that your older car didn't have? Seems financially perilous. There is no end to this. You can also get a professional chauffeur, bulletproof glass, and two other vehicles to escort you if you want. Secret Service-style protection can be hired to protect you from road ragers.

Frankly, though, you'd probably be better off getting rid of call and night shifts, doing more telemedicine, driving more defensively, and moving closer to work if you're really serious about reducing the risk of dying in a car accident.

Churning expensive cars isn't an absolute no-no for high-income professionals, but it's still a bad idea for those looking to build wealth. You don't have to drive a 20-year-old Civic your whole career, but minimizing the cost of your transportation can go a long way to helping you reach your financial goals.

What do you think? What do you drive, and why does that make you better than everyone else? Why are Teslas the best way to safeguard your family, save the planet, go fast, and show off at the same time? Which safety features do you think are worth upgrading for? 

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