The Net Worth Guideline for Buying Cars
If you're buying a car with cash, the net worth guideline helps ensure you're not tying up too much of your wealth in a depreciating asset. For enthusiasts considering classic or collector vehicles that may retain value differently, this guideline provides a framework to balance automotive passion with financial responsibility.
What is the Net Worth Guideline?
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
Most Cars Are Depreciating Assets
Unlike real estate or investments, most 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. However, classic and collector cars can behave differently, sometimes maintaining or even appreciating in value, which is why enthusiast purchases may justify allocating toward the higher end of this guideline.
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%)
Maintain strong financial reserves and minimize impact on net worth. Ideal if you prioritize building wealth over driving luxury.
Safe (10%)
Balanced and financially prudent. Can accommodate hobby/passion purchases while maintaining financial health.
Stretch (15%)
For enthusiast purchases or vehicles with unusually low depreciation. Consider this if you have strong income and low debt.
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 Enthusiast
Net worth: $2,000,000 | Safe car budget: $200,000
Luxury, performance, and classic vehicles become reasonable options at this wealth level, especially for vehicles that retain value well.
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