How Much Car Can I Afford (20/4/10 Rule)

welcome back to whiteboard finance my name is Marco and I'm here to help you master your money and build your wealth today we're talking about the 2410 rule and how it applies to buying a car so if you came from my how cars keep you broke video you'll know that I'm a big fan of just buying cars with cash and investing what would have been your car payment and some sort of investment vehicle that way it grows over time and you can just buy your next car with cash again however I got a lot of positive feedback from that video but there are a lot of people that commented and said hey Marco I can't afford to buy a car with cash how do I actually a finance a car or what's the best way to finance a car so let's take a look at what this 2410 rule is okay so we have twenty four and ten but what do these numbers actually mean or represent so the twenty is your down payment so twenty percent should go towards the down payment of the car so if the car for easy numbers is twenty thousand dollars four thousand dollars should be what you have is a down payment if you don't have four thousand dollars you know you need to decrease the price of the car so the four is your maximum term okay so this is the maximum loan amount in years so this is talking about your loan should be no more than four years aka forty eight months okay and then ten what is ten mean 10 means 10 percent of your total monthly income should go towards the cost of this car including maintenance and gas and all the good stuff that comes with owning a car so really you're trying to keep it to ten percent of your total monthly income encompassing everything that involves this vehicle some people are a little bit less strict with that some people are more strict with that so let's take a look at a real-life example of how this would apply to John the car buyer okay John the car buyer is someone who makes sixty thousand dollars a year you divide that by 12 which gets you five thousand dollars a month okay you guys see this okay and then obviously if you take ten percent of that going back to our 10 percent rule you know that John is going to be working with a budget of $500 a month okay so let's go through a real-life scenario where John is looking at a vehicle that costs $25,000 okay so I'm gonna break this down in two scenarios you guys that way it's gonna be easy to follow and you can see an apples to apples comparison so the car cost 25 grand in this scenario John is going to be putting down zero so zero for his down payment so he's financing $25,000 I went on Bank rate and I looked at used car rates right now and they're averaging right about four point seven percent he's going to finance this vehicle and break the rule and he's actually gonna finance it for 60 months his payment is going to be 468 a month and then the interest that he's paying over the course of this 60 month is going to be $3,100 okay so that's scenario 1 let's label that scenario one scenario two you know that the car is 25 grand however in this case John is actually going to be putting $5,000 down so he's financing $20,000 he's putting down $5,000 down payment his rate just for apples to apples comparison is going to be the same okay however he's actually going to follow the 4 in the 2410 rule he's gonna be at 48 months okay and then finally his payment is actually going to be lower believe it or not at 4:58 a month and the total amount of interest that he paid on this over the course of these 48 months is going to be one thousand nine hundred and seventy eight dollars okay so what two things stick out at you when you look at these numbers okay the first two things that I notice is that his payment is actually $10 a month less than the person that put no money down and secondly this person John the car buyer in the second scenario is actually shaving a year off of this term okay so not only did he drop the payment by putting down $5,000 he also dropped his loan by 12 months so this brings me to my next point he can actually start saving this 458 a month while still owning the car outright so this is kind of gonna create kind of like a hybrid from my last video if you take 458 a month times 12 that's the year that he has no car payment that actually comes out to be right around five thousand four hundred and ninety six dollars okay so what I want to do is I want to take this scenario of him using $5,000 and let's turn this into a hybrid video let's let's take my philosophy from the how cars keep you broke video and actually buy a car with cash using five thousand dollars okay so if John the car buyer takes that five grand okay and buys a car with cash let's just say he buys a beater you know that he's still saving that 458 a month okay so in year two after saving this 458 a month diligently you know he's going to have roughly eleven thousand dollars in the bank okay year three he's going to have roughly sixteen five and then year four he's going to have roughly twenty two thousand dollars okay so all he did was wait four years take the payment he would have been paying it hasn't paid any interest on that money that's going straight to him obviously and in four years he can buy a twenty two thousand dollar car with cash if he wanted to so do you see how powerful it is to just delay a little bit of gratification you know drive a beater yes there's gonna be maintenance expenses that go along with this so it's not gonna be exactly 458 a month however in four years he's driving a pretty nice car in my opinion so either way whether you guys want to use the twenty-four ten rule or whether you want to buy a car with cash and you know just save up the rest of what would have been your payment you can see that this is a pretty good way of buying a car or financing a car if you absolutely have to so either way I hope you got value out of this video these videos take me a little bit of time to make this one's taking me particularly longer and I know there's gonna be a bunch of smart people in the comments saying oh there's maintenance there's this there's that what if a cat crosses the road and he hits the cat and there's tire breaks I mean let's get real guys I can't account for every single scenario in these videos but this is just to get you thinking in the right way okay so it's to give you a little paradigm shift in your mind on understanding how you can own cars for less money so I hope you got value out of this video if you have please share it with one friend and remember guys have a prosperous day [Music]

Channel: Marko - WhiteBoard Finance

Views: 308,401

Rating: 4.8781338 out of 5

Keywords: how much car can I afford, car affordability, how much car can I buy, 20/4/10 rule, car buying financing, how much car can you afford, can you afford a car, how much should i spend on a car, how much should you spend on a car, whiteboard finance

Id: Q5_X36qBceE

Length: 7min 38sec (458 seconds)

Published: Wed May 08 2019

Reddit Comments

[u/NotARussianBotComrad]

Dave Ramsay would say to just buy a $5000 dollar car if he has it in cash and save the $458 a month. I get the idea though