Ramit Sethi: Can You Afford A New Car?

Use the 20-4-10 rule, suggests self-made millionaire Ramit Sethi, to determine whether you can actually afford to buy a new car.

A lot of experts will tell you that buying a new car is a terrible investment. But buying a new car can be important or valuable to you for other reasons, says Ramit Sethi, the best-selling author of "I Will Teach You to be Rich."

"You might have heard a lot of people telling you don't ever buy a new car, [it's] a huge waste of money," Sethi says. "I disagree with that. I think there are a lot of reasons to buy a new car."

Maybe you want something reliable that you won't have to constantly take in for repairs. Maybe you want the latest safety or fuel efficiency technology. Or maybe you just want to reward yourself by buying something shiny and exciting.

Whatever your reasons, if you are considering buying a new car, Sethi tells CNBC Make It, there's one big question to ask yourself: Can you afford it?

Running the numbers to determine the answer to that question can be complicated, so Sethi offers what he calls the "20-4-10 rule." Here's how it works.

Put 20 percent down

If you're not buying the car outright, you'll need to secure some financing. Most lenders will require a down payment, and Sethi recommends putting down 20 percent.

If you want to purchase a car with a sticker price of $30,000, then, you'll need $6,000 for a down payment.

Take a four-year loan

The most common term for an auto loan is currently 72 months, or about six years, according to Edmunds. But that's too long, according to Sethi.

Instead, look for a loan with a term of four years (48 months) or less. "That way you minimize interest," Sethi says.

If you can't manage the loan payments of a shorter loan, you need to find a cheaper car.

Use only 10 percent of your income

Finally, Sethi says, you should only put 10 percent, max, of your gross monthly income toward car expenses. So back to that $30,000 car and $50,000 income example. Under the 20-4-10 rule, you should only be spending about $400 a month, total, on the vehicle and related expenses, he says — and that accounts for everything, including gas, insurance, DMV fees, repairs and even fines.

"There are a lot of fees when it comes to buying a car that people don't think about," Sethi says. At one point, he says, his car payment was only $350 a month, but he realized he was paying roughly $1,000 a month when he factored in all the costs (and a few speeding tickets).

"If you stay within those boundaries, you're going be safe to buy the car that you want," Sethi says. "But if you find that you're pushing those limits, then you might be paying too much."

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Want to buy a new car? This simple rule will let you know what you can afford | CNBC Make It.

[cheezybred]

Buy a modest pre owned car until you’re established financially, then drive whatever you want. Jeopardizing financial health and stability for a car is dumb.

[princeataya]

Just buy a pre owned car or used car with less mileage at an auction. Just saying 😉🤔

[amesasw]

I feel like 10% of gross is a lot. But I suppose only 4 years.

I just worry a rule like this could help me justify a very expensive car. For instance it would let me get a $70k new car on a $240k gross salary.

I guess it depends how much you value a car. A $1k car payment is at least 2-4 nice dinners out a month. Or extra cash in a slow month.

[desagriffiths]

What about leasing - is that a good idea?

[munib]

Doesn't help if you're a car guy. I don't buy designer clothes and my rent is proper cheap and I do still save a lot of money.

[mike]

Everybody thinks that a new car is a horrible waste of money in the used cars are some magical thing but used cars are likely going to be more costly repairs so the price difference might not be that much

[tyguy]

Wow, what a bait and switch. Video starts saying he disagrees that buying and new car is a waste of money and then he answers a completely different question about whether you afford a new car. I can afford to throw $100 dollars out the window but that doesn't mean it makes sense.

[neoblackwolf]

Wow so just use common sense wow yeah we definitely need more people too show us how to use common sense, cuz we as a people are too stupid seeing as how common sense is no longer common.

[Slimgoodie]

I thought he drove a 2008 Honda Accord 🤔😂

[redrum]

Just pay a friend to give you a piggy back to work, and go vroom vroom bwwob bwwwobbubwub beep beep. You don't even need insurance. Your welcome!

[Legionar]

With 9.600$ per year (10% - 960$), which is almost the great payment in country I live in (Serbia), you cannot buy a new car, only used car 15-20 year old car.. You can buy a new little town car for yourself (on credit), but if you have a family of 4-5, you need a bigger car, and that is 2-3 times more expensive then you make per year..

So let's cut the chit-chat, your math is good, but only for people who are living in countries like America, Germany, Switzerland or so.. Or, for people who have year payments like you say in your video..

Conclusion: Unfortunately your math suits only the upper class people, who live in countries with good standard..

P.S. Just to be exact, the average salary per year in Serbia for 2020. is 7.920$ (660$ per month).

[atomrts]

Well what do u know I'm the first commentor

[jjw]

don't buy an expnsive car now. buy something cheaper and some bitcoin with the extra money. then get a better car later with the bitcoin