If there's one thing that people often spend too much money on (despite realising that it's a horribly depreciating "asset"), it's a car.
Today I'll introduce a rule of thumb to suggest how much car your finances indicate you can afford.
From a previous post, you should have an idea of your Net Worth. The figure I use for car spending is 2.5% of that (simply divide your Net Worth by 40). For many people (including me!), this is a very low figure and can be hard to achieve. I have broken it a little because I have only just started out and hence have a fairly modest Net Worth. [UPDATE Sept 2017 - OK, I've broken this rule a little more because I'm young, have no children and no debt, so I'm living a little! More importantly though, I'm still following the investment rule described in another post, mostly by having very little "stuff".]
Interestingly, the "average" UK household also appears to use this rule, albeit accidentally. (They break many others though as we will see in later posts!). According to the ONS, in 2008, the average UK household Net Worth was £204,000, of which £5000 was a car (or cars). Hey presto, the 2.5% Rule. I must admit, I was expecting more, but the data I could find from the DfT also supports this figure, stating that the average age of cars registered in the UK is increasing and currently stands at 7 years old.
The figures for the average UK household are quite interesting and we'll be going through them in a later post to see what they are doing right and also wrong. So far, they are doing well by not spending too much on a car.
The other thought I had while sitting in traffic on my way back from work the other day was this: People seem to want to spend as little time as possible inside something they often want to spend as much money on as possible...