Joanne Muller over at Forbes did some interesting digging on the car buying habits of Americans. Less than 40% of rich people (defined in this case as those making $250k+) actually buy luxury cars. And about 8% of people earning less than six-figures do. Now that doesn’t sound all that crazy but Thomas Stanley extrapolated a little bit more from those numbers:

I estimate that there are 2.5 million households or nearly 2.2% of the total that have annual realized incomes of $250,000 or more. Using Ms. Muller’s estimates that 39% of “the rich” buy luxury brands, one can estimate the number who do so, approximately 975,000. Ah, but this population is much smaller than those households who drive prestige makes but have annual incomes under $100,000. About 30 million households have annual incomes in the $50,000 to under $100,000 bracket alone. Translated: 8% of 30 million = 2.4 million who are buying luxury cars but are not in the so-called “rich” category. This population is nearly 2.5 times the size of the high income/luxury vehicle buyer.

In other words, most of the people buying luxury cars make less than $100,000 a year. That alone is interesting but we can go back into the numbers and learn more.

Dr. Stanley discusses in his post that the average price paid for a car by a millionaire is just over $30 grand. For the decamillionaire: $40 grand. So when someones wealth increases by factors, their spending on vehicles increases by fractions. That means that at some point on the wealth stream we stop spending more on our cars. But with so many people buying luxury brands with lower incomes it’s clear that until we reach that point, we’re overspending on cars. It sounds like that many people are faking being rich, until they actually are. Then they scale back.

This implies two things about rich people:

  • After a certain point projecting status becomes less important and money is spent on things with more value (maybe a second home, private school for the grandkids, charity).
  • Once we cross a certain point we start saving a greater percentage of our incomes

These two things are not mutually exclusive.

But what does it all mean? These numbers tell me a story about people that live beyond their means, and it’s not just with cars. It’s with purses, vacations, clothes, jewelry, food and even gifts. Most displays of economic status are not likely to be proportionate to the actual status. It is only and indicator of willingness to pay.

Personal Car Advice:

Should you be the type that struggles with figuring out exactly how much money to put towards a car, here’s my little formula. Take your total household income and subtract out any debt payments that aren’t for a mortgage. Take half of that and you’ll have the total maximum value one should ever have for their vehicles. An example is in order.

Say your household makes $90k and after student loan and credit card payments you clear $80k. Half of that is $40k so you should never have cars totaling in value beyond that. For a family with two adults that’s two cars worth $20k each. That is not to be confused always having cars worth that much. Each car should be owned for at least five years and new purchases should have at least 50% down and paid off within 2 years.  Buy a car where you can do that. Get all that?

Now, spending more than $30k on any one car should be considered a luxury purchase and made in all cash. If you can’t swing those things then you can’t afford the car you want. If you can’t follow all that definitely just buy a car that costs 25% of your income, all cash.

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categories: cars, loans, personal finance