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How to Buy A Car | The 20/4/10 Rule Explained

How to Buy A Car | The 20/4/10 Rule Explained


Cars are the most expensive item that we buy
that goes down in value. And we generally start buying them at a pretty
young age. So figuring out how to buy a car the right
way is of the utmost importance to all of our financial futures. Hey everyone, Daniel here and welcome to Next
Level Life a channel where you can learn about Investing, debt, retirement, and many other
general financial education videos because the school’s aren’t going to do it for us. So if any of those topics sound interesting
to you or if you want to learn how to better handle your money and have more financial
freedom be sure to hit that subscribe button and the bell next to my name to be notified
every time I upload a video. So today I thought I would go through a rule
of thumb that I’ve seen thrown around a lot for buying a car. It’s called the 20, 4, 10 rule and in today’s
video, I’m going to talk about what the 20, 4, 10 rule is when it should be used, give
my overall thoughts on the rule, and then talk about some possible alternatives for
saving up for a car. Let’s get started. So what is the 20, 4, 10 rule? Well as I said a moment ago it is a rule of
thumb to help you try and figure out how much you should be spending on a car purchase. It basically goes like this, you must put
at least 20% down on your car, similar to how you would with a home, you must Finance
the car for no more than 4 years, and you must keep the total monthly vehicle expenses
which include the principal and interest payments as well as insurance (and some people also
even include gas), under 10% of your gross income. So, for example, let’s say you had a $60,000
a year household income. This means that your monthly gross income
is about $5,000. If you were to follow the rule of thumb when
looking to buy a new car you would, therefore, need to keep your total monthly vehicle expenses
under $500. On the one hand, this is nice because it does
limit you to a certain extent when buying a new car. It does force you to at least put something
down on the loan and it does shorten the length of the loan, at least in comparison to the
average car loan which is between 5 and 6 years long. This means that your monthly payments on the
car are likely going to be a little bit higher than for someone else buying the same car
but having a longer loan period, so it makes you a little less likely to buy a car that
you can’t truly afford because you see what the payments are going to be. Let’s take a look at an example. Let’s say that John took out a $25,000 car
loan and didn’t follow the 20/4/10 rule, meaning he didn’t put the 20% down on the
car. So he has a $25,000 loan charging him an interest
rate of about 4.4%, which appears to be right about average at the time I’m writing this
script according to bankrate.com. His loan term is 60 months and his monthly
payment is about $465. He pays nearly $2,900 in interest over the
course of the 5-year loan, or a little under $50 a month on average. That’s all fine and good, but what if John
had followed the 20/4/10 rule? His loan would have been for $20,000 because
he would’ve made a $5,000 downpayment and the loan would’ve lasted 4 years instead
of 5. This means that assuming the interest rate
was the same, he would have a monthly payment of $455 (yeah, you heard me right, it’s
actually lower than the previous example!) and would pay about $1,850 in interest. But it gets even better! Because he gets out of debt a full year sooner,
he may be able to take that 5th year (assuming he doesn’t buy a new car) to start saving
toward his next car purchase. If he did that for the 5th year, putting $455
a month in the bank and assuming absolutely no interest whatsoever, he would have $5,460
in his savings account just waiting for his next car. Which is more than enough to make the down
payment he made for his current car. So you can see that it makes a decent amount
of difference. And I think that using this rule is certainly
better than using no rule at all. So if you’re in a situation where you just
don’t really have a guide to use for figuring out how much you should be spending on your
next car then certainly give this rule a look. However, it doesn’t sound like the best rule
to be following, in my opinion, most of the time. Let me explain. While it does limit the amount of time you
are spending in debt with a car loan it doesn’t actually eliminate the need for a car loan
in the first place. Now if you’re in a situation where you absolutely
need to get a new car because your old one is basically not running anymore and you don’t
have much time to plan out your next car purchase because it has to happen very soon then, by
all means, use this rule again it’s better than having no rule at all, but if you do
have a little bit of time in between your next car purchase then ideally what you would
do is in just your current budget so that you can start saving a little money to buy
a decent short term used car in cash. Normally, I like to buy cars from family members
of mine who I know take good care of their vehicles because that way I get a well-maintained
car and they get to make some extra money. I know that not everybody is in a situation
where they can do that so you may just have to go to a used dealer that you trust and
get a car but think of the difference that this makes. Let’s say you were going to follow the 20,
4, 10 rule like John did in the previous example. We’ll even use the same numbers as before,
meaning that John currently has $5,000 in the bank ready to make a downpayment. But, if you were to, instead of making that
down payment, use that money to buy a $5,000 used car and thus eliminate the need to have
a car payment at all, how much of a difference would that make over the next four years (because
remember the rule states you can only finance a vehicle for up to four year)? Just like John’s previous example where
he had a four-year $20,000 loan charging him a 4.4% interest rate, he would have a monthly
payment of $455 a month. And over the course of that loan, he would
pay almost $1,850 and interest. However, if he were to go and get the used
car and not have a car payment he would be able to save that $450 a month towards his
next car purchase. Meaning that every single year that he managed
to keep that used car running his would be able to put away $5,460 towards his next car. Assuming no interest whatsoever. If he had enough time to shop around and found,
just for example say, a good used Toyota for five grand that had maybe a hundred fifty
thousand miles on it and took care of it he might be able to get it to last two, three,
maybe even the full four years depending on how well it was taken care of beforehand. And this isn’t an ad for Toyota and they’re
not sponsoring the video it’s just I know that they are generally known to run pretty
well for a fairly long time if you take care of them. But if the used-car managed to last for 2
years that means he would have roughly $11,000 in savings for his next car purchase. If it lasted 3 years he would have roughly
$16,400 and if it lasted the full 4 years he would have roughly $21,900 for his next
car purchase. Depending on what kind of car he wanted to
buy next that very well might be enough to purchase it in cash. And then he’ll never have a car payment again
and we know how much of a difference that can make in your financial life based on my
how much is that car payment really costing you video that I did earlier on this channel. Now obviously there are other variables that
can come into play when making a car purchase such as resale value and maintenance costs
on a vehicle. But if you’re looking at getting a new car,
I’m assuming that you already have maintenance costs for your current car. Would the used car immediately have more monthly
maintenance costs? Maybe, it depends on what your current costs
are and how good of shape the used car you’re looking at is in. But even if it is, I doubt it is going to
be $400-$500 a month more in maintenance costs than what you’re currently paying. So you may not be able to put away the full
$450 or whatever your own numbers come out to be in your situation every single month,
but you should still be able to get ahead. And I know that some people just don’t like
buying used, my dad was one of them. So I do want to say that this isn’t a long-term
thing, or at least it doesn’t have to be. Again if you’re putting away roughly $450
a month, like in that last example and the first used car lasts you for 2 years. You take care of it while you have it and
after 2 years you sell it for say $2,000. You have saved roughly $11,000 in your two
years of car ownership without a car payment. Meaning that in addition to the cash from
the sale of your car you have nearly $13,000 to spend on your next short-term used car. Let’s say that you put it into something
with a little more resale value, like a Toyota Tacoma (again their not sponsoring this video,
I’m just using it as an example since the Tacoma’s resale value is generally pretty
good if it’s taken care of). You drive that for another 2 years and sell
it for something like $8,000, which let’s be honest is probably being a little conservative
based on what I’m seeing on AutoTrader as I’m writing this script. Meaning that in addition to the $11,000 you
again saved in the last 2 years, you have nearly $19,000 to spend on your next car. And depending on the car you want that may
be about enough to get it in cash. But that’ll do it for me today once again
if you enjoyed this video be sure to subscribe and hit that Bell next to my name so that
you’ll be notified of all my future uploads. I generally upload every single Friday, and
if you have a friend that would be interested in this kind of content be sure to share it
with them and let’s really get this information out there and start our own Financial revolution.

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100 thoughts on “How to Buy A Car | The 20/4/10 Rule Explained

  1. Get FREE Audiobooks and 2 Audible Originals (and support this channel!) with a 30-day Free Trial of Audible: https://amzn.to/2zEFqhT

  2. No no no no no. Stop using loans on something that WILL go down in value and you will pay 5% interest. Save up an emergency fund and buy a car outright when your current one dies. A working car that is a little rough around the edges that is payed for is better than a car payment. Pay very close to the end of the video.

  3. I am not sure if I understand this wrong, but I don't think it's possible to follow this rule where I live.
    I'll crunch some numbers (I'll take round numbers:
    Average gross wage where I live is 1600eur. 10% of that is 160eur which would be the total monthly financing budget.

    The average daily distance for work commuters is about 40km, with 20 working days/month, that would sum up to 800km/month. Now obviously, different cars burn different amount of fuel and older cars are usually less economical, but let's take an unlikely scenario that your car only burns 5eur/100km. So in fuel costs, that is 40eur/month.

    If you want this consumption, you probably need highway ticket (110eur, so lets round it to 120) + 10eur month .

    The insurance, again is different, but let's say it'll cost 300eur, so that's 25/month.

    The technical inspection that you have to do yearly for a smaller veichle will cost ~36eur; +3/month

    This comes with yearly maintenence, let's say this costs somewhere around 240eur, so 20/month

    You are required to have winter tires and if you are smart, you will also have summer tires. Let's say you replace them every 5 years and let's say two sets of tires will cost ~250 each, lets say 500 per 4 years, and round it to +10/month

    Now there are all sorts of other costs that I didn't include, but as you can see, this already sums up to ~70eur/month. Now let's say you have 100eur to finance a car. So if we put this together:

    So at a rate of 4.4% and 100eur monthly payment over 4 years, you can get a loan of 4400eur.
    So a total cost of the car whould me a maximum of 5500eur. Now I am not sure if you can even buy a new car for that money, so the only option is to buy used. Hell, that's hardly enough for a used car, if you want it to run for 4 years.

    Or am I missing something here?

  4. No one actually going to be saving the $445 a month. It great in theory but with so many cool things out there to buy.

  5. So he paid $5K as a down payment, used 48 months instead of 60 months, got "a free year" to save ~$5K for new down payment? What a surprise 😀

  6. For a number of personal values as well as financial reasons try to postpone purchasing a car until car as a service platforms eradicate car ownership in cities

  7. Overall a good video with good explanations. And while I agree a 100% loan is a bad idea, I will contest you in one point you made.

    The $5400 the guy saves by not spending on a loan for a fifth year isn’t much different than if he just kept the $5000 and never put down a down payment. 5 years later they both have $5k. The only important factor in that section is the change in interest costs.

  8. is this video justification for you? i would buy a crashed car repair it bit, mod it bit, fine tune it and drive it and sell it

  9. The sweet spot is buying a car that is 3-6 years old in this 8k to 14k range. IF you can pay cash for it, great. If you have great credit however, then the interest payed doesn't come out to be that much on a 4-5 year loan. By the 3-6 year mark, the car gone down in value enough to be worth it and you will most likely have a good 5-8 years of driving with minimal repair expenses. Then you sell it before all the repairs come. Rinse and repeat

  10. Always buy used and let someone else pay the initial depreciation. If you make payments on anything (car, house, furniture) you should always go for the shortest term possible. Hardest part of life: Only purchase what you need, not your wants.

  11. 2005 Toyota Highlander. Daily driver. Bought new. Now champing at 246k miles and she still reliably get me to work and back every day.

  12. You Americans have it easy, down here in Mexico interest rate for a new car is 13%, car cost is similar as up there in the states and wages here are a joke, I make pretty good money and own a 2017 Prius paid at the end of 2019, thinking of tossing it to buy a 2010 cheap used Toyota so I can be free of monthly payments (and the rest of the money from the Prius sale going to mortgage).

  13. Buy a classic, create an instagram page, get adverts, affiliate, keep the car properly maintained and original with part of your profits, get historical license plate if you can, sell it when it appreciates enough. Buy more. Dont thank me

  14. IF YOUR HOUSEHOLD INCOME IS ONLY $60,000 or less, DO NOT buy a NEW CAR which is a DEPRECIATING asset. In the first four years most cars will depreciate in Geometric Progression, while much of their life is still left in them. Buy a well maintained old Toyota and you have very little to worry about costly repairs. Try to buy one with Electronic Stability Control and a good braking system and you are good to go.

  15. I don’t know anyone was HASN’T financed for 60 or 72 months. My aunt bought a BMW and was ready to put 10-12k down, but she approved for 0.9% and just put no money down and financed for 72 months.

  16. But if you are saving 455$ a month, that is the same as having a 455 monthly payment yeah? Just with 0% interest. So you never escape the payment if you're doing it right.

  17. Start buying oldtimers or youngtimer (older than 20 years). But dont buy the base model, buy the high end. It will go up in value. If you need money you can resell it and make even lore money

  18. Your style of video feels weirdly aggravating – I can't tell you why, maybe it's you speaking too slow/drawing too slow… I'm just more and more pissed off.. so I skipped forward only to get the same information again. Literally the same information given in the fourth minute and the sixth minute.

  19. Financially the best option is buy a 3 – 5 year old car cash, and keep it until it's more expensive to fix than it's worth. Cash so no interest. Cars devalue most in the first few years, so a 3 – 5 year old so the car is cheaper. Cars of this age are often well looked after and regularly serviced to maintain a warranty. Car manufacturers make there cars last around 10 years/100k before expensive failures become likely to occur, so maintenance cost are low.

  20. Well, starting from my average 5,000 dollars a year as industrian enginering in México. A month is around 400. A 10% will be 40 dollars. In 4 years i can reach a $2,400 car. There is no new car for that. I can not follow that rule. I realize that with 60,000 dollars year you just have the life solved. You can even have childrens!! that rule is not even necesary, you can live well with 30% of that 60,000 with 1,500 each month. So there is no problem disposing of 70% of your payment just pay the car in one year and save more $$$. Or buy it instantly just saving 6 months of 70% and pay no interest. So if you earn that 60,000 year it will be fool to ask for a credit.

  21. I cannot even imagine spending 10% of my household income (especially pre-tax as shown here!) on a car!

    My wife and I share a 14 year old Subaru that runs great. We both take the bus to work, and are able to walk to a good portion of our errands and social events. Our car mostly sits in the garage, but is there when we need it, and we don't waste money on trying to make it be more than it needs to be!

  22. Pro tip : pay cash for a 5 year old Toyota Corolla (or a Honda Civic if you don't find one). Make sure to follow standard maintenance schedule (oil, tires etc.) and it will last you years and lower maintenance cost than most cars on the market.

  23. I only buy used. Because I can't afford a car repayment schedule. And yes you have to pay for maintenance. But I have noticed that a 5 year old car with 50k miles has the same kind of failures as the same car in 5 years time at 10 years and 100k miles. I had a Toyota yaris (vits for you in the US) that 76k miles on for a 14 year old car. The exhaust rotted through a year later. Looking at its history. Its exhaust had rotted through at 40k miles at 7 years old. Yet they would have paid way more for it when it was a 3 year old used car.

  24. @3:53 So Where is the 5,000 USD the 1st guy saved on down payment gone??? He could get interest over 5 years for his 5,000 USD too LOL.

  25. The monthly payment is supposed to be taking into account insurance? Then when you buy the used vehicle you cannot save the entire monthly payment because you'll still be paying that insurance

  26. If you don't have the money to pay a car off cash, you should be buying a used car under $10k, no exceptions. If you make $60k a year, you should be able to save up enough money for a used car fairly quickly. Buying a $25-30k car when you only gross $60k is financial stupidity. You are making yourself car poor. People really need to learn to live below their means.

  27. But.. But.. But…
    I save us $20,000 my bank account and my wife will say "There is NO WAY you are spending all that on a car. That is crazy!"

    "But look at the numbers," you say.
    Doesn't matter. It's the animal spirit.

  28. Liquid assets like cash are the best you can have. To spend them on a depreciating asset in full can potentially be a problem. Most car loans are easy and low percentage. However, hospital bills often are not things you can get a loan on and they turn over to collections fast.

  29. The biggest issue is that none of the calculations actually factor in repairs or depreciation. Those 2 items are the biggest issues that vary from vehicle to vehicle. It is extremely rare that a vehicle bought requires no maintenance and then sells for more than it was bought for. Even if you are a mechanic, you must get parts, and you must use time. Time is valuable and is a cost. Especially, if you could be making more by repairing another vehicle rather than at minimum for repairing your own. Cars, in the the end, cost money and the rule is a decent guideline to make things reasonable. There are better ways and worse ways, this is a nice middle of the road. I appreciate the people who produced this vid for the strategy.

  30. I bought a used 2000 civic for $3000 and it lasted 5 years with minimal repairs over that time. Reliable cars and also be very affordable!!

  31. As someone with a big expensive truck, I envy people driving around in 10 year old vehicles. Getting stuck in a huge loan was the dumbest thing I've ever done.

  32. Here's another way to save A LOT of cash. Drive the car for as long as possible until selling it for spare parts which could make you more money than selling the whole car as is. Yes, Toyota or Honda are super reliable vehicles that it will take as long time (except a collision) to get to that spare part point, but you would save on the monthly payments which can be used in other ways too. Perhaps redoing this video with this idea would prove my point. Afterall, we only need a car to get from point A to point B. How you get to your destination depends on how much money you're will to spend on a car.

  33. Best way to buy a car in 2 EASY steps:

    1. Buy in full with cash.

    2. Follow step 1 or don't buy a car, at all! >:^

  34. Why do you base the 10% on the gross income instead of the net. Like in Quebec if you make 60k gross a year it means 40k net after tax. It make a lot of difference and if you calculate even further with insurance and gas 100$+200$ a month it only leaves you 30$ after tax instead of 200$ before tax.

  35. In the US: Ford Edge msrp 29,995$ (26,609€)
    In Finland: Ford Edge msrp 67,692€
    Thats finland for you, we have lower wages and higher tax than most of europe, too

  36. Where the hell are you finding cars for $5k? You can't get even get a decent used car for twice that. I was looking for a used car when you were doing your research, and I couldn't find any car on autotrader or any of the other sites that weren't salvaged or wrecked. The cost of cars is throwing out your idea of how to buy a car.

  37. All these dumb rules will keep people poor forever. If you can’t pay for a car in cash then you can’t afford it.

  38. While I completely agree with the idea of this, in my experience with used junkers (aka anything over 100k miles) you start seeing a lot of maintenance costs. And if you need a big repair they are often 3K to do. A friend of mine had a car with 125k miles, a well taken care of corolla (we assume as she got it used) and it needed a ton of repairs she could do or spend that money on a down payment on a new car, or spend a bit more than that and get a good used car. Granted she got many years out of the car, the biggest problem with the high mileage market is that there are very often multiple owners and it’s rare to find something you can trust in good shape to last 2-4 years without repairs. While it is certainly not likely 5k a year, it is a big hassle to lose your time because of a breakdown or your car in the shop. If you have to miss work because of car issues that’s money lost too.

    I try to get a car that has under 60k miles and costs about 10k. Put about 50% down and finance the rest so I have a low monthly payment then put whatever extra money a month I can on it. This way if there is an emergency I’m not worried about dipping into savings/investments (which gains interest too, sometimes more than 4.4%) and can just make the normal payment on the car. My last car I paid off way before the loan was finished because I got a raise. And the car didn’t even have 100k miles on it before it was totaled in a nasty wreck. I could have gotten another 5-6 years on it with no monthly payments. Vs the 4 years in this example. And if you paid a new car off in 4 years damn that would last even longer. And the junker wouldn’t give you payments right away but with higher maintenance/breakdown costs and the need to replace in 4 years vs 10-15 years it just doesn’t seem viable. An oil change and tire rotation is maybe 200/year for 5 years vs that 200/year plus part of the car breaking for 2-3k every 2 years or more often. It’s much more complicated than you suggest in your video. It’s a huge risk to get a car with that many miles. Always buy used, but less than 60k miles do you get a decent life out of it.

  39. I highly suggest to buy car in value of your monthly salary. If your salary is not big enough for a decent car, you should be focusing on increasing your salary instead of spending it 🙂

  40. I'm sorry, who the heck is buying a $25,000 car? I make 60K and there is no way, I'd be paying $500 a month for a car ever! Don't buy a brand new car, they depreciate in value to instant you drive them off the lot. Don't buy a car if your old car runs, even if you put $1200 a year into your car in maintenance, that's still less than $100 a month. Keep your car till the wheels fall off. 10 years at least. Get the most out of it and save your money so that you can buy a car in cash when the time comes that you absolutely have to buy again. And if you're paying more than $250 a month on a car note… you're paying too much, period.

  41. Thanks for the video, but scotty kilmer don't advise to buy cars from friends or relatives. I just subscribed 👍

  42. In Washington your lucky to get 22,000 a year or 1400$ monthly if I’m lucky so besides the numbers thank you

  43. This is completely random and overly generalized advise. With low interest rates just keep the monthly payment within your budget and keep your down payment is as little as possible. Common, this is math.

  44. This is terrible advice if your married because you'll just be giving your spouse that cash when she divorces you

  45. Well I made no down payment, have a 5 year loan, and my car costs more than my mortgage. About 15%. Guess I’ll die now.

  46. Your saying I can only pay 10% of my monthly income on vehicle insurance? My monthly income is $1500 so that would mean I can only spend $150 for a car payment AND insurance lol. Tell me where I can get car insurance for less than $150 lmao

  47. It's American culture that stigmatizes people into buying a new car. They are outragously expensive and financially crippling. I have had a used car for 3 years now that costed $3500, haven't had to pay a single car payment and insurance is cheap, and maintenance has been about $500 in total.

  48. Or generally speaking: don't take a loan for a car, cause you pay interest on a thing that looses money. Try to save up, or maybe you don't even need a car and use public transport (if your living in Europe or in big cities in the US; if not, good luck with that 😉

  49. Great vid! I worked at a dealership for 17 years and it astounded me how much trouble people would get themselves in. I noticed a lot of people improperly using the 20-4-10 rule and it can honestly destroy your financial future if you don't pair it up with another calculation 😬. We just did a video on it cause we've been seeing so many videos online of people talking about the 20-4-10 rule but it honestly is flawed and can destroy you financially, The 20-4-10 rule is the second part of a 2 part calculation most people never do the first calculation and as a result are working on flawed numbers. would love to hear your input

  50. Here is the solution : buy a house with 3 or more rooms live in one of the rooms and rent the rest of the rooms. Now your not paying rent and you are collecting cash from the tenants that can pay your car in a few your you will pay off your car and have a house it’s that simple

  51. The BEST way to buy a car is to save your money and purchase a used clean titled car from an individual off of Craigslist. Save your money and don't get ripped off by new and used car dealerships.

  52. Worse idea. If you use a bank loan to buy a vehicle your screwed. You need to pay cash for new vehicle and demand the MSO which is the legal owner certificate and showing you sole owner of the car. If you don't the dealer sends the MSO to State Revenue office then they send you a certificate of title (pink slip). then you have to registrar the vehicle, you just transferred ownership over to the State. which now causes it to become property of the State. You do not own the car. The State owns the car. Now you have to get a driver license, insurance, pay tag fees, smog check. In order to drive State vehicles you need all those things. You must keep State property well maintained. Broken head light? they will issue you a ticket to fix the States vehicle. State has an interest in your car you thought was yours. But if you have the MSO in hand, making you legal ownership, you need no DL , no registration , no tag fees. State has no rights or interest to your private vehicle.

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