Katie:

Welcome back to the Rich Girl Roundup weekly discussion of the Money with Katie Show. I'm Katie Gatti Tassin, and this is our last proper Rich Girl Roundup of 2024. We'll get into it right after a quick break.

Before we read this week's question, the upcoming main episode this Wednesday is all about the personal finance philosophy that says you don't need to budget—right after having Ramit talk about his Conscious Spending Plan on the show, I know, this is criminal. But it'll be a good one, so make sure you tune in. Okay, onto the roundup Henah, what is our question this week?

Henah:

So this week's question came from Rich Girl Ally. She said, “So I've listened to the feeling bad for the Jones' episode and all of the others about the way that people feel about the economy, and there's something that I can't wrap my head around. Who are the people buying all of these $85,000 new cars out there? I have pretty healthy finances, and yet when I needed to get a new car, I still felt like I shouldn't get something more than a used Kia Sportage with a $400 monthly payment, and this is probably partially a me problem, but still, am I supposed to assume that every Mike and Tim out there buying a new F-150 with a $1,200 monthly payment is also taking home a six figure salary, or are they just going into massive debt and their budgets are totally out of whack, not prescribing to the very precise money with Katie recommendation of 13.3% in order to afford their Bronco and relive some OJ fantasies from watching that on TV at age seven? What do you think?” Ally, I love the way you asked this question.

Katie:

Okay, so first of all, I feel like there is a correlation between I feel like I shouldn't get anything more than a used Kia with a $400 monthly payment and I have pretty healthy finances. The causality on that might actually be backward. You have the healthy finances, because your instinct is not to get a $1,200 car payment.

Henah:

I often think the same thing about this question because Jovanni and I have two paid off Honda Civics and I'm trying to run them into the ground before I even consider another car.

Katie:

Henah said, I did the most stereotypically responsible car purchase.

Henah:

It's like the Asian car to have. Yeah.

Ramit:

Wait, doesn't Ramit have a Honda Accord? Isn't that his? It's like 20 years old.

Henah:

Yeah, I mean, you would be hard pressed to find an Asian family that does not have a Honda.

Katie:

Dude. Ever since I visited France over the summer, I have to say I deeply, deeply yearn for fast, clean, effective public transit. Every single time I drive around this suburb in my car, I'm like, I hate it here.

Henah:

Well, okay, because I've taken train in England and Vietnam and Italy and they have all been such great experiences, and so I also agree that we need better high-speed rail, but I also firmly believe that we need walkable cities. More walkable cities because that is where the bulk of driving happens. You know what I mean? That's your day to day. I'm not usually driving three to five hours to get somewhere.

Katie:

Yeah. So last week on the show, we heard from Ramit Sethi in his Honda Accord, and as you probably know, if you’re a Ramit acolyte, one of his most valuable—in my opinion—quips, is don't ask $3 questions, ask $30,000 questions.

Henah:

Before you move forward. Speaking of Ramit, can we replay the clip from the episode of Ramit also dunking on this topic?

Katie:

Roll the clip.

Ramit:

And truthfully, the biggest two sources of overspending are in this order, number one, housing and number two, your cars. A lot of bros driving $70,000 trucks two miles on a flat road to their insurance job. It's like, mm, what are we doing here?

Henah:

When he said, mm, what are we doing here? That's so good. Okay, continue.

Katie:

Yeah, I think this is, at first when I read this question, I just thought it was funny and I was like, that would be a fun one. But then I thought about it more and I was like, actually, from a practical standpoint, this is a extremely justified conversation to have on a personal finance show because this is a $30,000 question. This is usually going to be one of the most expensive things that you own, and it's a decision that to Ally's point, I think a lot of people probably are not making with the best information.

I have also had the same experience that she describes, but I will say it's almost always in the airport parking garage, which I recognize is a pretty select group of cars to begin with. There is a selection bias happening there where I'll walk around and I'll be like, every single car in this garage is brand new or luxury, but then I'm like, yeah, but if you're at the airport to begin with, you're taking a flight. So okay, that's already a pretty upper echelon of socioeconomic status, but then beyond that, you're parking in the covered parking. So that's another thing, and I'm like, maybe I should take a harder look at my life. Maybe I am the asshole who's like, who are all these lazy, rich people parking? And then I'm like, oh yeah, I'm also sitting in the parking garage.

Henah:

So we live right across from a Rivian showroom, and so every time I see a Rivian I'm like, oh, who’s, who's affording this? And I'm like, oh, well we do live by it right there.

Katie:

You're like, well, what does it say about me that I live across from the showroom?

Henah:

I know, I know.

Katie:

I have this feeling sometimes ever since work from home became more prevalent, if I ever go out and do something in the middle of a day, like a weekday and I see other people around, I'm like, why aren't none of these people at work? What are all these people doing all day? And then I'm like oh yeah.

Henah:

I do the same thing. If I'm running an errand, I'm like, don't you all have to be at work? What are you guys doing? But I do think it's funny though, to see the meme that was everybody that voted for the economy said it was because the price of eggs was too high and then we broke Black Friday record shopping sales, so we are asking $3 questions. You know what I'm saying?

Katie:

For sure. No, it's like as much as I recognize the selection bias in doing bougie shit and being like, how can all these other people do all this bougie shit? It's like there is—

So discretionary spending. I was curious. I looked into it. It's still down overall from the end of 2021, which if you put yourself back in 2021, you had the stimulus checks coming and people actually had some excess savings for once and the late capitalist machine took its foot off everyone's next for 10 minutes, and then they were like, no, no, that's not going to work. Back to work.

Henah:

Can’t do that.

Katie:

But it has been trending upward for months. Discretionary spending has been on the rise for I think five months straight. So there is some data that does kind of indicate people are still buying stuff. The hatches have not been batten down in any meaningful way, but okay, so let's talk about cars specifically.

I found an Experian data slide deck online to look at 2024 auto purchase data, and I guess I'll start with some good news. I noticed that borrowers in the super prime category of credit, so the highest credit scores actually hit a six-year high. One in three borrowers have a credit score above, I don't know, 780.

I don't think it's necessarily that people are behaving irresponsibly necessarily. Not to say that having a high credit score means that you are responsible with money. It just means you're good at borrowing money and paying it back. But that was encouraging to me. I was like, alright, okay, that's good.

Here's a crazy stat though. 61% of all vehicle financing in the US is for SUVs, 61%. And I think pickup trucks were at 16% and sedans were at 16%. But it's like the vast majority of cars that people are financing in this country are SUVs.

Henah:

I would be curious if the people who own the SUVs have families or if we're talking about single people or individual couples without children, anything like that. The reason I would see that you'd have an SUV.

Katie:

As a childless woman with an SUV… True.

Henah:

True. People have it for their dog, their pets.

Katie:

Yeah. Yeah. RIP BeanDog. Yeah.

So then another stat that kind of stunned me, Hondas are the number one leased brand and I just have to say, why is anyone out here leasing a Honda? A Honda is going to outlive your grandchildren. You should buy that car and keep it until you die. It's going to last longer than you.

Henah:

That is one, true. Two, I remember I only paid $260 a month for mine, and I remember thinking that anything more than $350 at the time was nuts.

Katie:

Same. That was also kind of my upper limit of that's crazy.

Henah:

I know that inflation has been a lot in the last 10 years, so maybe it's $400 or something that I would be more comfortable with, but I don't know when I'm hearing some of these numbers that people throw out of their monthly payments, or that TikTok where the lady went around and asked at a car dealership, how much do you pay for yours? And they were like, $1,078.

Katie:

$1,200 for a Jeep.

Henah:

Yeah, who's doing that?

Katie:

I would not be caught dead. Can you imagine?

Henah:

On top of that, that's just the payment—that doesn't include the insurance, the registration, the gas, the maintenance.

Katie:

Yeah. Well, so it's just a two part thing too. I feel like this is kind of a perfect example of the nexus of where systemic issues meet individual behavior because it is true that cars and because our cars are so electronic now, they have so many freaking chips in them and they are—so I was reading something the other day that was the biggest mistake that we've made is making cars so technological, because when stuff breaks it's really expensive to fix them, to repair them and they just don't last as long. It's like the way that some refrigerators now have screens and it's like, what are we doing?

Henah:

My friend has a car where it has that eco-friendly feature that if you idle, it’ll stop, it turns your car off.

Katie:

Oh my God, I hate that I turned that off.

Henah:

It made the battery die much faster even though it's supposed to be this eco-friendly smart function. But I think there's something with that. And also I wanted to talk about America's obsession with big cars. I wanted to talk about that.

Katie:

We talk about culturally—again, I feel like I put on my Judge Judy hat and then I immediately realize that every single thing I'm saying applies to me and I'm like, shut the fuck up. You are also a moron.

But yeah, it's like the cultural obsession. It's like an arms race though. I remember looking at smaller cars and being like, I'm kind of scared though because everyone drives these enormous vehicles that I'm like, it's like game theory where you're like, well, if everyone else is in a giant car and I'm in a tiny car, if I get in an accident, I'm going to die. So now I need to have a big car.

Henah:

This is exactly what I wanted to talk about. These were my notes. How did you do that?

So there's this Economist piece that came out that said that our country's affair with big cars is actually killing us both from a climate standpoint and from safety standpoints. But then they said this line that was just chef's kiss, it said, “But the odds that car makers curb their heaviest, most dangerous vehicles are slim. American car buyers value safety, but mainly for themselves, not society as a whole.”

And I was like, that speaks so perfectly to the individualism we have in this country, which is if everyone's going to have a big car, I need to have a big car to protect myself.

And I saw this thread on Reddit whose name I cannot say on the air, but they made a great point. They said, “When everyone around you rides transit or everyone around you bikes or everyone around you walks, you are going to adopt what they do when in route, when everyone around you drives, you won't think about doing otherwise. And I think employers need to be more proactive. There's a whole menu of things employers could do to facilitate non-car commutes, whether it's subsidizing transit passes, installing bike parking, installing showers, funding their own shuttles.”

My larger point is I don't think we should be giving your employer more power over your life necessarily, but I do think there's something in that that's interesting about everyone needs to get on board with this idea or none of us are ever going to get to a better place. And also automakers make more money from creating trucks than they do small cars.

Katie:

Yeah, you make more money from the big cars and you make more money when you load them. With tech, I was looking at to try to figure out, okay, what is the cheapest, reliable safe car you could get? And you're still going to spend a lot of money on that. Even the reliable cars that are affordable are not inexpensive. And so it's that perfect example of you've got the cultural influences, you've got the practical concerns about safety because you've got this crazy game theory playing out where the cyber trucks dude that are indestructible, I literally wrote, I present without comment, the Cybertruck, it's like if a Cybertruck runs into you in a Yaris, you are dead as a doornail.

Henah:

I saw a Cybertruck accident and the car behind it was totaled. The Cybertruck had not a scratch.

Katie:

And it's like, what a perfect example of how fucked up that mentality is of I don't care what happens to the people around me as long as I'm okay.

Henah:

Here's the other thing. When you were talking about culture, it's like SUVs are quintessentially American. Think of all the Super Bowl ads you see every year where it's like the rough and tough cowboy getting on his Ford F-150, because the people associate SUVs with freedom and strength and for whatever reason the F-150 is the car that people think of.

Katie:

There's nothing more patriotic than a suburban, and the fact that it's even called a suburban, we're obsessed with suburb culture, dude. Yeah, it's a mess.

Henah:

Anyway, I say all that to say I think we are spot on though that it's a cultural and individual issue.

Katie:

Because then at the individual level it's like yes, and all of that is true and also you still have some level of agency over the type of vehicle that you buy. Do you need a $90,000 full size SUV? Can we maybe consider bringing back the minivan? I dunno.

Henah:

Do we need a Porsche Macan?

*crickets*

Katie:

Like I said, like I said, I start wagging the finger and then I'm like the finger starts pointing back at me.

Okay, so more stats to your point about, we can put some numbers around this. The average monthly payment for a used car in 2024 is $525 with an average loan term of 67 months. So that's between five and six years. For new cars it is $730 a month.

Henah:

Oh my god.

Katie:

I know, that feels extremely high to me.

Henah:

I'm wondering because how sometimes people will send us their Wealth Planners and we'll look at someone's finance or they'll email us about their finances. I kind of feel like maybe part of this is people got in at the really low mortgage rate and so they're like, I have extra room in my budget to get this baller car. Now, trying to think, where would most people have room in their budget for $700 car?

Katie:

Yeah, I don't know. I don't know. That's definitely possible. I also wonder sometimes if, I think both Thomas and I, we bought our cars at the worst possible time. We got them in 2023. I know we both overpaid because it was kind of at the height of just cars being so expensive we were still in that supply crunch of the chips, whatever. But yeah, $730 a month and then the average cost of car insurance is $205 a month. So hold that all in your frame of reference that on average we're talking $700 all in if you're used to $900 and something all in.

Median household income in the US is $80k per year as of 2023. So that's a lot of money for $80k a year household income and that's just for one car.

Henah:

Well, because also thinking that the median household income being $80k means that all of these massive cities that rely on public transit or you don't need a car, New York City is also being calculated in that number. So the household income for the areas where you actually need a car are probably even lower than $80,000, which makes it an even more outsized part of your budget.

Katie:

Very possible. Here's a fun one. Per the F-150 of it, all men have 16.3% more auto loan debt than women. Men on average buy more expensive vehicles. Then the average interest rate as of Q2 was 6.84% for new cars. And are you ready for use? You're going to throw up.

Henah:

Okay.

Katie:

12%. 12% double digits, dude. For a used car. Gnarly. That is usury as far as I'm concerned. That's what I'm saying though is like, okay, so—

Sidebar, so my dad volunteers with this organization that helps people in rural Tennessee. I think I've talked about this on the show before. Basically they will go to people's homes. It's kind of like, Hey, what do you need right now? How can we make your life easier? One of the things that he says he consistently sees is people who have basically $400 to $500 per month car payments for used old beat up cars because the dealership in their town is screwing them because they don't have good credit. They're buying, I mean I'm talking 2005 Chevy Impala, $400 a month. The rate is like 28%.

Henah:

Yeah. Oh my gosh.

Katie:

So part of what they do to help them is basically take out, there's a lending program with this organization where they will pay off the remaining whatever on the loan that they've got and then give them a new loan at a more reasonable interest rate because basically you can't get ahead, you have no room in your budget, you're way overpaying for a car. They've already put more into it than the cars are even worth, but it was like that was the only way that they could access transportation.

And so again, it does come back to I wonder how many of these problems would go away if you just had good public transit and some reasonable limits on subprime usury because again, that is what it is. They're taking advantage of people. That is devastating for people. I know it's really sad. I think it has opened my dad's eyes a lot to the downsides of capitalism unfettered. He's just seeing these people get totally taken advantage of. They basically don't have any money.

They need access to these things. It's not like they're going out and buying a brand new Chevy Suburban. It's like they are getting the cheapest car that they can find and they're still just getting screwed. So I think that sometimes my glee in being like, oh, the Mikes and Tims, it's there is definitely some of that, don't get me wrong, but I do wonder what portion, it's probably based on the subprime lending data in this deck, like 10% to 15% of these numbers that the monthly payments are just high because people are getting taken advantage of.

Henah:

To those people, I extend nothing but empathy for that situation because well, what other choice do you have? And also if your car breaks down, what other choice do you? You know what I mean?

Katie:

Yeah. Then you're immediately screwed. You are underwater.

Henah:

Then you need to either get a new car again or pay absurd amounts to get it fixed.

Katie:

So the average cost of a new car in the US, $48k.

Henah:

Oh my god, that's really high.

Katie:

Bear in mind though, I think that that is really driven by the mid-size SUV because remember 61% of all financing is for SUVs. So average cost of the new car being that high is skewed up because at that average cost of a sedan is only $23,000. So far more reasonable.

But the bestselling car in America is the Ford F-150, which retails for $37k base new and can go up to $76k.

Henah:

For what? What are these features?

Katie:

Well, Henah, it depends on your trim level. Do you want the Tremor? Do you want the Raptor or do you want the Powerstroke?

Henah:

Those sound like sex toys.

Katie:

I was going to say it's all very erotic, which is why it's funny though, if you look at the bestselling cars in Europe, they're all little hatchbacks and sedans. They're all tiny little, even in the areas where they have all the public trains that they're like, oh, we'll be reasonable. I'll get a VW Golf.

Henah:

Those smart cars that are so tiny. It's hilarious when I think of smart. Yeah, when I see a smart car in the US I'm like, you are really at risk. But obviously that's what everyone has in Europe and I'm like, y'all are onto something there.

Katie:

That's why I think it's just interesting to look at the decisions that people make around transportation given the context of where you live, where you're driving the culture, the fact that you have no public transit options. Well, not everyone has no public transit options, but most Americans do not have access to reasonable, safe, clean, viable public transit.

So I was thinking what we could do next is just talk through some best practices. So if you are in the market for a car and you want to think through putting some scaffolding in place around the decision. Yeah. The first thing is there is this popular, the kind of rule of thumb is I think it's the 20/3/8 rule. I personally am more of a 20/3/10 and I'll get into that, but it basically says you should be able to put 20% down. You should be able to pay off the car note in three years, so the 36 month financing and then with those two boxes checked, your resultant monthly payment should be less than 8% of your monthly gross income. Again, per this rule.

Henah:

Gross income. Okay, that's interesting.

Katie:

I was going to say I tend to disagree with any financial metric that uses your gross income instead of your net income because depending on your tax liability, that's going to vary widely. So I might tweak personally again and say 20/3/10, so 20% down, three-year note, and then a total monthly cost—that's payment insurance, gas, maintenance, whatever—that's no more than 10% of your net income. What you're actually taking home.

Henah:

Is that what's in the Wealth Planner?

Katie:

Although it will this year. Again, it varies based on your save rate. So if you have a higher save rate, it's going to compress that proportionally. The original 10% is based on a budget that I think is assuming 25% savings. So pretty aggressive frankly. We know the average save rate in America is 4%, but this is more reflective of if you're striving for the moon, what would that look like so that if you're pairing it back to be more reasonable, you're starting in a place that's really strong for you financially.

Henah:

And where do you think the three-year note part came from?

Katie:

Well, I don't know the origination point. This is something that I've kind of always heard in personal finance, but I think what if I had to guess? It's just because that's a term that's going to limit the amount of time that this payment is coming out of your budget. And because as the term lengths offered by lenders get longer, it just means that you are going to end up paying more in interest and you are expanding the payment over more time.

So it's coming out of your budget longer, you're stretching out a bigger number, you're probably going to be thinking that a more expensive car is more reasonable than it might actually be spreading it out for so far.

Henah:

I was just curious. I feel like when you go to buy a car, they're usually 48 months or 60 months or 72. It's usually that range and I don't often hear 36, but so I was just curious where that came from, if that makes sense.

Katie:

I think that that's because the car dealerships are trying to get you to pay it off over a longer period of time because if you do compress it, your payment does go up. And I think that that's something to be aware of is just that if you're only looking at the monthly payment, well, there are a lot of ways to make a monthly payment low. You can pay it off over 10 years.

But I think that that's where it's supposed to just give you a, okay, if I'm doing this over three years, if I'm doing this over a reasonable period of time, what is the resultant payment going to be and how can that kind of guide my overall purchase budget?

Henah:

Yeah, that makes sense.

Katie:

Another rule that I heard that I liked, if you're buying a luxury vehicle, you should be able to pay it off in a year. And if that's not possible, it's probably not the best financial choice.

Henah:

Sorry, this reminds me of the guy who emailed you who was like, Katie, I don't think that you should be purchasing a Porsche at this age. And you were like, let's talk. And I don't know what you said to him, but then he emailed back being like, I take that back. Enjoy.

Katie:

I know. Well, I always think it's funny. I mean, I get it. I get because no one needs a Porsche at any age. That's not a need. It's 100% through and through a splurge. But yeah, I was able to buy it in cash and that was important to me at the time because I agree, I guess on some subconscious level with this rule of if I am buying something that is truly just like an adult toy, in no way should that be jeopardizing my financial future. I only want to this if I know that I'm on the right track and I can get it without hurting my long-term financial prospects. And that was the situation.

Henah:

I'm laughing. I remember when I went to go buy that Chanel bag, you were like, well, a Chanel bag would be 2% of this net worth. Are you comfortable with that? And I was like, a Porsche Macan is how much of your net worth. And you were like, this is not about me. This is about you.

Katie:

Well, you can't drive a Chanel bag.

Henah:

But the value goes up. Got 'em.

Katie:

Oh true.

Whether or not you actually pay it off in a year I think would depend on the interest rate for sure. If I could get a 3% rate on the car, I would've just made the payments on it so cheap,

But it was like 7% or 8% or something crazy. So it's kind of the same mentality around you don't have to put 20% down on a house, but you should be able to if you're going to buy a house, if you can only afford to put 3% down, you have no other cash, you're probably going to find yourself in a pretty uncomfortable position once you get into that house and something breaks and you're like, oh, I'm house poor. So it doesn't mean you have to pay it off in a year, just that you should be able to in order to gauge is this actually a good idea or am I setting myself up for pain here?

Henah:

No, I think that that makes sense. It's an interesting rule because I was like, is that an adaptation from the three-year rule? How did you land on one year?

Katie:

Just because it's luxury, just because it's a splurge, it's just a completely unnecessary, do I need a portion? No, no one needs a Porsche, but also it's going to be more expensive.

Henah:

And more expensive to upkeep. So you're going to need money for that too.

Katie:

For a hundred percent. Every single—Yeah, I would say anyone who's ever bought an expensive foreign car knows it is not just the car itself that costs more. You are on the hook for more expensive stuff the entire time because you're getting parts shipped from another country. They know that they have you on the ropes. Here's a perfect example.

Henah:

Y'all heard of tariffs?

Katie:

Not related, apropos of nothing.

So the other day we were staying at a hotel in downtown Denver and it was called the Brown Palace, which is kind of a funny name, but it's one of those—

Henah:

It's my house actually.

Katie:

Oh my god, shut the—.

It was one of those old historic hotels built in, I don't know, 1800 something. So we used points to pay for it, but across the street was a Holiday Inn. So it's like you'll see this often in cities where there's several hotels kind of in the same little block of space. They shared a parking garage. So both hotels had valet parking and the sign said Brown Palace parking $60 a night, Holiday Inn parking $40 a night, same parking lot, but depending on which hotel you stayed in, you were paying a different price. I'm like, that is what's happening here.

Henah:

This is America.

Katie:

They know the people that stay in this hotel will pay more for parking than the people who stay in that hotel. They know people who buy the Porsche will pay more for the oil change than the person who buys the Honda. So they're going to charge you accordingly. And that was something that I personally am, my warranty lasts through 2028, so I'm like, I'm going to see how it goes for the next five years, five years from the time I bought it. And I'm like, if is I'm getting beaten over the head by German automaker parts, then I'll probably get rid of this car and get a Subaru or something if it becomes too much.

Another rule that I came across that I like that I'll just mention before we get into an example is I saw someone say, your monthly contributions to investments should always be higher than your car payment. And I was like, okay, that's a good best practice. Again, we're taking out the example that I gave earlier of the subprime buyer who needs a car to get to work and is being taken advantage. We're talking about someone who's like, alright, I'm in a good financial position. I'm ready to buy a new car. What's a reasonable amount to spend if that is your attitude? I actually loved that kind of rule of thumb of like, okay, you're thinking it's reasonable. Well, are you investing more than that currently or is this going to far outpace your savings?

Henah:

And are you jeopardizing your future for this car today?

Katie:

Yeah, yeah.

Henah:

That's a great tip. I have two teensy tips on buying. One is we've talked about this in the show before, don't sleep on certified pre-owned if it's a good deal, because then you don't pay the premium for the brand new, which we all know expires the moment you drive off the lot anyway. But it still comes with solid warranty. So that was my Honda Civic is certified pre-owned.

Katie:

I'm glad you brought that up. That is part of my example.

Henah:

Oh, well there we go.

My other tip is also something that applied for my Civic is sometimes opening up your radius of where you will look for a car means that you'll get lower costs in more rural areas. So for example, in New Jersey, the cost of cars were much higher than if you went to Pennsylvania. And so my dad ended up finding my car in Pennsylvania and just an hour outside of where we lived and it was $3,000 cheaper, which when I was making $40,000 a year, that was a huge difference.

And so I would just say to the extent that you're not screwing over people in that community to our earlier point or if you're in that situation, maybe that is something to consider. But honestly my hottest tip is that if you can rely on public transport and ride shares and e-bikes and carpooling with friends, avoid a car at all costs.

Katie:

Yeah, we were a one car fam for a while and it was really nice actually. The level of, I would say the only times that it was truly annoying or inconvenient was when Georgia had to go to the vet while Thomas was at work. So it was like, I can't take her to the vet on a bike and you can't take a German Shepherd and an Uber.

Henah:

We're also one car right now and we have the same thing.

Katie:

So that's frustrating. But beyond that, I mean I would say 98% of the time there was a day where I literally just got a rental car for a day and spent $40 with a rental car to take her to a surgery. So the ways that you can get around it, the amount of money we saved over the years that we only had one, the amount of just headache that we kind of saved too, I think just not having to worry about having that second asset. It really was a nice break from car ownership.

Henah:

Right now, my car is actually in New Jersey with our uncle and we're in one of those apartments where you have to pay per spot and I was like, we're not using the car. I work from home. Why would I pay this? So I always figured if I'm spending more on rideshares or other things that add up to the cost of just having the car on site, then I will move it on site. But it hasn't really worked out that way and now we know we have an emergency car if we need it. It's kind of been nice to be like, okay, we can be a one car family and make it work. And it's not an end all be all.

You mentioned you had an example and that's what I think would be most helpful because we've thrown out a lot of numbers and stats.

Katie:

Yeah, well I wanted to use an example that I had from a couple of years ago where I kind of in some ways did it right and in other ways did it wrong. So I think it's a good learning example. So when I bought my previous vehicle, which was a 2017 Audi A3, I purchased it in 2020, CPO for I think it was $20,000 and my take home pay was $4,000 a month. So in that respect, I basically broke the rule because I put $4,000 down, which is 20%, but I did a five year term, because the interest rate was 2%.

Henah:

Well, did you really break the rule then because 2% is negligible…

Katie:

Well, so the reason I'm saying I broke the rule is because I did the five-year term, the 2% was great. My monthly payments were about $300 a month and my insurance was around $100. So my total monthly costs were about 10% of my take home pay, but over the five years instead of three. So had I done my math with a three-year term, it would've been too expensive for me. It would've been $500 just for the payment. So I probably should not have purchased that car, but at the time I was like, ah, $20k, that's great, that's great.

But anecdotally then I was trying to play around with some different examples and it appeared as though as I was kind of plugging in different payment amounts and different with the three year term and trying to figure out, okay, what would the MSRP, what would be the total purchase price of the car be if you are sticking with this 20/3/10 as we're calling it rule and anecdotally it appeared as though the total cost of the vehicle was often somewhere between a quarter and a third of annual income.

Henah:

So gross pay.

Katie:

Yeah, I was like, that's an interesting finding actually. So it would be like if you're making $100,000 a year, you're looking at a card that's between $25,000 and $33,000 as a reasonable ballpark to start in. When you start plugging in these numbers be like, okay, 20% down, three year term, 10% of take home pay, et cetera. That was generally the range. Now again, that's super rough math, but it was helpful for me to be like, okay, so getting in the ballpark of what is the overall purchase price that I would be starting with?

Henah:

Yeah, no, I think that's really great back with the napkin math, but I think this puts you in a precarious position if you're someone who makes less than the median income and you're in a choice where you have to buy a new car.

Katie:

So I figured what we could do is talk about, okay, what is the most responsible car approach? If you were going to check every box and be like grade grubber straight A student about it, what is the—

Henah:

Buy a Honda.

Katie:

Most responsible thing you would do? That is actually the top tip.

Okay. So keeping those rules of thumb in mind, how would we actually execute this? So two communities that I disagree with are, let me first tell you where I disagree. The Ramsey method is always buying cash. Disagree. You should not put that pressure on yourself. I get the impulse. I will say it's not that different from if you're going to buy a luxury vehicle, you should be able to buy it outright in one year. That should be something that you're capable of if you're going to do it. So I get the kind of impulse of he's trying to discourage people from the Mikes and Tims who make $75k and have a $1,200 a month car payment on an F-150 for their insurance job. I get it.

Henah:

It just seems a little extreme To me.

Katie:

It's extreme. And the FI community on the other flip side of that says, yeah, buy it in cash and also buy a $5,000 clunker, buy an $8,000 clunker. I disagree with both of these recommendations. Being able to buy in cash is a good marker of whether or not you can actually comfortably afford something, but I don't think that it's always the most sensible way to approach it depending on the interest rate. If you have a low interest rate, you shouldn't be buying it in cash. That's silly, right, from a mathematical standpoint.

If you love buying things in cash and that's your love language with money, great, go for it. I'm not saying that in any moral judgment way, but from a mathematical standpoint, you should not feel pressured to buy something in cash if you can finance it at a low rate if it's something you need, like a reliable vehicle. And sometimes you just need reliable transportation and you don't have a freaking choice. People have to get to work. So if you can't afford to buy it in cash, I also think that buying an excessively cheap clunker of a car can lead to the constantly dumping money into it problem. So that's why I think there's a sweet spot where you're not buying something excessive, but you're also not buying something that is just going to end up costing you a ton of money to fix every six months.

Henah:

Right, like the Cheap Boots theory or whatever it's called.

Katie:

Yeah, yeah, exactly. That's exactly what I was thinking of. So my best practices, you already touched on one, buy a car that is around three years old, preferably certified, pre-owned, or similar if possible because there's an extended warranty. So depending on how old the car is, in many cases you buy a car that's one or two years old, CPO, your warranty on that car is actually going to be longer than if you were buying it new because they're taking your manufacturer's warranty and then adding a CPO warranty onto it and you are allowing someone else to take that steepest hit of the depreciation curve.

Henah:

Agree.

Katie:

So you're getting a lot of the value chunked off the top and you're not having to pay for that. I would say buy a car that is known for reliability that you can keep until it no longer works. And so for that, I'm thinking Honda, I'm thinking Toyota, or if you're trying to go a little bit more luxury than that, Acura or Lexus, which are just the luxury versions of Hondas and Toyotas. My first car was a dad hand me down where he got a new car. So I got his car when I turned 16 and it was a 2004 Acura TL and it actually hit around 225,000 miles before it began having any issues.

Henah:

Mine was a Toyota Corolla, but it did make it to 210,000.

Katie:

Nice.

Henah:

And it had a sunroof and I loved it so much, but then when I was driving to work one day, the exhaust pipe just fell off, literally just fell off. And then people were on the highway pointing at me being like, ma'am, do. And then I had to call my dad cry 50 miles out from work to be like, how do I drive this? And he was like, just drive really slow. I’ll come.

Katie:

Incredible. Incredible. Just drive really slow.

Henah:

Then we had to sell it for parts. But anyway, that was Connie the Corolla. She was a gem. She lasted 200,000 miles.

Katie:

These cars will last forever if you take care of them.

So I think that that's a good thing of buying it used, buying it CPO if you can, and then just gently used. You're not buying a clunker that again, you're going to have to be putting money into all the time. It's still going to be reliable. It's still going to be covered.

Henah:

I will say though, make sure you're not getting a lemon. You might want to just run that VIN report and all the other stuff that comes with it.

Katie:

For sure. For sure. Same with the accident reports of, has it been in an accident?

The next is get a loan pre-approval from a bank that you already bank with or a credit union. So then you take that pre-approval with you to the dealership so you are not trapped using their financing. So it's like you want to apply for pre-approval with your bank of choice, you'll get probably get a better interest rate from them than you're going to get from the dealership. And if not, great, but then you have this option.

Henah:

Oh, I love that. I've never actually thought of that before until you brought it up. I think one time someone up Morning Brew asked about it and you mentioned it and I was like, oh, I never considered it.

Katie:

Bring in a pre-approval. Yeah. So you want to make sure that you're not just kind of on the ropes to accept whatever financing they'll give you.

And then one little tip that I've heard before, I think it's true, but I've never personally used it, so I'm not going to personally vouch, is shopping at the end of the month or at the end of the year basically to take advantage of salespeople trying to meet quotas.

Henah:

Right. No, I've heard that before. And also don't sleep on the President's Day sales or things like that. You might actually get a good deal depending on how aggressive they're trying to be.

Katie:

Merry Toyotathon. Yeah. Happy Honda Days to you.

Henah:

Speaking of American exceptionalism, have you thought of shopping on President's Day weekend?

Katie:

Happy Lexus December to Remember sales events? I'm like, how many more of these are there?

Henah:

Why do you know all of them is my question?

Katie:

This is perfect that this is going to go out right before the holidays, so we can wish everyone a happy December to Remember sales event.

Henah:

Happy Toyotathon.

Katie:

And then my last one is just drive it until the wheels fall off. The most responsible way to buy a car. Here's my bottom line, is it almost doesn't matter the extent to which you make mistakes or fudge the rules with this other stuff, if you just drive it for 10, 15 years, all of those sins will be amortized over time if you keep it for a really long time.

Henah:

Makes sense.

Katie:

Even if you overpay, even if you get a luxury car, even if you do a five year term, even if you make these classic personal finance car buying mistakes, if you just take care of that car and drive it for a really long time and you're not trying to replace it every five years, you're going to be okay. So I would say driving it just until the wheels fall off is probably the most important thing.

Henah:

Cybertruck, here I come.

Katie:

God, I also—in that Experian report, it was tracking cars with the most recalls and Tesla topped the list by a lot.

Henah:

Oh yeah. I believe that.

Katie:

I guess my last thing is just because we haven't really talked about it, I think there are very few financial situations where leasing makes the most sense. It's not that there are none, but I think for the amount of leasing that happens in the United States, there's far more leasing happening than situations that would say leasing is the most financially prudent way to access a vehicle.

Henah:

Do you want to hear something funny? The top page this year on moneywithkatie.com was leasing a car is setting it on fire. Which I was like, this is so old, but yeah.

Katie:

Really? Yeah.

Henah:

That we did that episode on lease versus buy 2022. Was it With Jorge Diaz?

Katie:

He basically was in order to know if leasing is better than buying, you really have to think about how much money you're going to be putting into maintaining the vehicle over time if you own it. But basically the argument that I made, and those were the days, man, those were the days, the article title was Why Leasing a car is Setting Money on Fire.

And the whole premise of it was like you are basically paying for it during the steepest depreciation hit and then giving it back. That's all it comes down to, really. And so that's why I say there are very few situations where that ends up actually being the most sensible thing to do. They exist, but it's not common. And so again, if your goal is to acquire own and maintain a vehicle in the most financially responsible way possible, everything that we just laid out is probably what you would do. And obviously feel free to bend the rules to your situation, but that would be kind of the checklist I would hand someone.

Henah:

Did you have anything you wanted to add before I move to a money story?

Katie:

No.

Henah:

Okay. So this week we have an email. I'm going to keep them anonymous, but they said, “A recent money predicament came up that I wanted to email you about to see if you all have covered this or just to share my story because it's so frustrating. My partner and I are both self-employed and living in New York State. He's currently a very underpaid handyman, so he is able to get a pretty good deal on healthcare through the New York State Health Exchange. And he has some chronic medical issues. So good healthcare is very important. My income is about $93,000 per year. And as you know, expenses like housing are very high. And I cover our full mortgage, which is about $2,100 plus utilities for a modest house in upstate New York. My partner and I have been together for six years and have been thinking about getting married, but we found out that if we get married, he would no longer be able to get low cost health insurance because my income would negate that. I'm currently able to get a low cost Vault captive insurance through a private company, but that company excludes preexisting conditions. So with his health conditions, he couldn't be part of that plan. If we were both to be on a plan through the New York State marketplace based on high income, the lowest payment for the plan we would need given his healthcare needs would be about $2,000 per month. We're actively also trying for a kid and know that we will have daycare expenses coming up and there's literally no way we can get married given the cost of healthcare. I'm beyond discouraged and frustrated with this system and we'll have to keep unquote living in sin. I'm not the only person I know in this predicament. One friend can't marry his partner who stays at home to take care of his three kids so that she can stay on Medicaid with the kids. And this system is insane, and thank you for the work you do to raise awareness, but it could be so different.”

Katie:

Yeah. So we picked this story because yesterday, as of the time of this recording, the CEO of UnitedHealth Insurance was killed. In What police are saying was that a targeted attack in Midtown Manhattan? I'm sure everyone's following this. The news broke this morning, again, as of the time of this recording, that the bullets had inscribed in them “deny, defend, depose”, which could mean any number of things, but my mind immediately went to denied claims and someone that basically snapped. I'm not trying to become a true crime podcast, so I'm not really going to offer much conjecture beyond that. Obviously this could be motivated by something completely unrelated.

Henah:

I guess my part of this story would just be United Healthcare for all. That is it. That is my tweet. That is—

Katie:

I think you mean universal healthcare for all.

Henah:

Universal, sorry. Yes.

Katie:

UnitedHealthcare for all.

Henah:

I do mean universal healthcare.

Katie:

This is the time where we acknowledge that Henah’s actually on UnitedHealth's payroll, she's now working in corporate communications.

I guess from a helpful standpoint though, I would say my first instinct is to plug our recent Rich Roundup about cohabitation agreements for unmarried partners. So if you are in this position, if you are someone that cannot get married because of healthcare costs, but you want to recoup some of the legal protections of marriage without getting legally married, a cohabitation agreement could be for you…and universal healthcare for all.

Henah:

And that's the tweet.

Katie:

And that's all for this week's Rich Girl Roundup. We'll see you on Wednesday.