

Whats the right way to handle your finances? - thecircusb0y

I've listened to Dave Ramsey and I've read his book, The Total Money Makeover. He believes basically that you don't need to worship a credit score, or have credit cards, and the only loan you take is a mortgage from the bank with 20% down on the house. You always keep an emergency fund and you work to use the "Debt Snowball" to destroy all your debt (credit cards, student loans, etc.) and get rid of it once and for all. And with the lack of empty payments, you can now invest and save your income.<p>Robert Kiyosaki, Author of Rich Dad Poor Dad , seems to use credit to build wealth. I haven't studied his ways nearly as much.<p>I've been out of college and working for about a year, and I pay all my bills, including my student loans.<p>But I'm hung up on the thought of taking a small loan to buy a vehicle that I'd love driving. (Because I love driving, its not just point a-b, its the adventure in between, the experience).<p>Now of course this comes down to my conscience, and my own choice. I just want to hear what you think.<p>(the psychoanalysis of this will go : "You're just looking for someone else's opinion to verify that what you want is okay to do, thereby shifting the blame if something goes wrong and not leaving you with responsibility in your mind".) Actually I'm looking for a plan of action to get what I desire.<p>Also, lets touch on personal gratification. How do you judge if you deserve something or not?<p>Thanks a lot for your time and attention.
======
brk
There is no universal answer, and I think the criteria change somewhat on
where you are in your life and your current and short-term expected income
brackets.

Generally speaking, a car is never an investment. It's a rapidly depreciating
utility assest. However, for some of us a car is also an entertainment item,
and we get a large amount of pleasure from owning and driving a vehicle that
makes the drive fun.

Some of my rules of thumb (and these sort of have to be adjusted for your
location, and inflation over time).

A "basic" salary, meaning you can eek out a not-intolerable living, is equal
to 1x your current age. At this income level you can mostly survive without a
lot of frills.

A "good" salary is 2x your income level. Here you can often look at buying a
modest house and maybe a new or 1 year old reliable middle-class car. At much
less than this amount it is probably unwise for you to take on any significant
debt.

A salary of 3x your age will generally put you into the upper 5-10% income
bracket, and if you manage your funds with a little bit of logic you should be
able to make significant contributions to a retirement fund, a savings slush
fund, own a decent house and have a luxury(ish) type of car.

For most of us in tech jobs, making a salary of 3x your age isn't difficult or
unheard of at all.

If you're going to carry a traditional mortgage, you can probably afford a
house that is about 5x your current income level. This is one place, IMO,
where if you have a semi-predictable career growth potential you can go to 8x,
especially if you're younger and expect your income increases to significantly
outpace inflation for the next few years (again, not uncommon in the early
stages of a tech career).

If you plan to keep your car for 5-6 years, then .6x-1x your income is usually
manageable in terms of a vehicle purchase price, scaling towards the higher
end as your salary increases.

As an example:

25 years old, make 50K. That would be about 30K after taxes, or $2500/mo. A
.7x car would be a 35000 vehicle. 0 down financing would be 686/mo over 5
years with an average interest rate. A 5x house would be $250,000 (yes, not a
lot in some places), which on a 30 year loan with 20% down and taxes/etc.
rolled in to the monthly payment puts you right around $1100/mo. So your car
and home eat up 1800 of your 2500/mo. Another 250 for utilities and 300 for
food, and you're bumping up at about 2350/mo. The other 150 would be for a
small amount of savings and incidentals. It's obviously very tight, but the
idea is that your salary is also going to be increasing over short time while
your major expenses (car, home) stay mostly fixed. Buying a cheaper vehicle (a
.6x or $30000 car)(or financing a lesser amount) would be a wise thing to do
at that stage if you weren't confident about future job opportunities.

Again, these rules of thumb might not work in San Francisco, or if your career
is going to be in the dog grooming industry. But for most non-outrageous cost
of living places for someone who has good career potential it is, IME, a good
beginning estimation point.

