Ramit Sethi breaks down why a $686 monthly car payment can actually cost over $1,000 when you add insurance, gas, parking, and maintenance. He shares his own $350 payment that ballooned to $1,000 total, and recommends keeping all fixed costs under 60% of take-home pay.
Questions this video answers
$686 (from a 2022 study).
50–60% of take-home pay (includes rent, insurance, auto, gas, and other fixed costs).
$350/month (Honda Accord) that averaged over $1,000/month when including other ownership costs).
Chapters
How many of you are overspending on your car? Let's talk about it. I recently read a 2022 study showing that the average payment for a new car payment is $686. Let me explain what that means, because to most people it just sounds like a number. When I had a car payment for $350 per month, it was a four door Honda Accord. As you would expect, I averaged spending over $1,000 per month on my car. How can that be? My car payment was 350, but when I added in parking insurance, gas, annual DMV registration, maintenance, parking tickets, and on and on and on, it averaged over $1,000 per month. This is why when people tell me that they're spending over $600 a month, or in many cases over $800 a month just on their car payment, I go, okay, you either have a very high income or you are now trapped by your car payment. I see people getting in financial trouble in two primary ways. The first is they overspend on their house. The second is they overspend on their car. And this is why I talk to so many people on my podcast who have 75 or $80,000 trucks and they go, what are you talking about? Of course, everybody has that around me. I go, you make $105,000. You don't make nearly enough to afford that truck. Especially when you factor in gas, insurance and all these other things. That truck is costing you well over $120,000. But people don't see the phantom or invisible costs when it comes to buying a car. And so if you've ever been in this situation, you know what it feels like. You go, every day I go to work, I'm making more than I've ever made. Why do I feel trapped? This is one of the reasons you feel trapped. Because you've committed to payments on something where you didn't factor in all the other expenses, and now you are trapped. So a quick little guideline is your fixed cost should represent 50 to 60% of your take home pay. That includes rent, insurance, auto, gas, all of your fixed costs. From my conscious spending plan, if you are above that, that is a big red flag that you're overspending on fixed costs. So it makes me nervous when I see people spending a ton of money on these car payments if they don't have the income to go along with it. Beware and be careful, because when it comes to your rich life, you don't need to track the price of asparagus. That's not going to stop you from your rich life. But a large car payment where you didn't factor in all the phantom costs that can stop you. So take the time, calculate out the big purchases in your life. It's worth it.
