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The Right House-To-Car Ratio For Financial Freedom

After delving into the exorbitant prices of new luxury cars, I’ve come to the realization that a larger segment of the population is purchasing such vehicles than I initially thought. This trend poses a significant problem for those striving for financial freedom, which is why I’ve come up with the House-To-Car Ratio guide.

I see people with expensive new cars parked outside modest homes everywhere. With hefty lease payments and revolving credit card debt, many Americans may find themselves trapped in the rat race indefinitely.

As someone who helped kickstart the modern-day FIRE movement in 2009, it hurts me to witness so much financial irresponsibility when the solution is so easy to fix. With my new House-To-Car Ratio guide, you can check whether you’re on track to financial independence or whether you need to make appropriate adjustments.

Given that everyone requires both shelter and transportation, this could be one of the most beneficial personal finance articles you’ll ever read. Let’s dig in!

We are all aware that a car is a liability, with a 99.9% probability of losing value over time. The only exception is collectible cars that appreciate over decades when left untouched.

Conversely, a house is an asset with a ~70% probability of increasing in value over a 12-month period. This probability rises the longer you hold the property.

Both car and homeownership are facets of the “American Dream.” However, the issue arises when individuals acquire too much car and/or too much house, particularly when financed with debt.

Given that homes tend to appreciate in value while cars depreciate, the logical conclusion is that individuals should prioritize investing more in a house, up to a certain responsible limit, and reducing expenditure on cars if they aim to accumulate significant wealth over time.

Coming Up With The Baseline House-To-Car Ratio

To build the baseline House-To-Car Ratio framework, we need to take the median price of a home in America divided by the average car price in America to get a score. For some reason, there is no reliable median car price in America, only average, but we can use the average used car price as well.

$48,000 is roughly the average price of a new car in 2024 according to Kelley Blue Book, Edmunds, and Cox Automotive. $420,000 is the estimate median home price in America according to the St. Louis Fed. Both figures change over time.

average new car price

Baseline House-To-Car Ratio

$420,000 (median home price) / $48,000 (average car price) = 8.75. In other words, the typical American has a House-To-Car Ratio of around 8.75. The higher your ratio, the better because that means your car’s value is a smaller percentage of your home’s value. The other assumption is that the average person spends way too much on a car.

According to Edmunds.com, the average price of a used vehicle is around $27,297 in 2024. Therefore, we can conduct another simple calculation by dividing $420,000 / $27,297 = 15.4.

In other words, the typical American household has a House-To-Car Ratio of between 8.75 – 15.4. Your goal is to beat this ratio if you want to attain financial freedom sooner than the masses.

Note: If you have more than one car, you must add the total current value of your cars (not purchase prices) to come up the denominator. Your house’s value is the current estimate value not your home’s purchase price.

For example, if you have two cars worth $20,000 and $27,000 each according to Kelley Blue Book, then your total current car cost is $47,000. Divide your house’s current estimated value by your total estimated current car cost to get your House-To-Car Ratio.

Median sales price of houses sold in the U.S. - St. Louis Fed (FRED)

Let Us Strive To Outperform The Typical American

We have to decide whether the median American is someone we aspire to be when it comes to building wealth. Based on the data, the answer is not really.

The median American household has a net worth of roughly $192,000 according to the latest Federal Reserve Survey Of Consumer Finances report. That’s not bad, but also not great for someone who is around 36, the median age in America.

The average American household, on the other hand, is doing much better. Based on the same report from The Federal Reserve, the average American household is worth about $1.06. million. In other words, the average American household is a millionaire. A household consistent of one or two income earners.

We all know that the median net worth is more reflective of the typical American. Therefore, we should agree that striving for a House-To-Car Ratio above the range of 8.75 – 15.4 is a worthwhile goal.

What if you don’t own a car, but own a home?

If you own a home but don’t own a car, you are winning. You’re resourceful because you take public transportation, car pool, utilize ridesharing platforms, and/or have the ability to work from home. You might also be lucky to live in a city with fantastic public transportation, such as New York City or every major city in Europe and Asia.

Given a car is a liability that will grow over time with maintenance issues, wear and tear, parking tickets, and potential accidents, to not need a car to get around is a huge financial benefit.

As long as you are saving and investing in the stock market, public real estate funds, private real estate funds, or other risk assets, you’ll likely build much more wealth than the average person over time.

If you don’t own a car but own a home, you can consider having a Home-To-Car Ratio of about 30. You’re doing twice as good as the average American.

What if you own a car, but not a home?

Most people will own a car first before buying a home given a car is cheaper than a home. That’s fine. However, after age 35, if you still only own a car but not a home, you are unlikely to achieve financial independence before the traditional retirement age of 60-65.

Below is a chart that shows the median age for first-time homebuyers in America is 35. The median age for repeat buyers is 58. Overall, the median age for all homebuyers is 49 years old.

Your goal is to outperform the 35-year-old median first-time homebuyer to build more wealth and passive income for financial freedom.

average age of homebuyer, first-time homebuyer age, and repeat buyers

Of course, there are circumstances where one is financially responsible despite owning a car and not a home over the age of 35. Examples include people who delay work to get their PhD and those who’ve sacrificed their finances to help others.

However, given the nature of inflation, if you don’t at least own your primary residence by age 35, then you are likely falling behind financially. Hence, it is important to try and get neutral real estate as young as you possible can. Just like shorting the S&P 500 long-term is a suboptimal decision, so is shorting the housing market by renting long-term.

If you own a car but not a home, you can give yourself a Home-To-Car Ratio of between 5-6.

What if you don’t own a car or a home?

In such a scenario, you have a clean slate. Don’t blow it!

Don’t go off buying a car you can’t afford just to look cool or satiate desire. Buy the cheapest, most reliable car you can afford or simply take public transportation and ride share. Maintenance expenses add up, even if you have an extended warranty.

As for owning a home, once you know where you’re going to live for at least five years, buy responsibly. This means following my 30/30/3 home buying rule. It also means not get into a bidding war and negotiating on price and real estate commissions.

The Ideal Home-To-Car Ratio You Should Shoot For

The typical American has a Home-To-Car Ratio of about 8.75 – 15.4.

Ideally, your Home-To-Car Ratio is 100 or higher. That’s right. As a financial freedom seeker, your house should ideally be worth at least 100 time your car.

However, once your Home-To-Car Ratio surpasses 50, you’re in the golden zone of financial responsibility. The longer you own your car, the higher your ratio will grow given your car will depreciate and your home will likely appreciate.

Does 50-100+ sound unrealistic to you? Let’s go through some real life examples to highlight the various ratios.

Home-to-car ratio for financial freedom by Financial Samurai

Home-To-Car Ratio Examples

  • Computer Engineer, Age 26. Rents for $2,400 a month. Car: $60,000 (value of car today) Tesla 3 sport edition. Home-To-Car Ratio = N/A. As a landlord, I see these examples all the time. Recent college graduates want to spend on something nice, so they often buy a pricy car instead of saving up for a home.
  • Roofer, Age 56. Home: $780,000. Car: $250,000 consisting of five cars and two motorbikes. Home-To-Car Ratio = 3.1. Al the roofer will be climbing up ladders well into his 60s due to his love of automobiles.
  • Software Engineer, Age 39. Home: $850,000. Car: $30,000 Hyundai Sonata. Home-To-Car Ratio = 28. Jack the engineer is doing three times better than the typical American.
  • Entrepreneur, Age 46. Home $1,700,000. Car $29,000 Toyota Prius. Home-To-Car Ratio =  59. Lisa the entrepreneur owns a median-priced home in San Francisco and is environmentally conscience.
  • CEO of Publicly Traded Company, Age 48. Home $15,000,000. Car $200,000 Mercedes EQS 650 Maybach. Home-To-Car Ratio = 75. Ted the CEO is living large with a home equal to roughly 15% of his net worth of $100 million. $200,000 for a new luxury car is chump change.
  • Retiree, Age 74. Home $1,800,000. Car $3,200 1997 Toyota Avalon. Home-To-Car Ratio = 563. At 74, Allen the retiree has no need for a fancy car. He hardly drives anymore and prefers to take the bus or Uber instead.

Income And Debt Levels Are Important Factors To Consider

My Home-To-Car Ratio is a helpful way to determine whether you are being financially responsible and on the road to accelerated financial independence.

Simply take the estimated value of your current home and divide it by the estimated value of your current car or cars, if you have more than one. If you have a Home-To-Car Ratio above 50, you’re doing well.

In addition to calculating your Home-To-Car Ratio, you must also take into consideration your income and debt levels to evaluable your fiscal health. Finally, your net worth is also an important variable.

Taking Income Into Consideration To Determine Fiscal Responsibility

Take for example the Computer Engineer above who rents for $2,400 a month, but purchased a top-of-the line Tesla Model 3 last year for $70,000. Although it is financially irresponsible to pay so much for a car while still renting, his salary might be in the top 1% at $600,000. In this case, renting for only $2,400 a month is quite frugal.

Instead, he decides to use his free cashflow on a nicer car with an $800/month car lease payment. Combined, he’s paying $3,200/month, which is only 6.4% of his $50,000 gross monthly salary. He wisely invests the majority of his after-tax salary in stocks and real estate online to earn more passive income.

However, this is unlikely the case because he only makes $175,000 a year. I know because I’m his landlord.

Taking Debt Into Consideration To Determine Financial Health

Now let’s review the 74-year-old with a Home-To-Car ratio of 563. It is extremely high because he bought his Toyota Avalon new back in 1997 for $25,000. However, because he’s maintained the car and held onto it for so long, his Home-To-Car Ratio naturally increases as the car depreciates.

Allen has no mortgage, no debt, and a pension of roughly $85,000 a year. He’s set for life and is encouraged to spend more of his wealth on himself, his wife, and his family because he can’t take it with him. He should probably buy a new Toyota Avalon for $45,000, however, he’s set in his ways.

The ultimate goal is to have a paid off forever home and a paid off car you enjoy. If you can do that, the only main necessary expenses left are healthcare, food, and college tuition, if you have children. Everything else, such as clothing and vacation spending, is discretionary where we can cut dramatically.

Taking Net Worth Into Consideration To Determine Fiscal Responsibility

Let’s consider Ted, the CEO, who boasts a net worth of $100 million, owns a $15 million house, and drives a $200,000 car. While his House-To-Car Ratio falls short of the ideal target of over 100, he’s still in good shape. His car represents only 0.2% of his net worth. Ted also enjoys an annual income ranging between $5 – 8 million on average.

The bulk of Ted’s net worth consists of equity in his company and other private enterprises. He could easily afford a $500,000 car without financial strain. If he were to make such a purchase, his House-To-Car Ratio would be 30, which is still double the average American’s ratio.

If your goal is financial independence, I recommend limiting your next car purchase to no more than 1% of your net worth. For further discussion, you can refer to my net worth rule for car buying.

Net worth composition by levels of wealth

Living In Expensive Cities Improves Your Home-To-Car Ratio

One reason why living in expensive cities might actually be more economical is because certain expenses, like car prices, remain relatively constant across the country.

For example, the cost of a basic Toyota Camry, with an MSRP of $31,000, is the same whether you’re in affordable Pittsburgh, PA, or pricey San Francisco. Consequently, if you can earn a higher income in an expensive city, everyday items such as cars, electronics, and clothing tend to be comparatively more affordable.

Residents of budget-friendly cities with lower median home prices naturally have lower Home-To-Car Ratios. In other words, it’s harder to build wealth in cheaper cities.

For instance, in San Francisco, where the median home price is around $1.65 million, owning a basic $31,000 Toyota Camry results in a Home-To-Car Ratio of 53.

However, not everyone living in an expensive city will find it easy to achieve a ratio of 50 or more. Consider the case of a homeowner with a remodeled 1,280 square foot house that’s worth about $1,550,000. If the homeowner drives a $90,000 Mercedes Benz EQE electric vehicle, their Home-To-Car Ratio would be only about 17.

Example of too much car

I see examples like the one above everywhere I go. People are driving way nicer cars than their homes would dictate. This is the opposite of Stealth Wealth.

Meanwhile, according to Zillow, the median home price in Pittsburgh, PA is only $223,000. Consequently, the Pittsburgh median homebuyer who purchases a $31,000 Toyota Camry ends up with a Home-To-Car Ratio of only 7, which is below average.

To achieve better fiscal health, the median Pittsburgh homebuyer should consider buying a car valued at $4,460 or less, or continue driving their current car until its value depreciates to $4,460 or less.

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Try To Match Your Car To Your House

You might not care much about my Home-To-Car Ratio for achieving financial freedom, and that’s perfectly okay. Spending money on a fancy car is a common practice in America, almost a rite of passage for those who start earning a regular salary. YOLO spend to your heart’s content.

I was one of those individuals who purchased a second-hand BMW 528i with aftermarket rims and a premium sound system for $28,000 when I was 24. I had just moved to San Francisco for a promotion and was paying $1,100 a month in rent. Owning a BMW had always been a wish of mine.

Later on, I realized that investing in property was a wiser choice. However, this realization came only after I indulged myself in an even more luxurious car—a $78,000 Mercedes Benz G500!

After that experience, I learned my lesson at 26 and shifted my focus to buying real estate and opting for inexpensive used cars. For me, attaining financial freedom outweighed the desire to drive a fancy car.

Driving A Cheap Car Lead To Financial Freedom Sooner

Owning a used $8,200 Land Rover Discovery II for a decade, from ages 28 to 38, turned out to be one of the best decisions I made. During that time, I diligently saved on car expenses and invested my returns wisely. In 2005, I utilized my accumulated savings to purchase a single-family home for $1.52 million, making a down payment of $304,000.

Twelve years later, in 2017, I sold the property for $2.75 million, and walked away with about $1,780,000. I then reinvested these proceeds into stocks, municipal bonds, and private real estate funds, which have since appreciated in value. The freedom to pursue my desires is far more valuable than the fleeting joy of owning a new car.

By opting out of buying a new luxury car at age 28, I gained the equivalent of 8 years of financial independence based on my family’s current annual budget. This span of time is priceless for someone entering the latter half of their life.

For those want want to achieve financial freedom sooner, consider the following:

  • Purchase a home you can comfortably afford if you envision living in one place for five years or longer.
  • Delay buying a car for as long as possible. Utilize public transportation, a bicycle, a scooter, or services like Uber/Lyft. By abstaining from car ownership, you will save a substantial amount of money.
  • If you do decide to buy a car, adhere to my 1/10th rule for car buying and opt for the most economical option available. Remember, maintenance costs, taxes, traffic tickets, and potential accidents can significantly impact your finances over time.
  • If you find yourself already burdened with an expensive car purchase, retain ownership until your Home-To-Car Ratio reaches 50 or higher. With time, your ratio will naturally improve due to the vehicle’s depreciation.
  • If you’ve overextended yourself with a costly housing investment, resist the temptation to compound the issue by purchasing an even pricier car. Instead, focus on retaining your current car for as long as possible while paying down mortgage debt. Simultaneously, prioritize paying off any outstanding car loans.

Achieving a Home-To-Car Ratio of 50 or higher can significantly improve your financial well-being. Aim to prolong car ownership as a personal challenge, striving to reach a ratio of 100 or more. Only after surpassing the 100 ratio mark should you consider purchasing a new car, which may lower your ratio back down to 50.

Invest In Real Estate To Build More Wealth

If you can’t buy a physical property just yet, that’s fine. You can still be fiscally responsible by owning real estate through ETFs, funds, REITs, or private real estate funds.

Real estate is my favorite way to achieving financial freedom because it is a tangible asset that is less volatile, provides utility, and generates income. By the time I was 30, I had bought two properties in San Francisco and one property in Lake Tahoe. These properties now generate a significant amount of mostly passive income.

In 2016, I started diversifying into heartland real estate to take advantage of lower valuations and higher cap rates. So far, I’ve invested $954,000 in private real estate funds and individual deals because I believe the demographic shift to lower-cost areas of the country will continue.

Check out Fundrise, my favorite private real estate platform. Fundrise has been around since 2012 and now manages over $3.3 billion for over 500,000 investors. Their funds mostly invest in residential and industrial properties in the Sunbelt region where valuations are cheaper and yields are higher.

Fundrise is a long-time sponsor of Financial Samurai and Financial Samurai is an investor in Fundrise funds.

The Right House-To-Car Ratio For Financial Freedom is a Financial Samurai original post. Please use the ratio as a guideline to help optimize your finances as you see fit.

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