Over the course of his long career, radio personality Dave Ramsey has noticed several indicators of personal financial status.
One of these indicators, he said on a recent episode of The Ramsey Show, could even possibly predict whether a middle class family could manage to break out of their income bracket and become wealthy.
At least, that is what he told Micah, 24, from Washington, DC, when the military man called in during the episode looking for financial advice regarding a potential car purchase.
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Micah said he earns $80,000 a year. He already owns a car worth $13,000, but is tempted to purchase a new sports car — a Nissan 370Z — for $30,000 in cash. He admitted this is purely an indulgence and that the new car would be for “play.”
However, he called Ramsey to find out if he should invest the money instead of splurging on a vehicle.
Ramsey let him in on a little secret.
Middle class indicator
Ramsey’s advice was simple: say no to the second car. As for his reasoning, the finance guru pointed to something he’s noticed over the years: “The way you know someone is going to stay middle class is when they have two very nice cars — that are obvious [sic] $500, $600, or $700 payments — sitting in front of a middle class house,” he said. “100%, those people are going to stay middle class.”
In some instances, America’s obsession with automobiles may have prevented many families from accumulating wealth. At the end of 2023, U.S. households collectively had $1.61 trillion in auto loan debt, just slightly higher than the $1.6 trillion in student loan debt outstanding, according to the New York Federal Reserve.
The average consumer had $23,792 in outstanding auto loans last year, according to Experian data, which was up 5.2% from 2022.
Unlike a college degree or a house, vehicles do not boost income or deliver capital gains. Instead, vehicles rapidly depreciate in value over time, especially if they’re purchased brand new. “[New cars] lose 60% of their value in just five years,” co-host George Kamel added.
By comparison, wealthy people often own modest vehicles. Ramsey said his team’s survey of American millionaires found that most of them were driving “very conservative used cars until [they] got substantial money.”
Based on this data, Ramsey developed some guidelines for people who want to build wealth.
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Ramsey’s wealth-building guidelines
“If you're going to build wealth, you have to keep as small an amount as possible going into things that go down in value,” Ramsey said. According to him, a person trying to build wealth over time should have no more than 50% of their income in depreciating assets such as cars.
Micah would be breaking this rule-of-thumb if he purchased the $30,000 sports car and kept his current $13,000 vehicle. His total collection of vehicles would be worth $43,000 — 53.8% of his annual salary.
Purchasing the sports car wouldn’t be a total financial disaster. After all, Micah planned to purchase it in cash and avoid auto loans. “You can afford it, obviously,” Ramsey acknowledged. “But the warning is [that] you’re putting money in the wrong places if you want to be wealthy.”
Hypothetically, if Micah placed the $30,000 in a low-cost index fund that tracks the S&P 500, his net worth could grow over time. The Vanguard S&P 500 ETF (NYSE:VOO) has delivered a 12.57% compounded annual growth rate over the past 10 years. At this pace, Micah’s investment could potentially be worth $98,027.5 within the next decade.
The most extreme example of this is Warren Buffett, who has driven used cars with cosmetic damages for several years, according to interviews with his family by the BBC, but is currently worth $135.9 billion, according to Forbes.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
