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Ramit Sethi Says Car Payments Are a ‘Wealth Killer’ — Here’s Why

©Ramit Sethi
©Ramit Sethi

The biggest threat to building wealth isn’t debt or leaving your money to stagnate instead of investing it. Rather, money expert Ramit Sethi said in a YouTube video that the car you drive and its car payments can destroy your chances at building true wealth.

Exactly how much truth is in Sethi’s controversial statement? Is it possible to have a nice car and build wealth?

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How Car Payments Ultimately Kill Wealth

According to Sethi, more than 100 million Americans have taken out auto loans. Why did they do it? Sethi said they’re doing what they think everyone else does: buying an expensive car because they saw their parents do it and to impress others.


However, taking out auto loans also means the same Americans are now trapped in debt and paying high interest rates. The money spent on paying off an expensive car is no longer available to put towards building wealth.

Check Out: 4 Affordable Car Brands You Won’t Regret Buying in 2024

4 Ways To Own a Nice Car and Still Build Wealth

It doesn’t have to be this way. Sethi said it is possible to not only own a nice car and build wealth at the same time and breaks down the steps for doing so into four parts.

  1. Calculate how much car you can afford.

  2. How to save money on a car.

  3. A better approach to car buying.

  4. Why you should always negotiate.

Let’s review each of these.

Calculate How Much Car You Can Afford

How do most people decide to buy a car? According to Sethi, they tend to make this decision by looking at the monthly payment from their car dealer to determine what they can afford.

This is not the way you want to buy a car. “The dealership can make your monthly payment lower or higher simply by changing the terms on your loan,” Sethi said.

Instead of looking at the monthly payment, Sethi recommends using ratios instead.

He uses the example of a budget or spending plan where your fixed costs, like housing, groceries and car payments, are between 50% to 60% of your take-home pay. Subtract your total housing costs, groceries, subscriptions and anything else in your fixed costs like student loan payments or credit card costs. The leftover amount is the total amount you can spend on a car, not just the car payment.

How To Save Money on a Car

Sethi said there is often an unspoken expectation that Americans should buy a new car “every three to five or six years.” Generally, however, most Americans that decide to sink this much money into a new vehicle will realize they can’t afford the monthly payments about nine months later.

Ask yourself how long you plan to keep the car before you get another one. While it’s great to get a good deal on a car, Sethi said most people neglect to ask this question.

“If you sell that car after just a few years of owning it, you will have lost a lot of money,” Sethi said. “Car depreciation or a vehicle’s drop in value over time. New car depreciation can generally be as much as 20%, 30%, even 40% after a few years.”

To save money buying a car, Sethi recommends keeping your car for as long as possible. Your savings start to add up once the car payments have ended. Once you pay your car off and wait a year or two before getting a new car, Sethi said you can save thousands of dollars.

A Better Approach to Car Buying

When buying a car, Sethi said you need to start by choosing a car you can afford and not the car you think you should have.

Buyers need to factor in TCO or “Total Cost of Ownership.” This means factoring in all car expenses including gas, maintenance, registration, insurance, parking tickets and parking fees.

Additional factors to consider when buying a new car include reliability, choosing a car you love, a solid resale value, insurance rates, fuel efficiency and the down payment.

Why You Should Always Negotiate

Sethi’s top negotiation tip? Negotiate mercilessly.

Buyers that don’t know how to negotiate are recommended by Sethi to take someone with them who knows how.

If possible, consider the timing when you purchase your car. As an example, you might decide to shop at the end of the year when car dealers are working to beat their quotas and will be more willing to negotiate with buyers.

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This article originally appeared on Ramit Sethi Says Car Payments Are a ‘Wealth Killer’ — Here’s Why