### Understanding the 238 Rule: Car Financing and Debt Management

The 238 rule suggests an 8% car loan limit to protect wealth-building while managing other financial obligations.

### Understanding the 238 Rule: The 8% Car Loan Threshold Explained
* 🚗 The 238 rule suggests that car loans should not exceed **8% of your income**, which aims to **prevent overwhelming debt** as individuals navigate their financial journeys.
* 💰 This percentage is designed to accommodate other financial obligations, such as student loans and mortgages, ensuring that **car payments do not derail wealth-building efforts**.
* 🔍 The decision to set the limit at **8%** instead of a higher number, like **10%**, stems from a desire to **avoid double-digit debt** on depreciating assets like cars.
* 📊 With average car financing extending to **nearly 80 months** and payments exceeding **$700**, many buyers find themselves in **negative equity situations**, which necessitates a **stricter approach to car purchasing**.
* 🛠 The 238 rule is not just a mathematical formula; it reflects **practical considerations based on real-world experiences** of individuals in their 20s and 30s, who often **juggle various debts**.
* 📉 The rule serves as a bridge for those starting their wealth-building journey, encouraging **responsible financing** while aspiring to **pay cash for vehicles** in the future.
* 💡 It’s important to note that the **8% figure is a guideline**, allowing for flexibility where individuals can choose to **finance less or pay more upfront**, with the ultimate goal being **financial stability and growth**.
* 🏦 As individuals progress in their financial lives, the hope is that they will **transition to paying cash for vehicles**, minimizing debt and enhancing their **overall financial health**.

In regards to the 238 rule, how did you end up at the 8% number? I can understand that the 20% down in 3 years helps mitigate depreciation on the car and time out of the market, but I'm curious how you landed on the 8%. Would you like

to explain yourselves? Let me think through all right, so I'm trying to go back because there are a lot of rules of thumb out there, and you can go like Google like "car buying rules of thumb", and you'll get a bunch of different answers from a

bunch of different people. For all the rules that we design and all the things that we come up with, try to help you, what we try to do is take a rule of thumb or a commonality or something that's like general guidance, but we want

to apply like real-worldness to it. We want to apply, okay, how does this actively play out and what is this like in my life, in my situation? The situation of the clients with whom we work can say something though, yeah, is that look without a doubt is cuz it is more of an

encompassing because we know there's other debts, and I always was thinking about, you know, we have these other rules, but there was also there was a just a tinge of I didn't the double digit, and I guess we could have put 9% if we wanted

to give a little more, but I just did not want car loans to be a double-digit part of your life because they're they're just horrible already for your financial life, so why in the world would you want a double-digit obligation that's depreciating the

moment you drive it off the lot, yes, that's exactly where we were going in terms of reverse engineering. We're thinking about what are most people faced with when they... because remember 238 is the stage of your life, the stage of your financial journey where you're probably

not at the ability to pay cash for an automobile yet. You need to finance in order to have some sort of reliable transportation. Well, most often in those situations and seasons of life, there are other things pulling on you in addition to maybe having a car payment. You might

also have graduated with some sort of student loan debt. You probably have a mortgage. You might have people like children or spouses or whatever pulling on the resources that you're creating. And so we didn't want the car to be something that took your wealth building

journey off track. And so we just kind of sat down and said, 'All right, there's a common rule of thumb: 10%. What's that look like? It seems too aggressive, and if you have these other things going on and we want you to be aspiring to save 25%',

when we think about okay how much is housing, how much is saving, how much is giving, how much is taxes, how much are these different things? It wasn't exactly a plug number because again we wanted to be realistic. We could have said 232 and you could have had like an incredibly

affordable automobile. We wanted it to be realistic, but we also want it to be practical and prudent so that you could actually get a car that you could actually afford and still be able to meet and satisfy all of your other financial goals. So I'd like to tell you

there's some magical, like incredibly well-thought-out mathematics to the eight. It was much more reverse engineering to see what practically makes sense and what was our experience as we were coming through the early years of our wealth-building journey. Look, the typical car buyer these days

when you look at the annual stats, we're getting close to 80 months on the financing. We're getting to over $700 a month in car payments. The majority of people are doing cars with negative equity, meaning that they made such a bad deal on the last car that they drove

that they're having to roll the loan balance into the new car. Um, and so America needs somebody to be hard with them on these car purchases, cuz they, they're literally driving their wealth around instead of building that wealth to build finances. So yeah, we took a hard

line. I didn't want it to be double digits. I also wanted to make sure because look, but there's also the tipping point the other way, whereas I know there's clunkers out there that yeah, maybe it'd be best if you bought a

$1,000 car, but is a $1,000 car going or a $5,000 car even be something that you can get that's going to safely get you or even put your family in? And that's where when when we played around cuz we

are nerdy and I'm, I'm willing to say yes, there is some math in this that um, this is where we landed because I felt like if you coordinated this with all the other debt rules, you'll see that this, this is going to balance itself out and

also remember we had that person a few weeks ago try to break he added up all these different rules that we have and I said you know what this person is not taking into account is that your life in your 20s is going to look different than

your life in your 40s and you're definitely in your 30s and your messy middle and that's what I love is car loan debt is typically something that you're going to experience probably in your 20s maybe even 30s as you're getting started but

Financial mutants don't even have car debt because as you get into your 40s and beyond and life starts feeling a little easier you're going to be paying cash cuz cash is preferred but this is going to be the rule that's going to be

that bridge that lets you get you that first wealth building tool which is your J.O. and remember 8% is the upper threshold 238 does not mean that you can only put down 20% that you must pay it off over three years or that it has to get 8% those are

the end of the threshold you can put more down you can finance it for a shorter period of time or it could only represent 3 to 4% of your income those are the like upper thresholds the upper limits anything less than that or

better than those is absolutely fantastic with the best being obviously paying cash for a car

How Much To Spend on a Car

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Explanation of the 8% car loan rule within the 238 rule

Question about the origin of the 8% number in the 238 rule.

Explanation that the rules are based on real-world application and client situations.

The 8% limit avoids double-digit car loan obligations, which are considered detrimental to financial health.

Emphasis on the negative impact of depreciating car loans on financial life.

Context of the 238 rule and real-world financial situations

The 238 rule applies to a life stage where financing a car is necessary.

Individuals at this stage often have other debts (student loans, mortgage) affecting their financial resources.

The goal is to prevent car payments from derailing wealth-building efforts.

The 8% is a result of considering other financial obligations (housing, saving, giving, taxes).

The aim was to create a realistic and practical guideline, balancing affordability with other financial goals.

Current car buying trends and the rationale behind the strict rule

Current car loan trends show long financing periods, high monthly payments, and negative equity.

Many people roll over loan balances into new cars due to poor previous deals.

The need for a strict approach to car purchases to prevent wealth depletion.

Balancing the need for affordable transportation with the potential risks of very cheap cars.

Considering life stage and long-term financial goals

The rule considers that financial situations change over time (20s vs. 40s).

Car loan debt is typically a concern in younger years, but less so as financial stability increases.

The expectation is that individuals will transition to cash purchases as their financial situation improves.

The 8% is an upper limit, allowing for flexibility in individual circumstances.

Clarification that the 238 rule offers flexibility beyond the 8%, 20%, and 3-year thresholds.

Lower percentages or cash purchases are ideal.