There are thousands of personal finance sites on the internet, all with different views about how much money you should save and invest, or whether you should buy off-brand cereal to save a few bucks. I live by the adage “if you take care of the dollars, the cents will take care of themselves.” I understand that personal finance is a matter of being good to yourself now while also being good to your future self, so yes, I buy the $5 latte and I have a nice mattress and shoes that last. One thing almost all personal finance sources agree on is that having a car payment is an inhibiting factor in your ability to invest. My favorite personal finance blogger (who runs the world’s largest independent finance blog) Financial Samurai has publicized his 1/10th rule for car buying, which so far I have been able to follow. The rule is this: you cannot spend more than 1/10th of your gross annual income on a car. If that seems a little too steep, make it the 1/5th rule, where you cannot spend more than 20% of your annual income on a car. It will help remove car ownership stress, and build your net worth over time, especially if you take the money that otherwise goes into a car payment and invest in cryptocurrency. The most effective way to ‘time’ the crypto market is not time it. It’s best to use Dollar Cost Averaging (DCA)- because it’s impossible to time those tops and bottoms.
New Car Prices are Insane
In April 2021, the average price of a new car in the US was $41,000, while the median income per individual in the US is $35,977. In America roughly 15-20 million new cars are sold each year, meaning there are likely hordes of people spending more than 100% of their gross income on an asset that depreciates 60% in the first five years. Further, car dealerships typically don’t make their money on the vehicle sale- but rather on the financing that goes with it. So in addition to that $41,000 for the new car, there’s additional interest paid (averaging 4% on new cars) over the five year loan period, bringing the total cost of the average car to $45,304 if 100% of the car is financed.
How I’ve been able to follow the 1/10th rule so far
When I graduated from undergrad, I took a job offer as an engineer for the US Department of Defense (DoD) that paid $50,000/year. I had loads of student loan debt and was scared to death of the future of my finances. I drove an 18 year-old Lincoln Mark VIII that still had some collision damage from a snowstorm a couple of years back that I couldn’t afford to fix. The car constantly had suspension system failures since it used an airbag suspension system, which made the Lincoln Mark VIII a notorious lemon. I knew I needed something newer that would last. After two years of working in 2014 I finally bought a 2008 Hyundai Sonata with 84k miles on it for $5,000, which was a steal! This paved the way for me to save more in my 401k over the years- and while I’m still young those small investments have become much larger and will someday be the foundation of my financial independence. If only I had put that money into Bitcoin instead of a 401k!
Some day my crypto will earn me $200k/year and I’ll be able to buy a brand new Honda Accord. Had I gotten into Bitcoin in 2014 and hung on I’d own Teslas and Lambos.
As the years passed, I have hung on to my 2008 Sonata. As of 2021, the car has over 221,000 miles on it, has some cracks in the windshield, and some big spots where the paint has chipped due to the gnarly winters in Colorado and New Hampshire it’s been through. Many fellow MBA alums from my class at Dartmouth are currently zipping around in their new Subarus, Teslas and BMWs. But here I am over here living stress-free with a 13 year old car that I’m not afraid to park anywhere. I don’t get upset if someone door dings the side panel in the parking lot, or if I pick up a bumper scuff. I 1000% intend to drive my car until it falls apart.
Dollar Cost Averaging for Crypto
Dollar Cost Averaging, as most of you know, is simply investing a fixed amount of money into crypto on a fixed time interval. For most of us, an easy way to do that would be every time we get paid, which for the majority of folks with payroll jobs is once every two weeks or twice a month. Since I’m relatively new to crypto, my enthusiasm hasn’t quite been crushed yet, so I put about 10% of my paycheck into crypto when I can, which is most of the time. When I’m putting my money into crypto I usually always mentally cue myself to lose everything. That way the expectation is set low and I’m usually happy over time when the price moves up and to the right, like Bitcoin has for its entire existence given a long enough time window.
Source: Bitcoin.com | The magic of DCA at work!
DCA is doubly important with the volatility that comes with cryptocurrency. DCA’s advantage comes when you can buy dips, and dips come often and are heavy with crypto trading. Don’t worry about day trading and spending countless hours of your time consuming resources online to try and get the ‘right’ coins at the ‘right’ time. Most cryptocurrency price predictions turn out to be wrong. When I first started investing in crypto, I followed several YouTubers and Twitter accounts. I traded frequently and thought that each new small cap coin I saw a video on was truly going to be the next 10x or 100x gainer. I wish I had just bought some large caps and left it alone. It would have been a lot less stressful! The most attractive part of DCA is psychological- I only have to make the decision once to put money in regularly and at fixed times and amounts and then just forget it and chill. More money and less stress? Let’s fucking do it.
There Are Some Caveats
I like to be flexible with my DCA- especially when the crypto market corrects by 5% or more compared to the last time I dollar cost averaged. I will usually ramp up the amount I contribute if we hit one of these scenarios. As Warren Buffett likes to say “Whether it’s socks or stocks, I like to buy things on sale!” Again, I make sure that I’d be ok if I lost all of this money. Unfortunately I have reached near religious-zealot status about how much I love blockchain technology, so I seem to be ok with losing more than I probably should be ok with given my student loan debt from my MBA recently and a little left over from undergrad.
Delayed Gratification Always Wins
Owning a new car and day trading cryptocurrencies have something in common- they are instant gratification behaviors. Early on when I started trading in crypto I had to get honest with myself and realize I was just looking for those short-term dopamine hits- the same ones I get when I play video games or eat ice cream or sleep in. I’m convinced now that the mature strategy is to put good or bad feelings aside and make a plan for contributions to crypto and stay with it. If I’ve been able to drive a POS car for years without folding to the temptation of getting a new car which I could easily do with my job income, I’m hoping I’ll be able to hold onto DCA with my crypto investments for many years to come. Since I believe crypto will change the world and see mass adoption, hopefully we’ll all reach make-it-rain status soon enough.