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, adding “100%, those people are going to stay middle class.”

In some instances, the general public's obsession with automobiles may have prevented many families from accumulating wealth. As of Q1 2024, consumer debt rose to CAD$2.46 trillion, with delinquincy rates for missed auto loans and line of credit payments surpassing pre-pandemic levels, according to a report from Equifax Canada.

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 USD$30,000 sports car and kept his current USD$13,000 vehicle. His total collection of vehicles would be worth USD$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 USD$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 USD$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 USD$135.9 billion, according to Forbes.

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Vishesh Raisinghani Freelance contributor

Vishesh Raisinghani is a freelance contributor at Money.ca.

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