If I could pick the number one thing that I see among young adults in their 20s and 30s that keeps them in the financial hole, it is spending way too much money on car expenses. My advice to you is to be sure that your car expenses, which includes a car payment, insurance, gas, maintenance, and anything else that it costs you to own your car, under 10% of your gross income. So if you make $3000 per month, your car expenses need to be $300 per month or less. Yikes! But for many young people the car insurance alone is $150 per month. Gas is another $100 per month. That is $250 already! We haven't even talked about a car payment yet. This is why I talked earlier about paying cash for everything you want so that you can be sure that you can afford it.

Most people who start tracking their spending, paying themselves first, and resolve to stay out of debt begin to buy used cars. They realize that there just is not enough money to go around to buy everything that they want. Let's look at the numbers for a minute so you can see why I recommend that you keep your car expenses under 10%.

Gross Income 100%

Taxes 25%

Savings 10%

Housing 25%

Car expenses 10%

Everything else 30%

Everything else includes clothes, vacations, gifts, medical expenses, child care, pet care, entertainment, insurance, education expenses, and unexpected emergencies. If your income is $3000 a month, that means you have just $900 per month for all of these "everything else" items.

If you decide to spend more than 10% on your car expenses, then you need to decide whether you want to spend less on housing or whether you want to spend less on this "everything else" category. What happens instead is that most people just spend more without thinking about it, and then the 10% that they need for savings has been eaten up. Of course this is why I always say pay yourself first by funding your savings first thing, and then decide that you are going to live on the rest.