Leather interior. Rearview cameras. Automatic emergency braking. Even though you might have visions of a brand-new vehicle with every feature imaginable, you might have to get used to sticker shock.
Kelly Blue Book estimates that the typical price of a new car will exceed $49,500 by the end of 2022, and the average price of a used car will exceed $26,500 by the beginning of 2023. To meet your transportation needs, you must consider your needs, your budget, and other financial priorities before determining how much you can afford to spend. Whether it’s a used or new vehicle, we’ll try to make the decision easier for you.
Buying a car is a big decision, and it’s important to make sure you can afford it before you take the plunge. But with all the different factors to consider figuring out how much car you can afford can be tricky.
Don’t worry though! I’m here to help you navigate the process and make sure you drive away in a car that fits your budget and your lifestyle.
Here’s what we’ll cover:
- The 20/4/10 Rule: A popular guideline for car affordability.
- Calculating Your Budget: Taking into account your income, expenses, and other financial obligations.
- Beyond the Purchase Price: Considering additional costs like insurance, maintenance, and fuel.
- Making the Decision: Choosing a car that fits your needs and your budget.
Let’s get started!
The 20/4/10 Rule: A Simple Guideline
The 20/4/10 rule is a popular guideline for determining how much car you can afford. It suggests that you should:
- Put down a 20% down payment. This helps reduce your loan amount and monthly payments.
- Finance your car for no more than 4 years. This helps keep your interest costs down.
- Spend no more than 10% of your monthly income on car payments. This includes the cost of the loan, insurance, and fuel.
For example:
- If you make $5,000 per month, your maximum car payment would be $500 (10% of $5,000).
- If your insurance costs $100 per month and you budget $200 per month for fuel, your total monthly car expenses would be $800.
- This means you could afford a car that costs around $24,000 (assuming a 20% down payment and a 4-year loan).
Keep in mind:
- The 20/4/10 rule is just a guideline. Your actual car affordability may vary depending on your individual circumstances.
- It’s important to consider your other financial obligations, such as student loans, credit card debt, and housing costs.
- You may need to adjust the 20/4/10 rule to fit your specific budget.
Calculating Your Budget: A Personalized Approach
To get a more accurate picture of how much car you can afford, it’s important to create a personalized budget. Here’s how:
- Calculate your net monthly income. This is your income after taxes and other deductions.
- List your monthly expenses. This includes housing, food, utilities, transportation, debt payments, and other regular expenses.
- Determine your discretionary income. This is the money you have left over after paying your essential expenses.
- Allocate a portion of your discretionary income to car expenses. This should include the cost of the loan payment, insurance, fuel, and maintenance.
For example:
- If your net monthly income is $4,000 and your monthly expenses are $2,500, you have $1,500 of discretionary income.
- You could allocate $500 per month to car expenses, which would allow you to afford a car that costs around $15,000 (assuming a 20% down payment and a 4-year loan).
Beyond the Purchase Price: Don’t Forget the Hidden Costs
When budgeting for a car, it’s important to consider the hidden costs beyond the purchase price. These costs can add up quickly, so it’s important to factor them into your calculations.
Here are some of the hidden costs to consider:
- Insurance: The cost of car insurance varies depending on your age, driving history, location, and the type of car you drive.
- Maintenance: Cars require regular maintenance, such as oil changes, tire rotations, and brake checks. These costs can add up over time.
- Fuel: The cost of fuel can vary depending on the type of car you drive and the price of gas.
- Taxes and fees: You’ll need to pay sales tax, registration fees, and other fees when you buy a car.
For example:
- If you drive 12,000 miles per year and your car gets 25 miles per gallon, you’ll need to buy 480 gallons of gas per year. At an average gas price of $4 per gallon, your annual fuel costs would be $1,920.
- If you live in a state with a 6% sales tax and you buy a car for $20,000, you’ll pay $1,200 in sales tax.
Making the Decision: Choosing the Right Car for You
When you’ve determined your spending limit and taken into account any unforeseen expenses, it’s time to begin your car search. Here are some tips for choosing the right car for you:
- Consider your needs and lifestyle. Do you need a car for commuting, running errands, or taking road trips?
- Set a realistic budget. Don’t overspend on a car that you can’t afford.
- Research different models. Read reviews and compare features to find a car that meets your needs.
- Get pre-approved for a loan. This will give you a better idea of how much you can afford to spend.
- Shop around for the best deal. Don’t be afraid to negotiate with dealerships.
Although purchasing a car is a significant choice, it doesn’t have to be difficult. You can find a car that suits both your lifestyle and your budget by using the advice in this article. Recall that it’s critical to conduct due diligence, establish a reasonable budget, and compare prices. You can take your new car out and drive confidently with a little preparation!
How Much of My Salary Should I Spend on a Car?
The 20/4/10 rule states that you should limit your transportation expenses to 10% of your salary. Those expenses include your car payment, insurance, fuel, and other fees. And that is following a down payment of at least 2020% on your vehicle and financing for no more than four years.
Maintenance Fees
While you may not be thinking about repairs on a new vehicle, all cars need maintenance. If your car is older, it may need a tune-up or new tires.
In general, maintenance costs 9. 55 cents per mile. If you drive 12,000 miles per year, then you should expect to spend $1,146 on maintenance annually.
How Much Car You Can ACTUALLY Afford (By Salary)
FAQ
How much should I spend on a car if I make $100000?
How much can I spend on a car based on salary?
How much should I spend on a car if I make $40000?
How much should I spend on a car if I make $50000?
How much should you spend on a monthly car payment?
If your gross salary is $60,000, your take-home monthly pay is probably around $3,750, assuming about 25% of your pay goes toward taxes and other expenses. Based on the 10-15% calculation, you should spend no more than $562.50 on a monthly car payment. On the lower end, your car payment would be $375.
How much money can a new car pay a month?
Paying an estimated 20% in income taxes would translate to a monthly income of about $3,148 for a buyer we’ll call John. If we follow our 15% rule, John could handle a monthly car payment of up to $472. In September 2019, the average amount financed for a new vehicle was $32,928, according to Edmunds data.
How much car can you afford?
To determine how much car you can afford, financial experts recommend keeping your total monthly car payment at 10% or less of your gross monthly income, spending no more than 15% to 20% of your take-home pay on car expenses, and ensuring that total vehicle costs, including loan payments and insurance, don’t exceed 20% of your monthly income.
How much money can you make with a car?
If you take pride in your frugality, 10–15% of your income sounds about right. If you value the reliability a newer, more expensive car brings, then 20–25% is a good benchmark. This gets you $5,000 to $7,500 on a $25,000 salary. Still not a lot, but you’ll have more options.