How Much Car Can You Afford?
As a child-free New Yorker, I’ve never had reason to buy a car. But if I ever had to, I’d set a budget the way I did both times I bought an apartment, which amounted to the vague-sounding “what I could afford.” What went into that nebulous number was adding the down payment, closing costs, plus the monthly carrying costs (mortgage and maintenance). The bank always said I could afford more, which made sense, because the more money I spent, the more the bank would make off of me in interest on the mortgage.
Researching online, I found a few guidelines and/or suggestions on how much car you could afford:
1. 10% of your yearly gross income OR 3-5% of your net worth if you are unemployed
2. 15% of your home’s value for a married couple or 10% if you’re single
3. Using the 50-30-20 model (50% of take home goes to needs; 30% to wants; 20% to savings), though you determine if a car is a need or a want
4. Transportation costs (including car payment, gas, parking, tickets, maintenance, etc.) shouldn’t be more than 15% of monthly income
5. Using the 20-4-10 model or 20% down payment; car loan for 4 years or less (I’ve also seen no more than 3 years); no more than 10% of monthly income toward transportation costs
Here’s a guide on determining the cost of ownership and information on registration fees by state.
Some commenters raise holy hell, saying you have to live a little and loosen the purse strings, especially if you are a car person. Others don’t care what they drive. I know people who have been in serious car accidents and went out and bought cars with great safety records but defied any guideline above because peace of mind was priceless to them. There are people who regret the fancy cars they bought or who derive great pleasure from their cars even if they went over budget. Still others are fine spending more in this area by spending less in areas that are not as important.
Other guidelines I came across:
1. If you can’t pay cash for it, you can’t afford it, which appeals to my fiscal conservatism.
2. All cars owned by a household shouldn’t exceed 6 months’ family income.
3. The longer you wait before trading up to a new vehicle, the more you can afford—some will drive a car for 200K+ miles.
I also asked a friend—a certified financial planner—about his car buying approach. He told me that because a car starts depreciating as soon as you drive it off the lot (), he usually buys a 1- or 2-year-old car, takes the dealership financing, then refinances to a 1-2% rate with a credit union. His advice is think about what the car is for: because he drives to clients, he didn’t want to roll up in something that would either telegraph profligacy or indifference; he wanted something that showed he was judicious with his own money and ultimately went with a 2-year-old Accord.
You’ve heard of people buying too much house; don’t be someone who bought too much car.