If you’re thinking of buying a car, you are probably wondering how to budget for it. Figuring out how much to spend can be a challenge: Do you go for a cheaper used car or splurge on a fully loaded new vehicle? And how do you balance a car loan with other debt you may have?
Read on for strategies to determine a car-buying budget so you can make the best decision for your needs.
Key Points
• Monthly income and expenses should be considered before deciding how much to spend on a car.
• The 10% rule says that no more than 10% of gross annual income should be spent on a car.
• According to the 36% rule, all debt, including car payments, should be below 36% of income.
• With the 20/4/10 rule, a down payment should be made on the car, the loan for the car should be paid off in 4 years, and monthly expenses for the vehicle should not exceed 10% of income.
• Other factors to consider when figuring out how much to spend on a vehicle include determining whether to buy a new or used car, doing research on car prices, and test driving vehicles.
Determining How Much to Spend on a Car
There are a few guidelines to consider when you’re trying to figure out how much money you should spend on a car. Before you dig into the details, start by taking a minute to figure out your budget so you have an accurate idea of how much money you’re able to spend on a car.
Tally up your monthly income and all of your monthly expenses so you have a keen understanding of where you are spending your money. Once you have a solid grasp on that, you may be better able to decide how much to spend on a car.
Here are some common recommendations for determining how much to spend on a car. They may give you an idea of how much you should spend on a car, but of course it all depends on your specific circumstances.
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The 10% Rule
The 10% rule is pretty straightforward. The general idea is to not spend more than 10% of your gross annual income on a car. But the low limit can make it difficult to stick to this rule. If you just need a car that will get you from point A to point B, you may be able to find a vehicle that will fall under 10% of your income. But if you need a car with more features or more space, you may want to consider one of the following rules.
The 36% Rule
This rule takes into consideration your total debt-to-income ratio. This guideline suggests you keep all of your debt, including your car payments, to less than 36% of your income.
If you, like many Americans, have debt from credit cards, student loans, or a mortgage, you may want to calculate how a car payment would factor in.
• Another related guideline is the 15% rule. This guideline suggests that you don’t spend more than 15% of your net monthly take-home pay on car expenses.
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The 20/4/10 Rule
This is a multi-part rule.
• First, it suggests that when you buy a car, you make a down payment of 20%.
• Secondly, it recommends that when you take out a loan to finance the car, you plan to pay it off in no more than four years.
• Finally, the total monthly vehicle expenses shouldn’t be more than 10% of your monthly income. Having your dream car is great, but it may not be worth it if you can’t afford to save for retirement or focus on other goals because your disposable income is primarily going toward your car payments.
The 50/30/20 Rule
If you find the above rules unrealistic, you could also consider using the general 50/30/20 budget rule. This rule says that you should spend 50% of your income on needs, 30% of your income on wants, and 20% of your income should go toward saving.
Your auto loan would fall into the needs category, but if you opt for a more expensive vehicle, you could consider a portion of the payment as part of your wants. This way, you can get the car you need with the features you want, while still keeping your budget balanced by allocating some of your discretionary spending money to your car payment.
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Finding a Car You Can Afford
Buying a car can be an intimidating process. Thankfully, there are plenty of options, so you can find a car that works for your lifestyle and budget. Here are some things to consider as you embark on your search for a car that fits into your budget technique.
What Are You Going to Use the Car for?
Will you use the car mostly for quick trips to and from work? Do you have a large family that you’ll be driving to and from baseball games, soccer practices, and play dates? How you plan to use the car may influence the type of car you choose to get.
It’s also worth considering the weather. Do you live in an area with harsh winters where a larger vehicle with all-wheel drive may be helpful? There are a wide variety of vehicles on the market that fill different needs so take the time to determine which features are most important to you.
Doing Your Research
Once you decide on the type of car you want to buy, you’ll want to dig into the research phase of the process, so you are familiar with the models available, the features, and their average price.
When you’ve decided on a few models, there are a variety of resources that can help you track down details on each car. Sites like Edmunds, Kelley Blue Book, and Consumer Reports have reliable information to help consumers. And hopefully being an informed shopper will take some of the intimidation out of buying a car.
Will You Buy Used or New?
You’ll also need to decide if you plan to buy a new or used car. If you are on a tight budget, a used car may be a more affordable option. Something to remember is that a car is a depreciating asset — it typically loses around 20% of its value within the first year.
Test Driving a Few Options
Before you consider buying, test drive a few options. Buying a car is a big purchase, so take your time if you’re able to. It can be worth trying the car out on a few different types of roads so you can see how it drives in different settings.
It can be easy to feel pressure to make a purchase after a test-drive, but it is a standard part of the car buying process. The salesperson will likely be interested in making the sale, but there’s no reason you need to decide on the car immediately after the test-drive. One option is to let the salesperson know at the beginning of the drive that you’re still researching options and don’t plan to buy during this visit.
Being Prepared to Walk Away
When buying a car, you may have to negotiate. Haggling can be an acquired skill, but if you’ve done the research and know exactly how much the car is worth, you can dust off your negotiating skills and try using them to work out a deal you’d be happy to accept. If negotiations aren’t going well, being prepared to walk away may help.
Recommended: Budgeting for Beginners
Saving For Your New Car
As you are saving for the purchase, consider which kind of bank account can help you get to your goal ASAP.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
How much should I spend on a car based on my salary?
While there’s no exact formula for how much you should spend on a car based on your salary, and the specific amount depends on your unique circumstances, there are some guidelines to consider. The 10% rule says that you should spend no more than 10% of your salary on a car. The 36% rule holds that all of your debt, including car payments, should not be more than 36% of your income. Finally, the 20/4/10 rule says that you should put a down payment of 20% on a car, take out a loan to pay off the car in no more than four years, and that your total monthly expenses for the car, such as gas and maintenance, should not exceed 10%.
What is the 50/30/20 rule for a car?
The 50/30/20 rule is a more general budgeting rule that says you should spend 50% of your income on needs, 30% on wants, and 20% on savings. When applied to buying a car, that would mean you’d spend 50% of your income on the car itself, but you could allocate 30% toward features you want, which might allow you to buy a more expensive model or get additional features and upgrades on the car you’re purchasing. The remaining 20% would go toward your car payment.
Is $1,000 a month for a car a lot?
Yes, $1,000 a month for a car payment is typically considered a lot. General guidelines suggest that you spend no more than 10% to 36% of your income on a car — and the 36% figure applies to all your monthly expenses, including a car. For many individuals, $1,000 a month could exceed those guidelines. Plus, there are other car-related expenses you’ll need to pay for as well, including fuel and maintenance, which could be challenging with a high monthly car payment.
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