In America, having your own car is synonymous with complete freedom. After all, the car allows you to go anywhere and anytime.
But this freedom comes at a price.
Cars – even the cheapest ones – can be expensive. Garbage that breaks down twice a month will still cost you several thousand. A good car with leather seats and a decent audio system costs more than most people make in a year.
However, for many, having a car is not an option. This is essential to get to and from work, go grocery shopping, or run errands in places where public transportation is less than efficient.
So how much should you spend on a car? How do you make sure this essential purchase doesn’t break your monthly budget and get a car that makes you happy?
The answer to this question, as to many other questions, is: it depends. It depends on your income, your lifestyle, and how important it is to you to have a nice, “cool” car.
How much should you spend on a car?
In general, the answer to the question “How much should I spend on a car?” “As less as possible”.
The most frugal people I know go out of their way to spend as little as possible on their cars. It’s not just smart money; it is a matter of pride. They buy a used car, perhaps for cash. They drive their cars up to 200,000 miles or more. They have one car per family instead of two or three.
Connected: How to drive your car 200,000 miles or more
So, really, how much should you spend on a car?
Here are three approaches to help you understand this.
One size fits all rule: 35% of your income
Personal finance is personal, but everyone wants to follow the rule. So, if necessary, I would say spend up to 35% of your annual income on a car.
This covers most bases. If you only make $20,000 a year, that gives you a $7,000 budget. This is not much, but it is enough to buy an old, but still reliable used car.
On the other end of the spectrum, someone making $150,000 a year could spend $52,500 on a new car. This will allow you to buy a wide range of brand new cars, including luxury models. However, this $150,000 man might be annoyed if he’s told he shouldn’t buy a well-equipped $115,000 Tesla Model S.
That’s why I think it makes sense to break the rule down into levels. Only you can decide which level is right for you based on your financial situation, whether you will pay in cash or cash, and how important your car is to you compared to other expenses.
Read more: Can you finance a used car? And what is the best way to do this?
Thrift Rule: 10% of your income
For many people, I think it will be 10 to 15% of their income. So if you’re making $25,000 a year, it’s going to be a $2,500-$3,000 used car with high mileage. If you’re making $80,000, that’s a used car for about $10,000 or $12,000. (Yes, this is the harsh reality of being good with money.)
But here’s the thing: I’m not that frugal. I know it’s weird coming from a personal finance blogger, but I’ve always been honest about the fact that I’m more of a born spender than a saver. I’ve tested myself in many ways and become better at making lean decisions, but I don’t have the same passion for spending as little as possible at every step (although I often envy those who do).
I also appreciate cars. I enjoy driving and taking care of it, so I’m willing to spend a little more – without overdoing it – on my cars.
Compromise: 20% of your income
For me, if I’m going to buy a new car, I want something that is as safe and reliable as possible for my needs. Especially with a young family and two busy, working parents, reliability is key – sending the car to the shop all the time would be a hassle.
The last two cars I bought were two to three years old with about 20,000 miles on them. The novelty of the cars was good for their reliability, but the fact that they were used reduced the price by thousands compared to buying new.
“How many cars can you afford?” is a different question than “How much should you spend on a new car?”
The loan officer will look at your income and credit report and say, “You can afford $650 a month.” You could finance a new Porsche for $650 a month if they extended the loan long enough, but you certainly shouldn’t be spending that much on a car.
If you are proud of your frugality, 10-15% of your income is right. If you value the reliability of a newer, more expensive car, then 20-25% is a good number.
This earns you between $5,000 and $7,500 on a $25,000 salary. Still not much, but you will have more options. With a $50,000 salary, you can spend $10,000 to $15,000, which should be enough for a basic used sedan with less than 100,000 miles on it.
Again, don’t spend more than you can afford. But if you need to finance a purchase, you can quickly and easily compare prices online using Monevo. This site allows you to compare loan rates from over 30 different banks and lenders, and personalized loan offers are available in just sixty seconds.
Comparing different lenders is essential in order to make sure you get the best rates. Monevo is free to use and checking options won’t hurt your credit score.
Read more: Car Availability Calculator
But if you really love cars…
For all of you personal finance bloggers, as long as it sounds good. If you’re here for the first time (and if you’ve read this far), you might be thinking, “These people are so cheap! This is madness. I can’t get the car I want for this money!”
I would tell you to ask yourself why you say that. Is it because you are a “car enthusiast” and value your car the most? Or is it because our culture, advertising and car dealers have simply made you think that you should buy a brand new car and that there is nothing wrong with spending a year’s salary on it?
If this is the first – then you love cars – cool. There is nothing wrong with intentionally spending on what you value most. By “intentional spending,” I mean spending money—maybe more than other people think is reasonable—on things that interest you.
So if you value your car, I don’t see anything wrong with spending more than what we recommend, perhaps up to 50% of your annual salary on the car’s purchase price.
Chances are, as a car person, you will care more about the car, enjoy it more, and get more money for it when you sell it than the average car owner. Again, you just need to keep in mind that since the car will require a lot of money, you will have to be especially vigilant about other expenses.
Get free dealer prices for your new car Use Edmunds to make dealers fight for your business! Choose your car and see the best price before you leave home.
Summary
If you’re not a car person, consider why you think you should be spending so much on a car. It’s easy to think that, I know – I used to work in a car dealership.
If someone came in and didn’t state a budget, we would sell them whatever car they wanted and only then worry about whether they could afford it. And by “affordable” I mean that they can get approved for funding. In some cases, I’m sure they sold cars that cost more than what the customer was making in a year.
We didn’t care about the actual income or budget of the car buyer; it’s not the dealer’s business. If the client cannot afford the car, the bank sends a repo agent and returns the car. The system takes care of everyone but you. Start looking for yourself by figuring out how much you should pay for a new car and then stick to your judgement.
Happy driving.