How Much Should I Spend on a Car?

Home Budgeting How Much Should I Spend on a Car?

Not having your own form of transport really sucks. Trust me, I know all about it. But, the problem is they don’t really teach you how to go about working out how much you can afford to pay for a car or even if you can even afford it.

Which is why most of the time, trying to invest in your own vehicle can be a nerve-wracking experience.

The good news?

You are not alone. There are thousands of people out there wondering if they have enough capital to buy their own set of wheels.

Finding ways to save money on your vehicle expenses isn’t hard if you know where to look. From getting free air to your tires and learning how to shop for car insurance, the savings can add up. So start with making sure you get a great deal on a car. Through this article, we will go through everything you could possibly need to ensure that you are not investing into a lemon. 

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First Things First

Luckily, trying to work out if you have the cash for a brand-spanking new car is actually not that hard. There are a few basic things we will need to run through first.

The most important is how much money do you have?

We are talking about disposable income. Basically, this is the money after you have covered all of your bills, food, and utilities. Having this figure in mind will help you figure out if you can afford a vehicle, and how much you will be able to put into it.

Some important questions to ask:

  • Do you have plenty of cash after bills, or are you scraping the wire?
  • Will investing in a vehicle right now force you to sacrifice anything from your daily living?
  • How will investing in a car affect your money at the end of the month (how much will you have left over for emergencies?)

Time To Get An Idea Of What You Can Afford

Now that you have a vague idea of what you can afford, it’s time to browse various dealerships to get a better idea of what you can afford.

Why do we bother doing this before looking into the rules for buying a new car?

Well, this gives you buying power. You want to make sure you search for the best possible prices. As this will leave you some room to negotiate with dealerships for a car that may have really caught your attention.

So, now that we have a few great quotes in mind, what’s next?

The Five Rules Of Investing In A Car

Okay, so we have a vague budget idea. We know a couple of great deals available out there. But we can’t exactly drop money when we only have a vague idea of what you can afford, right?

That would be ludicrous.

So, how do we turn a vague idea of your budget into something that’s concrete? Well, here are five final rules to get a clear idea of what you can afford to get.

The 10% Rule:

The first rule of investing in a car is to only spend 10% of what you earn over a year.

This rule is made for individuals who are rather tight on cash at the end of the month and don’t want to sacrifice too much from there daily habits.

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Basically, you only want to be spending 10-percent of what you make over a year. So, if you clear $50,000 annually, you can drop $5000 on a car.

Unfortunately, this particular rule will probably only allow you to afford the most basic car out there to literally get you from A to B. But hey, it’s better than walking everywhere, right?

The 36% Rule:

Let’s say you desperately need a car. You know you make a fair amount of money, but you just don’t have the upfront capital to pay for it out of pocket…

It happens, after all – it’s not like cars are cheap.

But the question is, how much can you afford to pay back on a car loan without shackling yourself to debt?

That’s where the 36% rule comes into play.

With this rule, the combination of any loan payments that you have should not take up more than 36% of your annual salary.

This includes title loans, mortgages, car loans, personal loans, student loans and so forth. So, for example, if you clear $100,000 per year – your loans should not take up more then $3,000 per month.

The Most Important Rule 20/4/10:

Finally, last but far from least we have the most important rule when it comes to investing in a vehicle. The cream of the pie to help you get transport without falling into debt…

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When you invest in a car, this rule suggests that you put down 20% on the downpayment of the car. The payment terms should not be longer than 4-years. Finally, you want to be putting down 10% of your monthly salary as payment at the end of each month.

But what about all the additional expenses?

The 10% should cover everything revolving around the vehicle. From the loans to the upkeep and maintenance – even the monthly insurance premium.

Honestly, that’s all you really need to know about getting your very first car. These rules will help you figure out exactly how much you have to responsibly spend without landing yourself in a bind. Well, next you can learn how to avoid dirty car dealership tricks!

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About the author

Brian Meiggs
Brian Meiggs
Brian Meiggs is a personal finance expert, and the founder of My Millennial Guide, a personal finance site helping you put more money in your pocket. He helps millennials follow the smart money in order to increase their earning potential and start building wealth for the the future. He regularly writes about side hustles, investing, and general personal finance topics aimed to help anyone earn more, pay off debt, and reach financial freedom. He has been quoted as a top personal finance blogger in major publications including Yahoo! Finance, NASDAQ, Discover, MSN Money and more.

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