What % of your income should you spend on a car?

[biomed_eng_2000]

Depending on your income, your car should cost about 10% to 20% of your salary.

That means the average American should be driving a used car in the $4k to $8k range. Nowadays, you can get a used but very dependable Toyota/Honda/Acura for about $4k.

 

[Benzadmiral]

NET income, people, not GROSS. You can't spend your gross -- you never get to see it. That approximately 22% should never enter into purchase calculations.

I bought my MB C230 almost exactly 3 years ago, and it ran about 45% of my annual net income at that time. The income's gone up (a teeny, tiny bit), extra payments were never a problem, and the car will be paid off by the 3-year mark.

It was a 4-year loan, so I saved quite a bit of interest. Crapital Wun hates me for that, apparently. My original loan was for 5.5%, their lowest back then for a used car. Their website now trumpets "As low as 6.6%!!!" -- but all they'd offer ol' Perfect Credit Me was 9.9%.

Scrooo 'em.

 

[VaderSS]

You SHOULD spend as little as possible on your car. If we all drove cars that just met our needs, rather than our wants, the price of gas would be a lot lower...

If I held to that wisdom though, I'd be driving a Geo Metro.

Most I've ever spent is 40%. I can't imagine spending a year's income on a car.

 

[VeeDubb]

The reason why I used gross income is because net income can swing a lot depending pre-tax 401/403 contributions, pretax insurance premiums, and get this: parking permit fees (yep, my employer makes me buy my own permit!), etc., whereas tax rates are much more predicable across different situations. Everyone's gotta pay em' and the rates are largely fixed (with minor variations for your locality).

Someone made a good point earlier about never putting cash down on a car. I would only put cash down if my loan requires 6% interest or greater. But with all these factory incentives going on (usually 3.9% or less), its' better to stretch those payments out as long as possible and put as little down as possible. Invest the money instead.

 

[Norm Olt]

It used to be that when one was considering buying a home (i.e., REAL PROPERTY) there was a pretty basic formula that you could probably AFFORD a home with a purchase price 3X your annual income. This with the caveat that you would have a REASONABLE down payment + $ to pay for closing costs... Also that that your income would rise over the years and that the value of the home would increase over the years.

The important concept being able to AFFORD the payments and QUALIFY for the loan: EVER HEARD OF "SUB-PRIME LOANS"? The concept that someone will loan you money for something you really CAN'T AFFORD is not new: look at the credit card companies! All they want to do is to change the "teaser" rate & charge you 24% on your balance because your minimum payment was 2 days late.

IF you are willing to make a car payment every month for the REST OF YOUR LIFE you can just lease a car for say, 3 years or so: then, if the lease isn't upside-down, open-ended, etc. & you don't trash it or go over the allowed mileage, you can reasonably expect to be able to just LEASE yet another car at the end of the lease for about the same $ per month...

Only problem is that the money you spend for an Accord lease today will probably only get you a Civic lease three years from now, and a Kia three years from then. The insurance on the Kia may also well be more that the Accord was 6 years before...

The real problem is the widespread belief that one is immediately ENTITLED to whatever one WANTS, not what one can AFFORD!

The college kid who graduates with $35,000 in student loans runs out and buys (or leases) a BMW for $549 per month but bewails having to make the payment on the student loan.

Some would argue that "ALL education should be free"...

And, of course, ALL health care should be free...

To get back to the topic, it depends on how far in the debt-hole you actually are:

IF you have paid down your short-term credit card debt: IF you are saving the max as far as ALL tax-deferred or employer matching retirement plans are concerned: IF you can afford the rent or house payment/insurance/taxes where you are now living, then...

YOU NOW HAVE DISPOSABLE INCOME! What you then decide you can AFFORD for a car (vs. for trips, dinners out, food, toys,clothing, etc.) is up to you.

If you are not already max'ed out by years of SPENDING MORE THAN YOU CAN EARN, you certainly do have options, don't you?

Cheers!

 

[rpn453]

I'm not as tight with my money as I could be when it comes to vehicles (I did buy a new car 3 years ago costing 50% of my gross income after all the smoke cleared), but these situations would go beyond my limits of financial responsibility:

1) Making payments on a vehicle that is no longer on full warranty.

2) Owing more on a vehicle than it's worth at any time during ownership.

 

[ShiningArcanine]

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So there are all kinds of conventional wisdoms out there for responsible financial management. E.g. "max out your 401K", % of bonds you hold in your portfolio should be the same as the number of your age, don't hold credit card balances, etc.

So I'm wondering if anybody has seen any rule of thumbs for the maximum amount a person should pay for a car as a % of their gross annual income. Note: I realize each situation is different, but that's true of all financial matters. Yet, we see plenty of rules of thumbs. So what is the rule of thumb for responsible car spending?

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Here is a rule of thumb. Get a good car and then never buy another car ever again. Repairing an old car over the lifetime of what would have been its replacement is cheaper than replacing it. Avoiding all contact with dealerships' sales departments as if they are the plague is also cheaper than trying to buy a new car in terms of overall frustration. It also has that feel-good effect that happens when you keep greedy people from having business and can cite their greed as the reason they have no business.

 

[onion]

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Depending on your income, your car should cost about 10% to 20% of your salary.

That means the average American should be driving a used car in the $4k to $8k range. Nowadays, you can get a used but very dependable Toyota/Honda/Acura for about $4k.

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Is this a personal opinion, or directly from some source?

 

[Aldaris]

I have a VERY hard time imagining someone making $40,000 a year (gross) making payments on a car that costs $30,000. That would be pretty awful. Imagine this:

Net income:
$2500/mo

Expenses:
$1000/mo for an apartment/house payment
$500/mo for utilities, car insurance, and other misc. bills
$300/mo for food
$500/mo on misc. living expenses - gadgets, tools, toiletries, anything you go to the store for that isn't food.

Total: $2300/mo
That leaves you with $200. That might make payments on an economy car like a Kia Rio. And NO money for savings. You can adjust my above numbers however you want, but unless you want to live like a total pauper these days, you as the average earning American are in pretty bad financial shape.

 

[Aldaris]

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So there are all kinds of conventional wisdoms out there for responsible financial management. E.g. "max out your 401K", % of bonds you hold in your portfolio should be the same as the number of your age, don't hold credit card balances, etc.

So I'm wondering if anybody has seen any rule of thumbs for the maximum amount a person should pay for a car as a % of their gross annual income. Note: I realize each situation is different, but that's true of all financial matters. Yet, we see plenty of rules of thumbs. So what is the rule of thumb for responsible car spending?

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Here is a rule of thumb. Get a good car and then never buy another car ever again. Repairing an old car over the lifetime of what would have been its replacement is cheaper than replacing it. Avoiding all contact with dealerships' sales departments as if they are the plague is also cheaper than trying to buy a new car in terms of overall frustration. It also has that feel-good effect that happens when you keep greedy people from having business and can cite their greed as the reason they have no business.

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But the Joneses.....

Remember that effect on people. That, and people grow frustrated with old cars very quickly and usually put them on minimum breakdown maintenance levels until they can afford nicer.

 

[ShiningArcanine]

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So there are all kinds of conventional wisdoms out there for responsible financial management. E.g. "max out your 401K", % of bonds you hold in your portfolio should be the same as the number of your age, don't hold credit card balances, etc.

So I'm wondering if anybody has seen any rule of thumbs for the maximum amount a person should pay for a car as a % of their gross annual income. Note: I realize each situation is different, but that's true of all financial matters. Yet, we see plenty of rules of thumbs. So what is the rule of thumb for responsible car spending?

---

Here is a rule of thumb. Get a good car and then never buy another car ever again. Repairing an old car over the lifetime of what would have been its replacement is cheaper than replacing it. Avoiding all contact with dealerships' sales departments as if they are the plague is also cheaper than trying to buy a new car in terms of overall frustration. It also has that feel-good effect that happens when you keep greedy people from having business and can cite their greed as the reason they have no business.

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But the Joneses.....

Remember that effect on people. That, and people grow frustrated with old cars very quickly and usually put them on minimum breakdown maintenance levels until they can afford nicer.

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My Toyota Avalon is 12 years old. I plan to drive it for the rest of my life.

I will be going to a few dealerships' sales departments tomorrow to help my mother buy a new car as my Avalon used to be hers. Having experience visiting them from previous attempts, I have realized that there are few things in the world that are more horrifying than a visit to a dealership's sales department. Therefore it is best to deal with them once to get a car and then to avoid them for the rest of your life.

 

[VeeDubb]

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I will be going to a few dealerships' sales departments tomorrow to help my mother buy a new car as my Avalon used to be hers. Having experience visiting them from previous attempts, I have realized that there are few things in the world that are more horrifying than a visit to a dealership's sales department. Therefore it is best to deal with them once to get a car and then to avoid them for the rest of your life.

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Why would you not negotiate the entire deal on the internet via the internet salesman? I've been told by car sales guys that internet sales is a whole different beast and they expect that 95% of customers will not buy unless they get a very competitive offer. They also expect internet buyers to have more information and be more savvy.. So they are generally willing to go lower and give you quotes. Plus, they can't pressure you face-to-face. My mom lives in Missouri and I negotiated a lease on a BMW X3 for my mom and we hammered out the details through email exchange. All my mom had to do was walk in and sign the papers. They also faxed me the transaction sheet so that I can make sure there were no hidden costs. On the other hand, walking into a dealer cold-turkey is asking for trouble. The motto for floor salesman is "if you let the customer leave, they don't come back."

I've also had good and bad experiences with dealers. The BMW guy and my VW salesman were very easy to deal with. No pressure, answered all my questions, and gave me straightforward answers that other salespeople might not give (like dealer market support from the manufacturer, # days the car has been on the lot, etc.). On the other hand, my Toyota experience has been horrific. Four out of the five Columbus dealers were high pressure, do not give straight answers, and/or won't give quotes. So you have to do some research on your local dealerships. Check out:

wwww.dealerrater.com

 

[VeeDubb]

So let me ask a more specific question. Suppose that somebody is maxing out their 401K contributions and is able to meet all mortgage/bill payments. The person is debt free (except for a mortgage) and has also saved enough to pay cash for the new car. But the car is a significant % of the person's annual income (say 50%). Would it be financially responsible to buy the car?

 

[Benzadmiral]

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I have a VERY hard time imagining someone making $40,000 a year (gross) making payments on a car that costs $30,000. That would be pretty awful. Imagine this:

Net income:
$2500/mo

Expenses:
$1000/mo for an apartment/house payment
$500/mo for utilities, car insurance, and other misc. bills
$300/mo for food
$500/mo on misc. living expenses - gadgets, tools, toiletries, anything you go to the store for that isn't food.

Total: $2300/mo
That leaves you with $200. That might make payments on an economy car like a Kia Rio. And NO money for savings. You can adjust my above numbers however you want, but unless you want to live like a total pauper these days, you as the average earning American are in pretty bad financial shape.

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If those are the kind of prices you're seeing in CA, my man, it's time to MOVE.

Not that it's much better anywhere else . . . but $1000 for rent/house payment, when you only bring home $2500/month? It *should* be more like $650 (one week's take-home pay). And $500 for utilities & car insurance? $300 for food? I'm shuddering even as I type this.

But I agree that a lot of people with impaired judgment about finances might very well get themselves into such a mess. "Where's all the money going?"

And the Giant Corporations, esp. credit card companies, love this sort of thing. Or they'll love it right up the point where vast numbers of their desperate customers default on their debts. . . .

 

[rjundi]

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So let me ask a more specific question. Suppose that somebody is maxing out their 401K contributions and is able to meet all mortgage/bill payments. The person is debt free (except for a mortgage) and has also saved enough to pay cash for the new car. But the car is a significant % of the person's annual income (say 50%). Would it be financially responsible to buy the car?

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Yes and no.

I think there should be a cap on a vehicle purchase price. If your household income is $150k do you really think its reasonable or prudent to buy a $75k car??? Even if you make $100k/year paying $50k is really high considering you only make that much. Making only $80k and spending $40k seems crazy to me..

Lastly you should always have about 3 months of salary(at least) sitting in the bank.

I guess I spent 10% of annual salary on our two brand new recent cars that replaced our 10year old/200k+ cars.

 

[JTK]

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..... Would it be financially responsible to buy the car?

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I'm still not sure I'd pay cash for a new car even in that situation VeeDubb. You'd be better off throwing those resources into something with better returns.

Joel

 

[VeeDubb]

Joel,
Sorry, what I meant to imply is that the person has the option of paying cash, not necessarily that cash is the best strategy to use during the transaction. Basically, the person has some financial freedom.

 

[deven]

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So let me ask a more specific question. Suppose that somebody is maxing out their 401K contributions and is able to meet all mortgage/bill payments. The person is debt free (except for a mortgage) and has also saved enough to pay cash for the new car. But the car is a significant % of the person's annual income (say 50%). Would it be financially responsible to buy the car?

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In this case it is the person's choice. What are his goals or aspirations in life?? If that situation presented to me, I probably would buy a cheap car and use the rest as a downpayment on a positive equity investment such as a house to be rented out or a summer home in florida that could be rented out in the winter. Anything that can hasten my retirement is good because I would rather travel year around and die knowing I enjoyed every nook and cranny of this world. A expensive car can only take you so far and cant show you the whole world. People need to understand that buying an expensive car that has negative equity can never be good.

P.S. People that follow this board and know that I drive a Lexus from my UOA's or posts need to understand that its a company car and I didnt buy it out of my pocket.

 

[LouDawg]

I'm surprised that I haven't seen anyone address the intangibles of owning a car. Especially with all of the enthusiasts on here and all the talk of "appliances" vs. "performance" or "driver's cars" or "classics" or "collectors", etc.

There are really only two ways to look at it.

1. Financial. It's not how much you make, but how much disposable income you have or will have to work with, before and after the purchase. All the talk about percentages and debt ratios and buy vs. lease really just boils down to how much money you'll have in your pocket at the end of the month, or the end of the purchase, whichever the case may be. Also, it depends on what you need to be able to DO with that residual amount, i.e. what other obligations or desires/hobbies/interest do you have? Also, what are the opportunity costs? What else could that money be doing for you if it weren't used to purchase/lease/finance a vehicle? At the end of the day, almost all of us need some sort of reliable transportation. However, most cars in most circumstances for most people are bad *investments*, strictly from a financial perspective.

2. Psychological. How much are you willing to pay to derive whatever psychological benefits you expect to realize? Whether it's driving pleasure, status, keeping up with the Joneses, speed, quality, technology, you're a car collector, vintage and classic autos, racing, car shows, or whatever other intangibles. Some are willing to pay a lot for any or all of those things, so it can't be simply boiled down to a dollars and cents argument to those people.

So to answer the OP question, I don't think it can be reduced to a fixed or maximum percentage for everyone. There are just two many variables. To me, the bottom line is that a car can be a bad *investment* without necessarily being a bad *purchase*.

 

[Gary Allan]

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What % of your income should you spend on a car?

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As little as your wants and needs will allow.