How Much Should You Spend On A Car?
Cars can be very expensive. Most financial bloggers would recommend you reduce the amount you spend on cars because on average they depreciate very quickly on a year to year basis. I’ve read tons of articles on this topic. Experts recommend a monthly payment of no more than 15% of your gross salary including insurance and maintenance. Also, for the total cost of the vehicle to be no more than half of your annual salary. With these rules in place, a person making $60k a year can afford a vehicle up to $30k with $750 a month total for car payments, insurance and maintenance (gas, car washes, etc…). But can you really “afford” to spend 15% of your gross salary on a car?
Technically speaking, you can “afford” anything if they stretch out the payments long enough. But just because it can fit into your monthly budget doesn’t mean you should spend $45k on a new car. According to an auto trend report from Experian Information Solutions, in the 1st quarter of 2016, the average new car loan was $30,032. That’s at least a $500 payment per month. Unfortunately, this record high loan amount also led to an increase in loan delinquencies. This let’s me know that people are living beyond their means.
Budgeting is sooooo crucial. Spending $750 a month total on a vehicle might not work for you if you have other financial obligations. Let’s say you have student loans, credit card and personal loan debt after graduating college. Spending 15% of your gross salary on a depreciating asset like a car while buried in all of that debt is not a great decision to make. Especially in the early stages of your career when you’re just starting to build your nest egg and job security is not always guaranteed. Adding more debt to your net worth can delay your path to financial success. Those new car payments can go towards other debt and free you up to have more cash flow to save and pursue other goals.
When car salesmen stretch out your monthly payments, they’re just trapping you with more interest payments. The longer the loan the more money you actually end up paying and vice versa with the shorter the loan the less. The ideal situation would be paying for a car in cash $$$$$$
In reality, that’s a difficult task for most to do nowadays, but if you’re going to take out a loan at least try to get the best loan possible before you sign on the dotted line. Shop around for the lowest APR rate you can get because this will save you money on interest payments per month on the balance. Do not get your auto loan from the dealership. Always negotiate the purchase price, if you don’t like it leave you are always in charge.
Research the vehicle you want and figure out how much it will cost to make a monthly car note and insurance payment. Transfer this estimated payment to a separate savings account for 3-6 months. If you’re comfortable making these payments monthly while still handling your other financial obligations, then you’re ready to purchase a vehicle. If your budget is tight during this test trial, I would recommend you searching for a cheaper vehicle. There are so many variables when it comes to spending money on a car. Make sure you prioritize your finances and tackle current debt before deciding to add on more. Here’s another popular article I wrote on my experiences while purchasing my 1st car after college. >>> I Purchased My First Car, 8 Things I Could’ve Done Differently
If you want to estimate your monthly car payments try Bankrate’s auto loan calculator:
Auto Loan Calculator
source: Experian Report