How Much Car Can I Afford?

Whether it’s the 10% gross income rule for monthly car payments and expenses or the 25% rule for purchasing a new vehicle, there is no one size fits all answer financial experts can agree on when it comes to how much “car” you can afford. So where do you start when it comes to car buying?

How Much Car Can I Afford?

Your salary should determine what car you can afford!

 Within five years (60 months) a car loses on average 60% of the initial purchase value. So, a $20,000 car at purchase would be worth $8,000 or less in five years – with still eight more months of payments to go! For these reasons, car buying shouldn’t be about what you want – but what you can afford!

Affordable Monthly Car Payments

Ideally, the best rule to follow when buying a car is the 25% gross salary rule, since it is 100% based on what you make each year. However, that doesn’t necessarily help you when it comes to your monthly car payment.

What does the 10% rule look like?

In hypothetical Jenny’s case, her $65,000 annual gross salary equates to $5,416 per month (gross). The 10% rule for Jenny would mean she has $541 per month to pay towards ALL of her car expenses each month.

Takeaway on the 10% rule

Always follow the 25% gross rule when purchasing a new car and your car payment should fall in line with how much car you can afford! if Jenny buys the car valued at 45% of her annual income, she would ultimately overspend each month after gas, insurance, and any maintenance.

Follow the 20-4-10 rule when buying a car!

The 20-4-10 car buying rule essentially guarantees you will be able to afford your car payment. Here is how it works. 1. 20% down on your car purchase 2. Don’t finance longer than four years or 48 months Make sure your monthly car expenses do not exceed 10% of your monthly gross income.

Ready to see how accurate these car buying rules are?

1. 25% of Jenny’s $65,000 is $16,250 2. 10% of Jenny’s monthly income leaves her $541 per month to spend on car expenses 3. With 20% down and her new car financed at 48 months, $13,000 is $270 per month.  The exact amount we accounted for in the affordable car payment section for Jenny.

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