In America, having a car is synonymous with having complete freedom—a car lets you go wherever you want, whenever you want. If you can pay for it, that is.
One fact that doesn’t change is that cars—even the cheapest ones—are expensive! A clunker that breaks down twice a month will still set you back a few thousand dollars. While a nice one with leather seats, a sick sound system, and a moonroof can cost more than most people make in a year.
For most people, having a car isn’t a choice.
How can you keep this essential purchase from breaking your monthly budget and get a car that makes you happy? The answer to this question, like so many questions, is “it depends.” It depends on your income, on your lifestyle, and on how important having a nice, cool car is to you.
How much should you spend on a car?
In general, the answer to “How much should I spend on a car?” is “As little as you can.”
The most frugal people go out of their way to spend as little as possible on their car. It’s not just smart money; it’s a point of pride. They buy a used car, probably with cash. They drive their cars to 200,000 miles or beyond.
So, really, how much should you spend on a car?
The frugal answer: 10% - 15% of your yearly income
If you earn $25,000 a year, that’s going to be a high-mileage used car for $2,500–$3,500-. If you earn $80,000, that’s a used car for around $10,000 or $12,000. Yes, this is the harsh reality of being good with money.
The compromise: 20% of your yearly income
“How much car can you afford?” is a different question than “How much should you spend on a new car?”
The dealership will look at your income and credit report and say: “You can afford $650 a month.” You could get an auto loan on a new Porsche for $650 a month if they stretch the loan out long enough, but you certainly shouldn’t spend that much on a car.
If you take pride in your frugality, 10–15 percent of your income sounds about right. If you value the reliability that a newer, more expensive car brings, then 20–25 percent is a good benchmark. This gets you to a price of $5,000 to $7,500 on a $25,000 salary. Still not a lot, but you’ll have more options.
At a salary of $50,000, you can spend $10,000 to $15,000, which should be plenty for a basic used car under 100,000 miles.
Do you LOVE your car?
If so, now you might be thinking, “These people are crazy. There’s no way I can get the car I want for that money!”
Ask yourself why you’re saying that. Is it because you’re a “car guy (or girl)” and you value your car most out of all your possessions? Or is it because you’ve simply been conditioned by our culture, advertising, and car salespeople to think that you should buy a brand new car and that there’s nothing wrong with spending a year’s worth of paychecks on a car?
If it’s the former and you love cars—cool. Spending more than recommended for most people might be OK. Chances are—as a car person—you’ll care for the car more, enjoy it more, and get more money for it when you sell it than the average car owner. You just have to remember that because the car will be a large expense, you’ll have to be extra vigilant about other expenses.
Is your car “just a car?”
If you’re not a car person, the takeaway is to think about why you believe you should spend so much on a new car. If reliability is key, consider researching used cars and buying a used car with several thousand miles on it. A new car is good for reliability, but the fact is that buying a used vehicle will take thousands off the price of buying new.
So start your car search with the ‘how much you should spend’ frame of mind vs. the ‘how much I can afford’ idea. Remember if you walk into a dealership and don’t specify YOUR budget, most likely you will be sold what you can “afford” as determined by the salesperson, and the top dollar that you can get approved for financing.
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