There is a well known financial blogger out there who says you should only buy a car that is 1/10th your annual salary, so if you make $100,000 a year, you should only spend $10,000 on a car… utter rubbish! I remember reading that once and just started laughing, talk about a stretch goal.
Cars are important parts of all of our lives, some more than others of course. But anyone living in any kind of suburban setting (most of us) a car is a vital part of our lives. A car says a lot about a person and what they want to communicate about themselves to the world, in a sense its kind of like a very expensive piece of clothing. Spending some money on something that is important to your daily life and brings you joy is just fine. We each value things differently in our lives and cars are no exception. That being said what are some ways you can think about how much you can afford?
A car in general is a depreciating asset, meaning you will get less money out of it than you put into it. So never think about your car as an investment, it is an expense, it is not going to materially add to your financial future other than to give you reliable transportation, and maybe boost your self confidence in certain situations. So like any expense your car payment, and insurance, maintenance and gas need to fit inside your budget.
As always your budget should be balanced towards savings, you should earn more than you spend. How much can you afford is right there, how much money do feel good about spending and will still allow you to save and move towards your financial goals? Once you have that number here are some rough figures to help you get a ballpark as to what you can spend.
Gas – You are probably already spending money on gas, so you have an idea what that is going to cost you going forward. But keep gas mileage in the back of your mind as your looking at different vehicles, if you buy something with a significant difference to your current vehicle, this could swing your gas budget by $100 to $200 a month pretty easily.
Insurance – Generally insurance is based on the individual, the car they select and the mileage that they will be driving each year. So a bad driver, in an expensive car, with lots of miles a year (20,000+) will have a much higher rate than someone on the other end of that spectrum. In general what I have seen are prices down in the mid-100’s per year up to the several thousand per year. You should already know about where you are at on that spectrum, but always remember that upgrading to a newer car will probably increase your rate at least a little bit, lets call it $200 – $500 a year.
Maintenance – This is one that seems to get people. I know so many people who are like, “Ohhh no my car needs new tires, that is so much money, how am I going to afford that?!” “Oh no my transmission went out, I can’t afford to fix my car?!” (remember I grew up in a poorer area) No doubt these things are not something we want to spend money on but they really should not be a surprise to anyone. Part of owning a car (and house for that matter) is preparing for the inevitable maintenance costs. How much you budget needs to be based on the type of car you own and how old it is. You might be thinking, “I could never buy a new car they are too expensive”, but are you considering the additional maintenance costs? If you want to get a rough number, add up a set of tires, 5 tune ups, and one big emergency repair and divide it by 60 months to get your approximate budget. If you want a rough number I’d say its going to range in the $50 to $100 a month range for most normal cars.
The Vehicle – Finally we get to the car. When financing a new car you can look to pay about $150 to $200 for every $10,000. So a nice $40,000 car is going to cost about $600 to $800 for the payment. Leasing a car might be a good option depending on the circumstances but will require a whole other post to dive into that.
When you add all of these items up, buying a nice new car is going to push close to $1000 a month in expenses when you factor it all in. So in the end, how much you can afford will depend on how much room you have in your budget and how long you want to put off your other goals.