It’s easy to buy an expensive car. Yes, Americans typically spend a lot on cars. After all, you probably need a car. You rationalize it by saying it’s reliable, fun, safe, whatever. Auto manufacturers are more than willing to help you think this way. Therefore, it’s a slippery slope. Pretty soon you’re rationalizing an expensive car purchase as a ‘need’ rather than a ‘want’. I get it. I’ve been there. After graduating college, I too asked myself the question, “How much should I spend on a car?” It can get confusing. There’s a lot of talk about practicality, seating, safety, options, depreciation, color, leasing, owning, foregoing, buying, etc. There are so many car brands and so many places to buy a car. There are so many things restricting your car budget. There are so many other things to buy besides a car. First and foremost, don’t buy a new car. Buying a new car is a terrible idea.
But after a lot of digging and talking to rich people, I know exactly how much a person should spend on a car.
How Much Should I Spend on a Car?
I can’t give you a fixed amount you should spend. Some people can (and should) justify spending quite a bit on a car. Others (like myself) shouldn’t spend that much on a car. Your situation is unique. Therefore, we’ll use a percentage. That’s key. I’m not going to say to buy a new or used car. That’s not important in order to figure out your percentage. A percentage is the number you need to know when buying a car.
Never spend more than 10% of your gross income on a car. Cars suck. They are a depreciating asset. You want to put your money towards appreciating assets in general. That means if you make $50,000, never spend more than $5k per year on a vehicle – that number includes fuel, insurance, maintenance and repairs. And financing a car is crazy town so if you don’t make that much money, start off in a ‘cheap’ car. And yes, you can definitely find a reliable car for $5k or less. Use Craigslist and avoid car stealerships. Stealerships are expensive middlemen which should be avoided. If you want a ‘nicer’ car, save up the money for a few years. If you buy a 2000 Honda Civic today for $3,000 and it doesn’t breakdown too much (it won’t) and you don’t drive too much (bike instead when possible), you’ll have about $1,000 to put into your car fund. After driving that Civic for just 3 additional years, you’ll have about $15,000 saved up + the value of your Civic. Now you’re into a whole new level of cars to choose from. The selection of cars you can buy really opens up around $15k.
Consumer Reports has a similar method of determining how much you can afford to spend on a car. I love that site, check it out if you’d like.
Using the 10% rule including fuel, insurance, maintenance and repairs is good because it pressures you to think about those things. Most people just put fuel in their tank and don’t think about it much. But it’s a real cost which much be calculated. With these additional costs in mind, they will pressure you to buy a reliable car rather than a jalopy. If the car doesn’t take you from point A to point B, who cares how cheap it was.
The 20/4/10 Rule
When wondering how much to spend on a car, and if you want to finance, (I don’t generally recommend), follow the rule of 20/4/10. Make a down payment of at least 20%, finance the car for no more than 4 years and do not let the monthly expense (payment, fuel, insurance, maintenance, repairs) exceed 10% of your gross income. How much should I spend on a car? Use percentages and calculations to figure it out. Try not to focus on a lump sum.
How to Lower the Cost of Insurance, Fuel, Maintenance, and Repairs so You Can Afford More Car
I pay $17 for state minimum liability insurance. I’m a 25-year-old with a sports car. My policy is with GEICO. I love them. If GEICO gives you a less than favorable quote, check out my list of the best auto insurance comparison sites on the web.
To save on fuel, hyper-mile. Here’s how I doubled my old car’s fuel economy.
To save on maintenance and repairs (and even more on fuel) drive a manual. Here are 20 reasons you should be driving a stick shift. Don’t know how? Here’s a step-by-step guide for how to easily drive one. Want a free car? I wrote about how to get one. You can click it – it’s not a gimmick.
How Much the Wealthy Spend on Cars
I read The Millionaire Next Door a few years ago. Of all the millionaires interviewed, the average they spent on cars was 2% of their net worth! Can you believe that? How much should I spend on a car? I want to spend what the millionaire’s spend. I know it’s hard to spend so little when you’re starting off in life. But if you aspire to become a millionaire, it’s best to listen to those folks. I definitely am.
Cheap Cars Can Be Cool and Nice
I just want to end by saying a low-priced car can be awesome! It’s just a matter of finding a make and model you enjoy and finding a nice one. For me, I love Mitsubishi Eclipses. The car is fun, economical and looks great if you ask me (1995-1999 anyway). Don’t feel like buying a low cost car is a sacrifice. Instead, focus on the fact that the car is making you richer!
“How much should I spend on a car?”
10% of your gross annual income TOTAL. Not a penny more.