Generally, you should spend no more than 15% of your gross income on a car, including ongoing costs like insurance and fuel. If you have existing debts, are on a tight budget, or want to prioritize other investments, 10% is a better guideline to follow.
How Much Should I Spend on a Car?
The exact amount you should spend on a car will vary significantly based on your financial situation.
However, because a vehicle is a depreciating asset, you should generally never spend more than about 15% of your gross income on a car.
While 15% is the maximum limit to keep in mind regarding how much you should spend on a car, the “golden number” is 10%.
If you’re not at a point financially where you can make large investments, sticking to the 10% guideline will leave you more money to cover things like housing, utilities, or food.
It can also allow you to dedicate more of your budget to your savings goals or building an emergency fund.
If you have minimal debt and a well-organized budget, spending only 10% on a car will allow you to increase your savings or make other, smarter investments.
In general, you want to put most of your money toward appreciable assets, such as real estate, artwork, and securities, says Reuben Advani in his book Financial Freedom: A Guide to Achieving Lifelong Wealth and Security.
The less money you spend on a car, the more money you’ll have for other investments, which can improve your financial situation overall.
Factors to Consider
When estimating exactly how much your new vehicle should cost, consider the following factors.
You should include all of these costs in the 10% or 15% of your budget that you’ll dedicate to your new vehicle.
Do a cash flow analysis for a full understanding of your monthly budget; if you don’t follow a budget, consider setting one up. Determine the maximum monthly payment you’re comfortable with and can afford.
If you plan to buy a vehicle outright, determine how much of your savings you’re willing to spend, or whether you should continue saving before you buy.
Research your potential costs (monthly and annually) based on your zip code and the vehicles that interest you.
Consider how many miles you regularly travel and whether your fuel costs will increase or decrease (due to the new vehicle’s gas mileage) compared to your current transportation.
You’ll need to pay for regular maintenance like oil changes, bulb replacements, and rotor turning in addition to being prepared for emergency maintenance, such as tire repairs.
When you purchase a car, you’ll need to pay any sales tax required; this is generally somewhere around 5% but varies by state.
Interest (If Financing)
Consider a shorter loan term to lessen the percentage of your payments going toward interest.
To help you better understand how much you should spend on a car, we detail some sample budgets below.
Keep in mind that these dollar amounts should include all of the vehicle-related costs listed above, including your car payment (if you choose to finance), insurance, fuel, maintenance, and repairs.
Tips for Buying an Affordable Car
Whether you decide to finance your car and budget for a monthly payment or want to buy a car outright, we have a few tips to consider when searching for a reliable car that fits within your 10% budget:
Explore Several Buying Options
A branded dealership isn’t the only place to find a reliable car. In fact, with the potential for extra charges and fees, you could end up paying more than you plan to when buying a car from a dealer.
Consider buying a used car from a private seller, visiting an independent dealership, or checking out online auctions and listings.
Use the 20/4/10 Formula
If you do choose to finance a car rather than buying it outright, you may want to consider following the 20/4/10 rule:
- Make a down payment of at least 20%
- Finance for no more than four years
- Stick to the “golden number” of 10% of your gross income for monthly vehicle expenses
Wait to Buy
Consider saving up for a while rather than buying a vehicle immediately. If you set aside 10% of your income for a few years, you can build up a sizable budget to buy a more expensive car, or to make a larger down payment on a financed car.
If you’re buying a used car, this can be particularly helpful — a larger budget will give you a wider range of vehicle options, including more recent models and cars with lower mileage.
CARFAX listings show that cars priced around $15,000 have lower miles, more recent model years, and better accident reports than cars listed at around $5,000.
How to Afford More Car
Lowering your costs can help you stay within or even underspend on your 10% or 15% budget. Cost-lowering measures include:
- Finding the right insurance: It’s important to find insurance that fits in your budget, but also provides the type of coverage you need or want.
- Saving on gas: Hypermiling is the practice of changing your driving habits to improve your gas mileage; drive a little bit more slowly, keep your car’s cargo load light, brake gently, and reduce your use of air conditioning. You can also find the cheapest gas prices near you using free apps like GasBuddy, or save by driving fewer total miles (carpooling, biking, or walking whenever possible).
- Saving on maintenance: To save on maintenance and repairs (and to save even more on fuel), consider a car with a manual transmission. See our 20 reasons you should be driving a stick shift.
There is no steadfast rule for how much you should spend on a car. However, spending no more than about 15% of your gross income is a good guideline to follow, and following the “golden number” of 10% is even smarter for your finances.
Be sure to account for insurance, fuel costs, maintenance, and potential repairs when setting your budget — but know that you can save money on fuel and insurance in order to afford more car.
Why do you choose to calculate 10% based on Gross, and not Net ? It’s a great rule of thumb either way.
Love your math. You’re absolutely right to include insurance, gas and maintenance in the costs. The only thing I’d add to your post is a greater emphasis on the depreciating value of a car. But that’s something that you only truly realize as you age and see your first car slowly rust and fall apart and no amount of maintenance can bring it back. And that’s when you realize how much money you spent on a something that is worth less every year . . . .
That’s true – depreciation is something to consider no matter what we buy. With cars, they have depreciated to their lowest after 20 years. After that, the value generally either stays flat or rises. So that’s the sweet spot for avoiding depreciation basically entirely. But a 20 year old car is too old for most people. So I recommend buying when a car is 5 years old. A 5 year old car will have depreciated about 50% but will slow dramatically. That’s the ‘sweet spot’ when buying a car. Thanks for your comment, Steve!
These are great guidelines!
My husband & I share a car, so it’s a nice one 😉 Only comes to just under 6% of our monthly net income though, which makes it super affordable for us.
I had never really thought about the whole percentage thing although now that I’m doing some math I kind of fell into doing it anyway. The only problem I have with buying too old cars I need to have one that is within the last 10 years (I’m a rideshare driver and that is there requirements) thing is you can get a car that’s 7 years old for a decent price that will still last for a while.