“How Much Should I Spend on a Car?” Follow These Guidelines…

If you’re wondering, “How much should I spend on a car?” we have the answer. Buying a car is a major purchase, and an essential one throughout most of the U.S. It’s important to find a car that is reliable and safe, but it’s also important to be smart about how much you spend. Generally, it’s a good idea to spend no more than 10% of your income on a car — including ongoing costs like insurance, fuel, and maintenance. Below, we’ll tell you why 10% is “the golden number,” plus share tips to keep in mind when buying a car and ways to lower your automotive costs.

The Golden Number

The exact amount you should spend on a car will vary greatly based on your financial situation. However, because cars are a depreciating asset, you should generally never spend more than about 10% of your gross income on a car.

In general, you want to put most of your money toward appreciable assets, such as real estate, artwork, and securities, according to 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 needs and investments, which can improve your financial situation overall. The average amount that millionaires spend on their cars is only around 2% of their net worth, according to The Millionaire Next Door by Thomas J. Stanley and William D. Danko.

Spend no more than 15% of your gross income on a car, with 10% being an even smarter guideline to follow, particularly if you are on a tight budget or have any debt. That means if you make $50,000 a year, you shouldn’t spend more than $5,000 to $7,500 on your vehicle per year, including car loan payments, fuel purchases, insurance, maintenance, and repairs.


  • Do a cash flow analysis for a full understanding of your monthly budget.
  • Research your potential car insurance costs based on the vehicles that interest you.
  • Determine the maximum monthly payment that you are comfortable with and can afford.
  • If you’re financing your purchase, take a shorter loan term to lessen the percentage of your payments going toward interest.

Tips for Buying an Affordable Car

Whether you’ve decided 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 all of the extra charges and fees, you can end up paying more than you need to when buying a car from a dealer. You may want to instead buy a used car from a private seller, check out online auctions and listings, or visit an independent used-car dealer.
  • Finance with 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 the car for no more than four years, and do not let the total monthly expense (monthly payment plus fuel, insurance, maintenance, and repairs) exceed 10% of your gross income.
  • Save up for a car rather than buying one 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. (A quick browse of CARFAX listings shows 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 Lower Your Costs so You Can Afford More Car

Whether you’re buying a car in full or financing your purchase, there are several ways to lower your costs. 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. The internet has made it a lot easier to find for the best rate and policy for you, using comparison search engines and online quotes. (See our list of the best auto insurance comparison sites.)
  • Saving on gas: Hypermiling is the practice of changing your driving habits in order to improve your gas mileage. Hypermiling can be accomplished by driving a little bit more slowly, keeping your car’s cargo load light, braking gently, and reducing your use of air conditioning, according to Mother Earth News. You can also find the cheapest gas prices near you using free apps like GasBuddy (available on the App Store and on Google Play), 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), drive a car with a manual transmission. We have articles on 20 reasons you should be driving a stick shift, plus a step-by-step guide to learn how to drive a stick.

Following these tips, you can put the money you save on insurance, gas, and maintenance, toward a larger or newer car while staying within the 10% budget.

In Summary

There is no steadfast rule for how much you should spend on a car. However, spending no more than about 10% of your gross income is a good guideline to follow. 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.

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  • 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 . . . .

    • William Lipovsky says:
      First Quarter Finance logostaff

      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.