How Much Should You Spend on a Car? A Guide to Using Your Savings Wisely
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Regardless of whether they're new or used, cars can be expensive.
They can be expensive to buy. They can be expensive to fix. And they can be expensive to operate, too: gas prices, insurance premiums, the cost of registering the vehicle with the DMV, loan rates. The list goes on and on.
And needless to say, these expenses soar higher and higher with each passing year.
But for those of us who don’t live in urban centers with convenient and easily accessible public transit systems, navigating life these days without a car is essentially impossible.
That’s exactly why it’s so important to know all the ins and outs of determining exactly how much you should spend on a car, truck or SUV before you start shopping around.
How much should I spend on a car based on my salary?
If you're wondering how much is a safe amount to spend on a vehicle – regardless of whether it's new or used – the most frugal financial advisors say you should stick to what are known as the “1/10th” and “1/20th” rules.
Simply put, you should aim to spend one-tenth to one-twentieth of your annual gross income. That means whatever the amount you bring home before setting aside whatever will be deducted for taxes.
If you earn an annual income of $55,000, for example, that means your budget for a car should be $5,500-$11,000. If you make $70,000, your budget would be $7,000-$14,000. It may not sound like much, but staying as close to that figure as possible will come as a great help in keeping you out of financial trouble down the road.
What if I don’t have enough cash on hand to pay for the vehicle that I need?
Given your situation in life, the “1/10th” and “1/20th” rules may simply not apply.
Say you’re in the construction industry and are needing a new pickup for hauling cargo to and from job sites such as the Toyota Tundra or the Ford F-150. Or perhaps your family has outgrown the old minivan and it’s time to upsize to a third-row SUV like the Kia Sorento or the Dodge Durango, which feature seating for up to eight.
Because of their size and utility, both genres of vehicles are anything but inexpensive, to say the least. In many car buying situations, it isn’t a question of wanting but rather needing a certain make and model of vehicle.
Sometimes staying within such a tight budget when in the market for a new vehicle simply isn’t in the cards. What if you don’t have enough money to pay for the car, truck or SUV that you need?
That’s where financing comes into play.
What are the perks of financing a car?
Oftentimes buyers simply don’t have enough cash in the bank to entirely pay upfront for a vehicle that they need. One way around that fork in the road is to opt for a used model in lieu of a new one. Used models, generally speaking, cost about half that of their new counterparts.
Another way to get the vehicle you need if it happens to be out of your budget is financing. By making monthly payments over the course of two, four, six or more years, you have access to a higher level of purchasing power than if you were to pay directly out of pocket.
What’s more, financing a vehicle can help strengthen your credit score all around. That is, if you decide to finance a vehicle and are sure to make your monthly car payments on time, you’re more likely to have access to other types of borrowing opportunities down the road, such as a loan for making downpayment on a home or sending the kids off to college.
Financing your new car rather than paying in full up front can also free up room in your monthly expenses to allow you to finally make those long overdue renovations on your home or take that dream vacation with the family.
2016 Kia Sorento SX (from $19,950)
How much should I spend on monthly car loan payments?
These days, the average American borrows more than $30,000 to purchase a new car and more than $20,000 for a used car, which is a record-breaking high. And approximately 20 percent of auto loans are for $50,000 or more.
Another seemingly foolproof way to determine your budget for purchasing a car, one that can also be combined with the 1/10th and 1/20th rules, is what experts know as the “20-4-10” rule. That's to say, 20 percent of the cost of the vehicle is paid upfront as a down payment, with a four-year loan and no greater than 10 percent of your annual gross income to liquidate the remaining balance.
If the loan life is longer than four years or the annual payment is more than 10 percent of your annual gross income, it's advisable for you to consider a less expensive vehicle.
How much do people spend on car insurance and maintenance per year?
Based on the top 10 auto insurance providers in the United States, the average cost of auto insurance is just shy of $4,000 annually, or about $330 monthly. Add another $150-$200 to your monthly car budget for gasoline and repairs, and your total monthly auto budget drops even lower.
One thing's for sure: The longer you use your car, the more money you will ultimately wind up needing to spend to keep it in good working order. Be it a car, truck or SUV, automobiles are literally made up of thousands of parts. Something is eventually bound to give out and require replacing, and it usually happens after the warranty window has closed. Not only will you have to pay for the vehicle's upkeep, you'll also have to shell out cash for gas, insurance, registration, most likely the occasional parking and speeding ticket or two and – oh, yeah – interest on your auto loan, too.
The novel excitement of showing off your new or semi-new vehicle usually wears off after a few months, but making those hefty monthly car loan payments will be an ongoing chore for years to come.
2015 Toyota Tundra SR (from $27,650)
What are the cons of spending more than 10-20% of my annual income on a car?
Spending more than 10-20 percent of your annual income on a vehicle can bring added financial stress in more ways than you may imagine.
Every time you leave that trophy car parked in a parking lot or on the street it's susceptible to dings and scratches at the hands of random passersby … or worse. Then there's the fact that simply driving around town in that deluxe ride can come with added worry, too, because needless to say you're at the mercy of other motorists and their possibly less-than-stellar driving skills.
Overstepping your boundaries as far as your budget for a new car goes can also lead you to want to spend – or, better put, indebt yourself even more – in order to complete the look by way of frivolous things like a new pair of designer sunglasses or interior accessories.
In short, when it comes to choosing a car that’s right for you, savvy vehicle owners know practicality should never take a backseat to style. Rather, the two go hand in hand.
It's important to remember that yes, whichever vehicle you decide to choose can be fun to drive and easy on the eyes, too. But it needn't involve overhauling your lifestyle or reinventing your entire persona.
Your vehicle is essentially a way of getting you and all you need to haul, be it the kids, cargo or just you, from point A to point B. Period.
What are the benefits and downfalls of leasing a car?
Leasing cars has become increasingly popular in recent years, as lease cars essentially allow a buyer on a budget to afford a new car. But in all actuality, the vehicle is essentially nothing more than an embellished rent-a-car. That is, unless you actually decide to purchase the car once your lease is up, which is more often not the case than it is.
Unless you decide to buy out your lease at the end of its life, the vehicle will not be yours to resell, despite the fact that you made monthly payments for years as if that were the case.
That’s why it’s crucial for you to remember that a new car loses up to 20 percent of its value the second you drive it off the dealership lot. And in the first year of ownership, a new vehicle might lose as much as a third of its value. Those are the facts. And so that's why it's crucial to keep in mind that purchasing a vehicle is not an investment as if it were real estate or stocks.
Sure, on the surface, new cars may seem fantastic. But they come at a considerable cost. Used automobiles, however, are substantially less expensive, and these days, as is often the case with Shift, they usually come with a guarantee, too.
Shift's inventory includes thousands of options of used cars, trucks and SUVs scattered all ends of the price range spectrum, so there’s literally something for everyone regardless of their budget.
Shift also offers best-in-class service contracts at a fair-price without sales pressure. That means you get the great price and value of a used car with the bumper-to-bumper protection of a new car.
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All prices are based on vehicle availability and pricing as of
April 15, 2022
Pricing shown is not guaranteed and does not include taxes or other product fees.