Consumers these days struggle to determine how much to spend on their cars. Too often they focus on the monthly payment amount, as this is the easiest to work into a monthly budget. Unfortunately, an emphasis on monthly payment can get you into trouble quickly when buying a car, as extended loan terms can hide a high interest rate and unrealistically-priced vehicle. And, if you’re buying a car the ideal way–in cash–monthly payment doesn’t apply. Another, perhaps more useful rule-of-thumb is percentage of annual salary. In order to find out just how much of your yearly income you should spend on a car, we hosted a survey and invited our friends, colleagues, and acquaintances from the personal finance world and automotive industry–all experts themselves–to weigh in on the matter.
We have included our Top 10 responses below. Overall, of those survey respondents who provided a numerical answer, the average was: 16%. If you earn $50,000 per year, about the average income in the US, this would be a vehicle priced at $8000.
Percentage to Spend
|10%||I believe 10% is an attainable amount to save up for a car. Which negates the need for a loan.||From Foreclosure to Frugal|
|Depends||Spend what you can afford in your budget. I don't drive, so this is not an issue for me but I have to budget for commuting by train which is expensive in the UK. My train costs equates to 10% of my net monthly salary which I think is too much really.||The Frugal Trial|
|5%||The percentage is a bit too simple for me since there are other variables to take into consideration: the availability of good used cars in the area; the COL & how much of my income was committed; whether I'd already saved anything, and how much I'm making. These days, my 5% is a world of difference from when I bought my first car. Generally, I'd say $5k is the average low-end cost for a good used car with a lot of miles left on it where I live, and it's worth paying out the higher amount for a car that will last years. Alternatively, if it's really hard to find good used cars, I'd consider going with a good standard new car for a bit more and pay it off ASAP (which is what I did w/my first car) if financing is necessary.||A Gai Shan Life|
|30%||My personal experience and those of friends has led me to conclude that generally, most people should not spend more than 30% on their gross annual income on a car. However, I would suggest that people not start with the proposition that they are going to spend x% of their annual gross income on a car. Instead, they would be better served by first establishing and managing a monthly budget that prioritizes contributions to savings/investment accounts, mortgage/rent payments and living expenses. The remainder of their monthly income should then be considered available for a monthly car payment, recognizing that most do not pay cash - the best approach - for cars.||RetirementSavvy|
|25%||I picked 25% because I feel that can give you a good car for the money. There are ways to buy cheaper cars, but if you want something that is not going to be a money pit, then 25% of your gross annual income should be able to get that for you. I also think saving up 25% of your income is possible, but it might take a year or two.||Debt Roundup|
|15%||I currently spend closer to 25% of my income on my car, but once my car is paid off this year, I anticipate it will be closer to 10%. I chose 15% because I anticipate that will be the average cost over the life of the car that I will spend, and suspect that others are in similar situation.||My Life, I Guess|
|5%||I think Americans tend to spend way too much of their annual income in this area. Try to spend as little as possible in transportation costs-which this is what a vehicle falls under.||FinanceQA|
|10%||"I didn't want to choose 5% because that might not be the best choice for everyone. It really depends on your situation. If you have a job that requires you to travel long distances, I recommend to buy a reliable new car, even if you don't make that much money. It will save you so much in the long run.|
But I didn't want to choose anything too high, because people can overpay for cars because...cars are cool.
|Listen, Money Matters!|
|8.3%||I think that keeping a vehicle at roughly 1 month's gross income is a good rule of thumb. When coupled with a 6 month emergency fund, having to fix or replace a vehicle becomes a small part of your world. For the median family earning $51,000 a year, this would result in spending $4,200 on cars. This formula would put someone working a full time minimum wage job in a $1200 car, and someone earning $100,000 a year in a $8,300 car.||Action Economics|
|Depends||I don't believe in basing how much to spend on a car on your income. It basically says that with more income you "deserve" more car.||If You Can Read, You Can Cook|
|30%||Spending less than 30% would be nice, but if you make the median personal per capita income of $24,000, 10-20% is only $2400 to $4800. It can be very tough to buy a reliable car for this price.||Motive Auto Finance|
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