What % of your income should you spend on a car?

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VeeDubb

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So there are all kinds of conventional wisdoms out there for responsible financial management. E.g. "max out your 401K", % of bonds you hold in your portfolio should be the same as the number of your age, don't hold credit card balances, etc.

So I'm wondering if anybody has seen any rule of thumbs for the maximum amount a person should pay for a car as a % of their gross annual income. Note: I realize each situation is different, but that's true of all financial matters. Yet, we see plenty of rules of thumbs. So what is the rule of thumb for responsible car spending?
 
So there are all kinds of conventional wisdoms out there for responsible financial management. E.g. "max out your 401K", % of bonds you hold in your portfolio should be the same as the number of your age, don't hold credit card balances, etc.

So I'm wondering if anybody has seen any rule of thumbs for the maximum amount a person should pay for a car as a % of their gross annual income. Note: I realize each situation is different, but that's true of all financial matters. Yet, we see plenty of rules of thumbs. So what is the rule of thumb for responsible car spending? I'm talking about the price of the car relative to income, not monthly payments over 12 months. Any shady dealer can scam the numbers to make them look deceptively good.
 
Seems to me I've always heard something like "Don't buy a car that costs more than 1 year's gross salary." On the other hand, financial "experts" nowadays routinely, and moronically, advise people to use gross salary to calculate all sorts of things. A sensible person uses net salary. (After all, you can't spend what gets deducted from your check before you even receive it!)

Maybe "Price of car should be less than 75% of net annual salary"? So if you make $30 K gross (optimistic in today's America, I know), and lose 22% of that due to Uncle Sugar's greedy grabbing, then you should not buy (read: finance) a car that runs more than $17,550?
 
I don't think that you should buy a car that you can't save up for in a year/pay off in year. My last new car was about 36% of my net income.

Not much going into the cash stockpile this year!
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Quote:

...So if you make $30 K gross (optimistic in today's America, I know),

Click to expand...

A little negative there?
wink.gif

"Wednesday, April 18, 2007
USUAL WEEKLY EARNINGS OF WAGE AND SALARY WORKERS: FIRST QUARTER 2007
Median weekly earnings of the nation’s 105.9 million full-time wage and salary workers were $693 in the first quarter of 2007, the Bureau of Labor Statistics of the U.S. Department of Labor reported today."
That's $36,000 per annum, so not all that bad. Anyway, my rule of thumb has always been try to not spend more than half my annual salary for a car. Of course, for me, that usually means finding a good late model used one.
smirk.gif
 
Half? Sounds good. And here I thought people would think me too conservative for suggesting 75% of net.

Maybe I'm just filtering my salary perception through the dense mesh of [censored] known as New Orleans. I doubt median income around here is anything like $36K!
 
IMHO if you cannot pay it off within in a three year loan you cannot afford the vehicle you desire.

Also unless you have mechanical ability and time you should not spend replacing vehicles often.

My wife/I just replaced our cars in 2004 and 2005. We spent about 10% of gross income on each and paid each within 1 year.
 
I once heard from one of those financial gurus who give seminars that if you can't pay it off in three years, you can't afford it.

Everyone's situation is different. I for example have five kids, the oldest of which has just received her license. My slogan for the next ten years is, "The Art of Cheap Transportation."
driving.gif
 
I agree with the 3 year loan idea. Half of one person's gross income (not family income) seems reasonable too. If the average wage earner is 36K, then up to an 18K car sounds reasonable to me, but I would use that as a maximum figure. You can get a lot of decent cars for under 18K, esp if you get late model used ones.
 
I agree with the half of one person's gross income, too. More than that gets you into payments that can be too big to manage for most people.
 
That site makes some interesting points. For me its a constant battle between my left brain and right brain. Being a car buff, I'm always ready to jump in a new car, but then I think about all the cash I'd give away that could be working for me in a mutual fund. Plus, there is a certain satisfaction I'd get if I can keep my car (a VW no less) for 10 years or 200K miles just to know that I did it.
 
A vehicle worth HALF your annual income?? That's insane... WAY too much money to be putting into a QUICKLY depreciating asset. I can understand that most people NEED better vehicles than my old beaters (as they either can't or don't want to fix them on occasion)... but you can buy a perfectly good and reliable vehicle for 10k- one that will last you for many MANY years if properly maintained. IMO, unless you have need for a 3/4 ton truck, anything over $10k is a luxury item. Nothing wrong with that... just pointing out that it's far from neccesary.

Maintanence costs included, I've averaged less than $1000 per year in vehicle costs since I was a kid. Cheapest vehicle I've owned was an '85 F-150. Paid $1000 for it, drove it for 6 years and put about $300 in parts into it over those years. That's about $217 per year. Sure, it's ugly as sin... but it's still sitting in front of the house ready to go.
 
For a new vehicle, if the payments easily fit into your budget with a 36-60mo loan, you're doing OK IMO. My personal thought is; car loans are too easy and inexpensive (interest/fee wise) to use your cash/savings on such a horrible 'investment'. I would never drop a large amount of cash on a NEW vehicle.

Joel
 
most I ever paid for a car was 5200$, 11 yrs and 200k later, I'm still driving it. Annual upkeep , maybe 500$ a yr average. I do my own work for fun.
 
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