20% Rule
It is easy to assume that you can cut costs in other places to help afford the car of your dreams. But that is a lot easier said than done. Similar to the budget for your home, there’s a rule of thumb for your car. You should cap your auto spending at 20% of your income. You’ll probably want to calculate this number monthly. But if you keep good track of your usual expenses and are very organized, you could do it on an annual basis. This rule needs to include all auto and travel expenses, including insurance, fuel, and maintenance, not just the cost of the car itself.
Needs
We all use our car a little bit differently to fit with the needs of our lifestyle and our occupation. When you’re asking the question “how much car can you afford?” consider how you’ll use your car. If you’re self-employed, or if you use your car for work, you can take deductions on the miles you put in or on the purchase of the vehicle itself. Consider this when you start budgeting for a new car - it may be your deciding factor between a new or used car. Another consideration is the car's reliability and insurance. The nicer your automobile, the more you’ll have to pay for insurance and potentially in monthly auto loan payments. But if you need your car to be nicer for your job, then it might be worth it to spend more.
Loan or Cash
It can be tempting to buy a used car outright with the cash you have been saving up for your new car. With this strategy, you don't have to worry about a monthly payment or accruing interest on a loan. This may be a good idea for you, depending on your stage in life. No matter how you decide to purchase your car, you must remember to account for other expenses that come with a car including gasoline and insurance. These expenses are all part of buying a new car, but can be easy to forget when buying a car without a loan.
Don't forget to still consider the 20% rule. When you buy a used car outright, it is easy to forget about budgeting for your car. Used cars sometimes come with unexpected expenses. Make sure you are accounting for this when you purchase a car. While it is hard to budget for these expenses, being aware that they might come up and saving for them will save you in the long run.
Other Expenses
We’ve heard about these miscellaneous expenses a few times already, but they’re so easy to forget. They’re also essential when you try to answer our question, “how much car can you afford?” The nicer the car, the more expensive the insurance will be, so if you can just barely afford that Porsche, you might want to check your expenses one more time. Maintenance costs also come into play, and if you think you’re saving some cash on a hot used car deal, you might end up paying more than the cost of your ride on repair bills.
Whatever you’re looking for in a car, the question of how much car can you afford can be more complicated than it seems on the surface. Be thorough and plan ahead to avoid any unwanted surprises in your monthly budget. If you want to learn more about budgeting for a car or anything car related, check out our page on the car buying process.
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