How Much Should You Spend on Your Car?

Answering the big question—how much you should spend on a car?—can be tough, because there are many variables that come into effect, including your income, the total cost of the car, the monthly payment of the car, your down payment, and if you have anything to trade in. While it ultimately depends on your own personal situation, here are a few guidelines to go by.

The Twenty Percent Rule

You shouldn’t spend more than twenty percent of your monthly income on your vehicle. Many people go by this rule when they choose to purchase a new car, and many people are happy with the results, but some people don’t add in all of the vehicle’s expenses.

That twenty percent of your monthly income is supposed to include gas, maintenance, and insurance. So don’t go out and buy that flashy sports car without checking on the cost of insurance and gas first.

Maintenance can be hard to compute, but when estimating, always try to give yourself a little more room. There will be some months where you don’t put any money towards maintenance and other months where you have to put in a lot of money.

The Fifty Percent Rule

Some people have an easier time dealing with things by looking at their yearly income. For those people there is the rule that the overall cost of your vehicle should be no more than half of your household’s annual income after taxes. This includes the cost of insurance, gas, and maintenance.

Something to keep in mind is that the fifty percent of your household’s annual income has to pay for the cost of all vehicles. If you own two cars, they both should cost less than half of your annual income. If you own three, the same rule applies.

The Cash Approach

If you’re not worried about a new car or a flashy car, you may want think about the cash approach. This is the idea that you save up your money and take your cash with you to the dealership. You find a car that you like and tell the seller that you want to buy it right now for cash. This is sometimes a great way to get a deal on a vehicle. Most sellers will drop their price if they see that you have enough money to buy the car right then and there.

The downside to this is that it can be difficult. Sometimes you need to have a car and you can’t spend the time saving up the money. Also, you probably won’t be able to get as nice of a car if you go this route. However, the big benefit is that you’ll pay up front and avoid monthly payments and accrued interest.

Negotiate Your Price

Whatever you decide to spend, you need to negotiate your price. Prices on vehicles are almost never final, and if you’re willing to negotiate with the salesperson, you can sometimes get a great deal. If you don’t feel comfortable negotiating, find a friend who is. And always remember to never make a deal that you feel uncomfortable with.

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