Car buying guidelines. Eek. Car buying and car ownership has become a giant pitfall that most people have fallen headfirst into. Buying a car is not only stressful at the dealership because you are usually being “sold” a car but also all of the additional add on items that the dealer would like to throw on as well. It is also stressful because a lot of times when we are car shopping, we have a limited time to do it. Maybe you were just in an accident and have a check from the insurance company, maybe your car just permanently broke down, or maybe your family has simply outgrown the car that you have now. Anyway, it can be stressful.
So in order to help you through the car buying process here are my car buying guidelines that you should use when purchasing your next vehicle.
Spoiler alert: You may not like them because there are some limits to what you can spend. I don’t go as far as Dave Ramsey, but you also don’t have my blessing (not that you need it anyway) to purchase whatever car the dealership says you can afford on the lot.
And for full disclosure, I have taken the bulk of these guidelines from The Money Guy Show. If you are not familiar with them, check them out. They are awesome!
And BTW, these guidelines are ones that I use.
(1) Paying for a Car With Cash
Above all other measures, this is my preferred way to purchase a vehicle. Do it in cash, regardless of the interest rate.
I know that things have been weird over the past couple of years with the supply chain issues that the world has seen, but these will not last forever. Car prices will get back to normal. And so will car depreciation.
The main reason that my preferred method of paying for a car is with cash is because then you don’t have to pay interest on that car WHILE AT THE SAME TIME it is going down in value.
When you are paying interest on a car that is depreciating, then it is like you are getting punched in the face from both sides.
You won’t be able to stop your car from depreciating. But you can help in compounding that financial hit that you’ll take.
Look, I get it. It can be really difficult to purchase a car for cash. I know. I have had several car payments myself. But do what you can to make this happen. It may not happen in the next car that you buy. But try to make that happen over time.
After all, the average car payment in the US right now is over $700/month! THE AVERAGE!
Think of that payment going into your savings, retirement fund, toward a vacation, etc. Sheesh.
If you can pay for it in cash, do it. Thank you for coming to my Ted Talk.
(2) When to Start Saving for a Car
In my opinion, I think you should always be saving for your next car as long as your current car is paid off.
If you are still paying your car off, don’t save in addition for your next car. That’s silly.
But AS SOON AS your car is paid off, keep making that same car payment into a savings account for your next one.
You WILL need a new car sometime. Your car will break down, you will get in an accident, you will outgrow it, or you will simply become tired of it.
On average, we drive cars for about 8 years before we get a new one.
So as soon as you pay off your car just keep saving that amount in a savings account so that your next car will either be paid for or you will be able to put down a healthy downpayment.
(3) Car Buying Guidelines
So without further adieu, here are my car buying guidelines:
Car Buying Guideline #1: Put down at Least 20%
This can be done in the form of a trade-in or cash down. Either way is good with me. But make sure that you put down AT LEAST 20%.
The reason for this is you don’t want to drive off the lot and be upside-down in it. (This means that you owe more on the car than it is actually worth.)
You want to make sure that you have some skin in the game with this car.
Car Buying Guideline #2: No More than a 48 Month Term
This is the sticking point that most people don’t like.
Yes, if you have a 48 month term, your payment will be quite a bit larger. I get it. But you don’t want to pay on a vehicle for a really long time either.
If you get a 48 month term, you will pay less interest over the long haul than with a 60, 72, or 84 month loan.
Remember, you want to pay your car(s) off ASAP. In order to do this, take the shorter loan term instead of the longer one.
Car Buying Guideline #3: No More Than 8% of Your Gross Monthly Income for the Payment
You should never have more than 8% of your gross monthly income going toward car payments.
This is going to ALL payments on anything with a motor (cars, boats, four wheelers, riding lawn mowers, motorcycles, etc.)
So here is where the first bit of math comes into play.
You don’t want to have too much of your income wrapped up in something that is going down in value. You want your income to go to as many things that are going UP in value and as little of your income as possible to things that are going down.
Remember that “gross” income is BEFORE your taxes, retirement, health insurance, etc.
So for example, if you make $50,000 per year, your gross monthly income is $4,167. My car buying guidelines are that your car payment is NO MORE than 8% of that. So for someone making $50,000 per year, their max car payment should be no more than $333/month.
If you have two car payments, then they should still be no more than $333/month in total.
The reason for this maximum is because you want to have as little money wrapped up in your car(s) and as much of your money wrapped up in savings, investing, and retirement.
Here’s a chart of some different maximum car payments based on income amounts:
| Gross Income | Monthly Income | Max % Toward Payment | Max Car Payment Amount |
| $30,000 | $2,500 | 8% | $200 |
| $45,000 | $3,750 | 8% | $300 |
| $60,000 | $5,000 | 8% | $400 |
| $75,000 | $6,250 | 8% | $500 |
| $90,000 | $7,500 | 8% | $600 |
| $105,000 | $8,750 | 8% | $700 |
| $120,000 | $10,000 | 8% | $800 |
| $135,000 | $11,250 | 8% | $900 |
| $150,000 | $12,500 | 8% | $1,000 |
| $165,000 | $13,750 | 8% | $1,100 |
| $180,000 | $15,000 | 8% | $1,200 |
| $195,000 | $16,250 | 8% | $1,300 |
Car Buying Guideline #4: Always Contribute More Toward Retirement Than Car Payments
This is probably the biggest of my car buying guidelines.
You should always be contributing more money toward your retirement than toward your car payments.
Your cars won’t be there for you when you retire. Your retirement account(s) will, however.
If you are not currently saving for retirement, get started ASAP. Here’s how to get rolling with it.
Just make sure that you are putting more money into things that are going UP in value and less money in things that are going DOWN in value and you will be in pretty good shape. 🙂
Final Thoughts
You might be reading these car buying guidelines and thinking that you are completely lost and behind already because you already have a big car loan that is more than 8% of your gross monthly income and is 72 months or so.
That’s okay!
You can’t fix what you’ve done in the past, but you can start to correct your future!
Just start to pay extra on the car and get it done with ASAP and then keep saving each month for your next car.
Yes, I know that pretty much all of us need some sort of reliable and safe transportation. But we don’t have to get a car that is WAY overpriced and WAY too expensive for our lives.
You can do this!
If there is anything that I can do to help you, please let me know!
I am here for you!
Until next time!
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