How much car should you buy? This is a question that a lot of us ask ourselves from time to time. But sadly, we often rely on car salesmen to tell us how much. (Which is a really bad thing to do.) That’s kind of like having a jeweler tell you how much you should spend on an engagement ring. They will ALWAYS tell you to spend more than you should because they are trying to sell you a car or a ring.
So let me set the record straight and give you my guidelines on how much car you should buy.
(And FYI, these are nearly the same guidelines as The Money Guy Show gives you as well.)
Luxury Car or Ordinary Car?
The first question that you ask yourself is if you are buying a luxury car or an ordinary car.
If you are buying a luxury car that means that you should be out of debt, have substantial emergency reserves, and be investing heavily for your future. If you are not in that place, then you should not be buying a luxury car.
For the sake of simplicity, and because there are a wide variety of people who will read this article, I will not go into what is a luxury car and what is not a luxury car. That is largely going to be dependent on the person and their situation.
But I can say with a reasonable degree of certainty, that you should not be buying a Lambo, Ferrari, Bently, etc. until you have reached this point in life.
As far as an “ordinary” car is concerned, this is going to be a car that is going to get you from point A to point B safely, relatively inexpensively, and reliably.
Once again, I will let you decide what type of car fits into the “ordinary” category.
Paying for a Car in 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 cars with 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.
Guideline #1: Put Down at Least 20%
The very first thing you should consider when asking yourself how much car should you buy is how much money to put down on that car.
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.
Guide #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.
And by having a 48 month term (AT MOST), you will be way ahead of other people in paying your car off sooner. The average car loan is over 70 months now.
If you pay your car off in 48 months, that will give you time to save for your next car or extra money in your monthly budget.
Don’t go over a 48 month term.
Guideline #3: No More than 8% of Your Gross Monthly Income for the Payment
How much car should you buy when you have a car 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 (on ALL vehicles combined).
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 |
Guideline #4: ALWAYS Contribute More Toward Retirement Savings than to 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 be there, 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
Trying to figure out how much car you should buy can be confusing. And I know that this can seem a little confusing. But if you follow these guidelines, then you will be far more likely to not let your cars sink you over time.
Too many people spend way too much of their income on vehicles, only to have those vehicles depreciate and lose money.
I hope this was helpful to you!
And if it was, please share it with a friend!
And if it wasn’t, share it with someone who you don’t like.
You can do this!
I am here for you!
Until next time!
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