How Much Should You Spend On A Car?

How Much Should You Spend On A Car?

How Much Should You Spend On A Car?

Think back on the cars that you’ve owned in your life so far. How much did you pay for them? How much were you earning at the time? Most recommendations on how much you should spend on a car suggest a certain percentage of your gross annual income. I’ll briefly describe my personal experience with car purchases before we delve further into this.

My car purchases (not so frugal)

When I graduated from college in 2007, I hadn’t learned much about personal finance. I was a naive millennial eager to start my career, so I went shopping for a new car without even considering a used car. I bought a brand new 2007 Hyundai Sonata (manual transmission), base model. Cars were a bit cheaper back then, and I was able to get it for under $14,000. Since then, I’ve also purchased a 2012 Honda Crosstour, a 2012 Toyota Prius, and a 2015 Subaru Outback (all new). We currently own the Toyota and the Subaru. I sold the Hyundai and the Honda. I know I could have been a bit more frugal and purchased used cars, but I don’t regret any of the purchases I made.

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Some things to consider

When purchasing a car, you have to consider more than just the cost of the car. The total cost of ownership is a lot more than just the initial purchase price. You also have to figure out what you truly value. Here are some of the things I consider.

  • Fuel economy. Gas prices have come down quite a bit, but I remember back in 2008 they were hovering around $4/gallon. Unless you have an electric car, you will constantly be paying for gas. Getting a fuel efficient vehicle will save you money over time.
  • Cost of insurance. Typically, the more expensive the car, the more it will cost to insure.
  • Property taxes. Some states and counties assess a property tax every year which is based on the assessed value of your car. I live in Fairfax County in Virginia, and I get a property tax bill on both of our cars every year. The more your car is worth, the more tax you’ll pay. In Fairfax County, we get a decent subsidy until $20,000 in assessed value.
  • Resale value and depreciation. Almost all cars depreciate in value, some faster than others. If I know the car I’m buying depreciates quickly, I either won’t buy it or will try to negotiate a great deal.
  • Comfort. Make sure to test drive the car and make sure you’ll be comfortable driving it.
  • Safety. Also, be sure to make sure the car has excellent safety ratings, especially if you have kids.
  • Trim level. I’ve always chosen the lowest trim level because it has everything that I need(usually power locks/windows, good A/C, decent audio). Many cars these days come standard with many additional features.
  • I know there are a lot of other things that I probably forgot. Comment on this post, and I may add it to the list.

So How Much Should You Spend?

Well, obviously it’s up to you, but here are some guidelines I’ve gathered from the personal finance blogosphere that I’ve modified slightly.

The general consensus for those trying to achieve FI (financial independence) or early retirement is to keep your car purchase to around 10-15% or less of your gross annual income. If you’re trying to get out of debt quickly or save/invest a substantial portion of your income, you want to be in this range too.

You’re still considered to be in pretty good shape and a wise spender if your car purchase is around 20-25% or less of your gross annual income.

Once you approach around 50% of your gross annual income, you’re still doing all right, but you know you can do better.

As you car purchase approaches 100% of your gross annual income, you probably need to consider if it’s worth it. At this point, your car is probably a heavy financial burden.

I made a color-coded table below to match with the descriptions above. If you’re married, you can use your household income and combined value of your cars.

Gross Annual Income 10% 15% 20% 25% 50% 100%
$30,000 $3,000 $4,500 $6,000 $7,500 $15,000 $30,000
$50,000 $5,000 $7,500 $10,000 $12,500 $25,000 $50,000
$80,000 $8,000 $12,000 $16,000 $20,000 $40,000 $80,000
$100,000 $10,000 $15,000 $20,000 $25,000 $50,000 $100,000
$150,000 $15,000 $22,500 $30,000 $37,500 $75,000 $150,000
$200,000 $20,000 $30,000 $40,000 $50,000 $100,000 $200,000

I had never done a self-assessment on my own car purchases before this. Most of my purchases have placed me in the green (20-25%) category and have moved into the blue category after 1-2 years with increasing income and depreciation of the car.

In the end, it’s really up to you. I realized that I’m willing to pay a little extra for reliability, safety, comfort, and my wife’s happiness. I still need to get her the heated seats next time though.

Here are some insightful posts on this topic from other personal finance blogs:

Image of car source

2 thoughts on “How Much Should You Spend On A Car?

  1. Hi! I just stumbled across your blog through a mutual friend’s Facebook! You have some really great things to say and I’ve subscribed 🙂

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