Are there any rules of thumb for how much to spend on a vehicle purchase?

[babyishcare]

I've heard the rule of thumb about your rent should be no more than 30% of your monthly take home.

I was wondering about vehicle purchase (or lease), is there a good rule of thumb maybe expressed as if you make $x take home annually, you should spend no more than some percentage of that x as the total vehicle cost. And your monthly payment with interest should be no more than some percentage of your net monthly take home.

Any advice is appreciated, thank you!

 

[resjudicata]

@babyishcare People have all kinds of rules but it's all subjective. Car enthusiasts will almost always break those rules but it doesn't necessarily mean they're being financially irresponsible. The most important thing is to factor in the additional costs beyond the payment. Insurance, repairs, tires(how often you change them depends on how much you drive.) etc. include all of these costs into one number and make sure that number isn't excessive or detracting from your savings goals, or maybe you prefer to take a small hit on your savings goal to enjoy a special car you want to get. Life is a lot more enjoyable when you don't treat cars like this dreaded horrible expense that you have to be as frugal as possible about. A lot of us are financially responsible so that we can spend a stupid amount of money on cars.

 

[eadillard123]

@resjudicata This is a good point. I LOVE cars and would love nothing more than to have a “nice” car, but always have trouble allowing myself to do it. I’ve driven boring commuter cars all my life, but someday I’ll get a car I’m excited about.

 

[magnet21]

@eadillard123 Everyday Driver can get you the help you deserve

 

[eadillard123]

@magnet21 Thanks for the suggestion! I’ll check them out

 

[dg1993]

@eadillard123 Life is short, get one you like and you may be surprised that the resale and other factors really make it a non issue. Think of the difference in annual depreciation vs the overall price of the car. Don’t go absolutely crazy but I’ve loved having the cars I want and features I want

 

[emmafrancis]

@resjudicata This is an excellent point. I have $30K of depreciating asset sitting in the garage under a cover. Not because it is the right thing to do financially, but because I like it.

That is where I splurge. We live frugally in many other places so we can afford this extra car.

 

[resjudicata]

@emmafrancis I bought an e350 convertible, loved driving it, sold it to Carvana this summer for almost the same price I paid 4 yrs ago.buy the right car and it isn’t a total loss

 

[theguydude]

@resjudicata That situation is historically uncommon and only possible because of the shortages during covid.

 

[emmafrancis]

@theguydude Yeah, I agree. Making money on non-classic cars is pretty unusual. The last year has been a huge exception to how car values usually work. I was offered about $2K shy of why I paid new for my 2019 Miata a few months back. And we had not even negotiated yet.

 

[jose7rivera]

@babyishcare So the rule of thumb is your total cost of transportation shouldn't be more than 10% of your income. Eg. If i make 72k a year. My total cost (gas, insurance, parking, and car payment) should be within the realm of 600 a month. (6000/10). I always assumed it was gross. But frankly never heard for sure either way.

Fyi I've lived in a city without a car and the subway was less than 100 a month at the time, so my total transit cost was in the low single digit %. But housing is more. Friend of mine who paid for parking at work and home (could have used transit) paid 150$ to park at home and 300$ to park at work. That's 450 right there before anything else. Nuts to me.

 

[resjudicata]

@jose7rivera I’m 34 and never owned a car (NYC and now Chicago) and the transportation costs are great! People always forget that when they talk about the expense of big cities. I have a shared bike program which is $100 a year as well so I rarely even get ubers. I don’t think I’ll purchase a car until I’m in the suburbs, which is probably 5 years away. I know Dave Ramsey says no more than 50 percent of your income on cars but that sounds high to me.

 

[jose7rivera]

@resjudicata Haha I moved to the suburbs of NYC a few years ago for work. (Jobs outside the city). I miss walking places. Very weird to me this whole suburbia thing.

I think Dave Ramsey is talking about the cost of the car. Which if you assume you Pay for over 5 years these days is a out 10% excluding gas and insurance.

 

[fishermansfriend]

@resjudicata Dave Ramsey’s 50% rule pertains to the value of the cars you own, not to the expense. I also feel like this number is way too high for my situation but just wanted to make that clarification.

 

[deborahl5255]

@jose7rivera This is the rule I try to live by. I pay cash for cars. Current budget $500/mo.

$90 - Ins
$150 - Gas (this is really going up lately)
$50 - regular maintenance like oil changes
$210 - Invested for the next car. I used to be able to put 250 away but gas is creeping up.

 

[jose7rivera]

@deborahl5255 I wouldn't bother paying cash today with interest rates but sounds about right. I tend to drive cars as long as possible and that is often 3-5 years. (I've never paid more than 5k for a car but am in the market for a new car for the first time ever. I'm getting a basic sedan, I could afford whatever nice car or SUV but why?)

 

[oursimpleife]

@babyishcare I’ve heard 20/4/10 rule. That’s putting 20% down, loan length no longer than 4 years, and monthly payments no more than 10% of your (I think gross) income.

 

[lawrence90]

@oursimpleife I use a similarly structured rule but it’s a lot more conservative: 20/3/8 rule so 20% down finance for no more than 3 years and monthly payment no more than 8% of monthly gross income.

$30,000 car would require $6,000 down and have ~$720 monthly payments for 3 years, so you need a gross income of $9,000/mo or $108,000 per year. If you’re income is half that at $54,000 then you can afford a $15,000 car with a $3,000 down payment and ~$360 monthly payments for 3 years.

20/4/10 would let someone making 108,000 buy a nearly 50,000 car with $10,000 down and $900/mo payments for 4 years, or someone on a 54,000 income buy a $25,000 car with $5,000 down and $450/mo payments for 4 years, which seems a little aggressive

 

[mattbilyeu]

@lawrence90 0 down / 0% / 48 months. 10% or half your yearly salary.

 

[johni]

@mattbilyeu I don't think planning on never paying interest to last forever is a good idea. If you want to pay 0 down or 0 interest, the amount will simply be added to the sale price when interest rates go back up.