Here's How Much Of Your Income Should Really Be Going Towards Your Car
Cars are one of the most expensive purchases most people make, second only to housing. For many of us, they're essential for work, errands, and daily life. Whether you splurge for luxury or keep it practical, car costs add up quickly, and many people end up spending much more than they bargained for.
So, how much income should really be going towards your car? Can you really afford that Mustang, or should you stick to the Honda Civic? The answer is more nuanced than a one-size-fits-all, but there's a framework experts generally agree on that can help you choose the most viable option while staying financially healthy.
The 20 percent rule
Unfortunately, determining how much you should spend on a car isn't as simple as, say, the 30 percent rule, which states that roughly one-third of your income should go to your rent. However, a rough guideline that some financial planners recommend is that you shouldn't spend more than 20 percent of your monthly income (before tax) on your car costs. This includes gas, insurance, car payments, and maintenance. However, you shouldn't necessarily follow this rule blindly, as each financial situation is different.
That being said, don't strive to spend 20 percent—this is the maximum. Shop around until you find the cheapest car that checks all your boxes.
50-30-20 rule
Antoni Shkraba Studio on Pexels
When determining how much you can spend on a car, consider the 50-30-20 rule. This guideline states that you should spend 50 percent of your income on needs, 30 percent on wants, and 20 percent on savings. In other words, don't burn such a big chunk of your paycheck on an expensive car when you have nothing in your savings account.
20-4-10 rule
When budgeting for a car, another method many experts recommend is the 20-4-10 rule. This states that you should put a down payment of at least 20 percent of the car's value to avoid owing more than the car is worth down the road. You should finance the car for no more than four years to minimize interest, and you should keep all car expenses to 10 percent or less of your net annual income. For example, if you earn $70,000 a year, you could afford to spend $7,000 on car payments.
Obviously, this is a lot less than the 20 percent rule stated above, but if you're more frugal or don't care so much about having a "fancy" vehicle, then it may fit your lifestyle better, freeing up more of your income for you to use on things that do matter.
Beyond percentages, it's important to keep in mind your individual financial situation. If you're paying off student debt or saving for a house, you might want to allocate less of your income to your car. However, if you have minimal other expenses, a healthy salary, and really want a nice car, it may be perfectly reasonable for you to splurge a little more. In the end, your car should serve your life, not add unnecessary stress.
