What Percentage of Income Should You Spend On a Car? (paying, taxes)
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You are not accounting for saving up first.. and paying out of that account. Then income has NOTHING to do with it.
Who says I'm not saving? I might be able to buy a car with cash right now. But what if the interest rate is so low that I could invest that money and get a higher rate of return elsewhere to more than offset the interest I'm paying on the car loan? Or what if I'm someone who needs to buy a car right now. I have a job, but no public transportation options. I can't wait til I've saved up enough to buy the car with cash. So I have no choice but to borrow.
I also think income is not the most important number. There isn't a magic number that you should spend no more than 20% of your income on a car.
Example:
Person A makes $4k/month, pays $750/month on a mortgage, and another $1000/month on utilities, groceries, entertainment, etc., and invests another $1000/month. They have no other debt. So they have about $1250 left every month. They can buy pretty much whatever car they want, and could save up to pay cash pretty quickly.
Person B makes $10k/month, has a $4k/month mortgage, and spends $3k/month on utilities, groceries, entertainment, etc. They also have minimum credit card/student loan payments totalling $3k/month. They are most likely already negative cash flow every month and can't afford a car payment at all right now.
So even though a reasonably priced car is a much lower percentage of income for person B, they can't afford it, while Person A can easily.
I've searched all over the internet and there doesn't seem to be a consensus. Some use gross income while others use net income. Some only talk about your monthly payment while others include things like gas, insurance, and maintenance. What do you recommend and can you explain how you arrived at that figure? Also, I'm mainly referring to a car that you're financing and have already put a down payment on. If you think the formula should be different for a leased car (assuming you can't write any of it off), please say so. Lastly, if one was to discover they were over budget on their auto expenses, which would make more sense? Trading in for a less expensive car even though you may owe more on the car than it's worth and would still have to incur some expenses from switching cars? Or doing what you can to pay off the car you have so that you can completely eliminate the monthly payment?
Well that is actually two different questions. The first is a practical question about how much it really takes to provide yourself transportation.
The second is how much you need to invest in your personal ego in order to support whatever insecurity you may feel is being compensated by driving a car you feel will impress others.
The majority of people spend much more on the latter than the former.
The cost of basic transportation is relatively cheap. The support of ego on the other hand is usually very expensive.
I've searched all over the internet and there doesn't seem to be a consensus. Some use gross income while others use net income. Some only talk about your monthly payment while others include things like gas, insurance, and maintenance. What do you recommend and can you explain how you arrived at that figure? Also, I'm mainly referring to a car that you're financing and have already put a down payment on. If you think the formula should be different for a leased car (assuming you can't write any of it off), please say so. Lastly, if one was to discover they were over budget on their auto expenses, which would make more sense? Trading in for a less expensive car even though you may owe more on the car than it's worth and would still have to incur some expenses from switching cars? Or doing what you can to pay off the car you have so that you can completely eliminate the monthly payment?
As little as possible, especially if you are financing it. Cars are a necessary evil. Unless you are maxing out your retirement plan and Roth IRA, can pay cash for the car and have a year's worth of living expenses still left over, you should pay as little as possible for the most reliable car you can get.
I bought a 22K Jeep that I run through my corporation as a company car. Bought it at 0% interest. It's barebones, and I like it that way. So 0% of my personal income, roughly 15% of my corporate income.
As little as possible. My husband and I buy a new car every 12-14years or so and pay cash. I estimate we'll spend around 30K on our next one in a few years, about 15-18% of our income.
Financing a car is (imo) dumb. Why owe money on a depreciating asset? Eat the cost and eliminate the risk.
The point was that if you save for a car, income is moot.
No, it is not. It is your income that lets you save an X amount and hence let you buy car Y. Therefore, income and car price are related and it is a fair question to know how they are related or how much of your income (whether you saved it or pay through finance) are you willing to spend.
It really is pointless. Just like any other transaction. What matters is how much of that income you have left to spend. Two people can make the exact same income and have drastically different expenses and therefore have a drastically different amount of money available for a car (or any other purchase).
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