What Percentage of Income Should You Spend On a Car? (pay, rent) - Personal Finance -debt, loans, credit cards, banks, insurance... - City-Data Forum

DennyCrane · 05-16-2012, 10:30 AM

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?

ragnarkar · 05-16-2012, 10:42 AM

My rule of thumb is no more than 1/4 of your total net worth.

Car Price <= 0.25*(Your Assets - Your Debts)

If the car gets over 40 MPG, you can relax the criteria a bit:

Car Price <= 0.33*(Your Assets - Your Debts)

ML North · 05-16-2012, 10:47 AM

Quote:

Originally Posted by DennyCrane

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?

My current vehicle is worth about 4% of my annual gross income and has 150k miles. As a ballpark figure, I would be looking to spend about 10-15% of my annual gross income on a new vehicle and get about 200k miles out of it.

Whenever the costs of depreciation, operation, and maintenance for my current vehicle exceed what those costs would be for a new car, I'll buy a new vehicle.

With my current vehicle, which I own outright, those costs are about 5-6% of my annual gross income That takes into account fuel and maintenance. Depreciation would up that figure a little bit, but its effect is going to be small compared to those of fuel and maintenance.

Waterlily Pad · 05-16-2012, 10:47 AM

Income is yours only when you get it in cash or trasferred to your bank account. The future income is unpredictable.

Hence, the question may better be asked in this fashion: What percentage of the income IN MY POSSESION should be spent on a car?

For the security, freedom, and peace of mind, don't go into debt. Buy the car you can afford with the money already saved.

A car is just a car. Don't fall into the trap of conventional rules for status symbols. Similar to the question that many have puzzled over: what % of the income needs to be used to buy an engagement ring? Ugghhhh.

Pitt Chick · 05-16-2012, 10:58 AM

I never thought of car price vs income.

I save up for my car. I either pay cash, or finance at 0% and pull the monthly payment from my car account (keeping the rest to collect some interest).

ReblTeen84 · 05-16-2012, 11:11 AM

I financed, and based what I wanted to pay on how much I wanted to not see in my checking account. The payment is about 14% of our net income, and thats with me overpaying the loan. Insurance went up all of 10 bucks compared to the car it replaced. The only thing that'll suck is when property taxes on it come due, but I already figured on that.

stan4 · 05-16-2012, 11:12 AM

Quote:

Originally Posted by Pitt Chick

I never thought of car price vs income.

I agree.
I don't think income has anything to do with car purchasing.

What you can afford (for anything) is too complicated and individualized to just create some formula across the board.

Here's how I worked it.

I take my income. Ok? I figure out the huge chunk that is going to taxes. Throw that out. I take out the maxed out (to the hilt) retirement. I take out my forced savings account (this is a non-negotiable set amount that comes out of my paycheck every month right as it is directly deposited into my checking account that cannot be touched).

I then look at what I have left. Do I have a year's worth of salary (after taxes/retirement) in emergency fund? Yes? Ok...now let's think about what I can spend.

Well, let's take out the mortgage. And extra payment to mortgage. And property taxes. And utilities/insurance.

Ok...whatever I have left...that's for fun. I figure my car into my 'entertainment' budget. I don't really do much. Go to work. Work out. Cook at home. Then it's just a matter of what I can get for the price. Oh...and that's my leased car. I have 2 others fully paid for (one paid for in cash and the other I got 0% loan on). Oh. And I make sure to have the cash to back the lease up in case of something bad happening. You pretty much can't get out of a lease.

See how ridiculously individualized that is? Other people (like my parents or my wife) would find something very practical and pay cash for it.

It's really dependent on you, what you want the car for, how your spending and savings habits are set up, etc.

DennyCrane · 05-16-2012, 02:12 PM

First of all, how can income not have anything to do with buying a car? Unless you're planning to buy the car in cash, you're going to have a monthly payment. So in order to figure out how much you can spend per month on a car, you first have to look at your other expenses. Taxes, 401k, rent/mortgage, child support, alimony, student loan, etc. Things like taxes or alimony are obviously out of your control. But how much you decide to spend on rent or a mortgage is up to you. Just like you would with a car, you'd come up with some maximum for housing. For example, a number I hear thrown out a lot is 28%, meaning don't spend more than 28% of your income on housing. Budgeting formulas aren't meant to be rigidly adhered to, but they are meant to give you a good starting point. So using the 28% figure, I'd go out apartment hunting and exclude everything that doesn't meet that criteria. It's the same with the car. Maybe I can afford to spend more than 14%. But that doesn't necessarily mean it would be a good idea.

AnywhereElse · 05-16-2012, 02:19 PM

Cash only. The big problem with using a percentage of income anymore is, one day you have a job and the next day, you don't. Have seen it here and I am sure it happens everywhere else. A lot of people end up "upside down" so that they owe more on the car than what it is worth so they can't even unload it and break even. Percentage of income is a useless in this economy. Ask yourself "What payment can I afford if I lose my job?" and you'll know what you can afford.

Pitt Chick · 05-16-2012, 02:29 PM

Quote:

Originally Posted by DennyCrane

First of all, how can income not have anything to do with buying a car? Unless you're planning to buy the car in cash, you're going to have a monthly payment.

You are not accounting for saving up first.. and paying out of that account. Then income has NOTHING to do with it.