How to Determine How Much Car You Can Afford
03/13/2012 1:48 PM
Whichever way you look at it, buying a car is a big deal and is a decision that should involve careful consideration. While determining the actual cost of the car is important, it's also essential to consider factors like car insurance payments, gas and other regular maintenance. So how much "car" can you afford? Here are some pointers that could help you get started:
General Rules of Thumb
- According to Edmonds.com, you should't spend more than 20% of your monthly take-home pay on cars. So:
[...] if your after-tax monthly income is $4,000, your total cost of car ownership for ALL of the cars you own should not exceed $800 under this rule. I don't want to put a damper on your dream of having a flashy sports car, but to be clear, this percentage includes the cost of all those other things mentioned above - insurance, gas, maintenance.
- According to Dave Ramsey, you should aim to buy a car that costs no more than 50% of your annual income. So if you're making $50,000 a year, your car cost should not exceed $25,000.
Recommended Car Purchase Calculators
For more great tips about staying within your budget when purchasing and maintaining a car, head over to Dough Roller's How Much Car Can You Afford?