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How much is too much for a car payment?
Generally, paying more than 10% of your income for a used car or 50% for a new car is considered too much. Ultimately, the deciding factor should be your overall financial situation to guide your car payments. You should be able to afford your expenses, savings goals, and use leftover cash for a car payment.
Remember, personal finance is personal. Only you know how your money will benefit your life the best. If you can meet your financial responsibilities then you can splurge on cars.
My only recommendation is that you consider the opportunity cost. Transportation is one of the biggest expenses you’ll face. Debt, such as a car payment, does not help you build wealth.
As previously mentioned, start with your budget. You should have a plan for your income 2 plan your monthly expenses, emergencies, and still be on track for retirement.
Once your budget is completed, is there any spare money left over? You can use this for a car payment provided no better alternatives exist.
So let’s say you’re comfortable spending $300 per month on a car payment. You visit the dealer, but the payments come out to $350. What do you do?
You can either revisit your budget and see if you can find an extra $50 per month. However, it’s probably best just to save up for down payment on your new car. With a substantial down payment, you can greatly reduce your monthly payments.
The Ultimate Goal
The ultimate goal of this is to have as nice of a car that you want to drive in a few years time.
that in a few years when you have a really nice used vehicle that you can keep for 8 or 9 years, you take that $475 a month and invest it. Since there will be no reason for it to be liquid since you will not be buying a car for a while, there should be no qualms about letting it grow in the market.
$475 a month, or $5700 a year is just under the amount that you can contribute into a Roth IRA (as of 2020). You can check out more information on the 2020 limits for Roth IRA’s here.
It can also be a nice boost toward your 401K coming directly out of your paycheck.
Cars as status symbols
Why would someone want to spend so much on a car? Well, there are many reasons.
Some view an expensive vehicle as a status symbol. And some believe the nicer the car, the more authority they have on the road. Of course, that’s not true. Others may want more expensive vehicles to support a personal image or give others the impression of wealth.
According to Financial Samurai, spending money on a car that you can’t afford actually detracts from the enjoyment of owning the vehicle. If you fall on hard times and can’t keep up with payments, the car could be repossessed. And if you’re in an accident, repairs might be expensive. Plus, parts could be hard to find if you own an exotic car.
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The Dough Roller Approach
Here’s my rule of thumb–pay cash. Now I can hear what you’re saying. You just graduated from college and have a great job making $60,000 a year. But if you pay cash, you’ll be lucky to drive to work in a car that costs $2,000. Everybody else will be driving new cars that cost “just” 60 “easy” payments of $500. So you want me to drive a sled (as they use to say in my day)? Yep.
DR, is that what you did when you got out of school? Nope. And I regret it. Do everything in your power to pay cash for your car. And if that means driving around in a car that doesn’t compare well to the cars your co-workers and friends are driving, so be it. That’s the advice I’ll give my children. And that’s the advice I wish I had followed.
About The Author
Lindsay VanSomeren Lindsay VanSomeren is a personal finance expert who has written for many websites such as Credit Karma, LendingTree, The Balance, and Experian. She currently lives in Kirkland, Washington with her husband, two cats, and a dog. In her spare time she enjoys homebrewing, reading, and outdoor adventures.
How much does Dave Ramsey say you should spend on a Car?
Dave Ramsey believes that the total value of your entire vehicle should not be more than half of your annual take-home pay.
For example, if you earn $100,000 a year, then you shouldn’t be driving a car that’s worth more than $50,000. Why? Because the value of a car depreciates the moment you drive it off a car dealer’s shop. You’re investing a chunk of your income in something that depreciates with time. And you need to have the capacity to absorb the loss without going into debt.
Dave Ramsey believes that cars lose 70% of their value within four years of purchase. It means that a $30,000 car won’t worth more than $11,000 within four years. That a loss of $100 weekly.
Dave advised that his listeners should not consider purchasing a new vehicle till they have a net worth of $1 million.
Other Car Purchase Calculators
Recognizing that you may not follow my advice, here are some additional online car calculators to help you decide how much car you can afford. You plug in a few pieces of information. Then the calculator tells you what you can afford.