A car is more than something shiny to park in your driveway. It’s freedom to go where you want to go whenever you want to go there. It’s a financial asset that gives you equity you can cash in on if you need it. Of course, it can also be a serious financial burden if you overspend. So what’s the magic number? If you’re asking, “How much should I spend on a car?” there are a few calculation options to consider.
How Much Should I Spend on a Car in Total?
One way to determine how much you can spend on a car is to look at the total car value. You can use a simple calculation based on your annual income. Financial advisors have differing opinions about what that calculation is, though. The frugal-minded folks suggest that your car should cost no more than 10% of your annual gross income. Others say that 35% of your gross income is acceptable.
In cases like these, it’s a good idea to split the difference and aim for 20% – 25% of your annual income as the total purchase price for your car. The median income in the US is just over $63,000. This means the average person should spend around $12,600 to $15,750 on their vehicle.
How Much Should I Spend on Car Payments?
The annual income method might be an easy number to calculate, but that approach has its problems. For one, it doesn’t account for your expenses. If two people make $100,000 per year, one could have $80,000 in yearly expenses and the other could have $40,000 in expenses. Those two people shouldn’t be spending the same amount on a vehicle. It also doesn’t consider the monthly payment amounts. The same vehicle could cost $200 per month or $500 per month with two different financing plans.
A better choice is to add up your monthly budget. Consider all your expenses and your post-tax income. Look at the difference and decide how much you’re comfortable spending on a vehicle. This will require more calculating as you shop for a vehicle. You’ll need to calculate the expected purchase price for a vehicle based on your monthly payment target, the length of financing you want, and the average interest rate for your credit score. Still, it’s worth it for financial comfort. Car payments can increase tremendously with a custom car.
Weighing the Pros and Cons of Car Values
As you shop for a vehicle, the key is to find a happy medium between overspending and underspending. An approach of “the cheaper, the better” has some issues. For one, an inexpensive car is likely to need more repairs as time goes on. It could cost you more than it’s worth in the long run.
You also don’t have as much equity in your vehicle. If you ever find yourself in financial difficulty and you need a title loan in Tacoma, you’ll be grateful for every cent of equity in your vehicle. Of course, you don’t want to overspend either and wind up with more than you can afford. It’s all about finding a happy medium.
When you first ask yourself, “How much should I spend on a car?” the numbers can feel overwhelming. Still, running the numbers and setting a budget is a crucial step for your financial stability, and the calculations above can help.