Ever wonder how much car you should own?
I’ve been there. Many times. I’m also not a car person so my top priority is just having a reliable car. That’s it. But for the rest of you, I wanted to dive deeper into how much car you should own.
Here’s a list of 5 car-buying rules from the pros. I can’t say there’s one “right” answer, but at least it should give you some perspective.
5 Car-Buying Rules
- Suze Orman says a good way to identify how much car you can afford is a 3-year financing plan. Whatever monthly payment you can afford to pay off your car in 3 years is about the value that you can afford in a vehicle. If the payments on a 3-year plan are too large, then you cannot afford the car. She also advises keeping your car for 10-15 years.
- Dave Ramsey says that the total of all of your vehicles should not be more than half your annual income. So, if you make $60,000 the total value of all your vehicles should not exceed $30,000. Ramsey emphasizes how cars go down in value over time, so you need to be able to absorb that cost over time. Dave says to always by used (unless you’re worth at least $1 million) and always pay cash for your vehicles (and forget the extras on the cars when you buy them).
- Frugal finance bloggers and other super frugal people will say no more than 10% of your annual income on a car. Because cars depreciate so much in value, tying up more than 10% of your income in a car is unwise. Additionally, there are so many other maintenance costs that come with car ownership that if you own more than 10% of your income in a car, you are going to be spending a lot more money on other things like insurance, gas, and repairs. So, if you make $100,000, then you should have a car worth about $10,000-$15,000. Similarly, if you make $40,000 then your car should by worth $4,000. With the median car valued at around $24,000, this will be very hard for most people.
- The not-quite-so-frugal-but-still-financially-responsible person says your car should be about 20-25% of your annual income. If you make $100,000 then your car should not be worth more than $25,000. There may be a number of reasons why a car worth 20-25% of your income may be the way to go for you. This includes your need for a safe, reliable car and your family situation.
- The 20/4/10 rule for buying a car means that you should put 20% down, finance for up to 4 years, and spend no more than 10% of your gross income on total transportation costs (principal, interest, and insurance). This rule ensures that you buy a car you can actually afford.
And that’s it! 5 car buying rules to help you figure out what your next car budget should be. Ultimately, you have to do what’s right for you.