When budgeting for a car what percent of your gross income should it cost?

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Posted by Camille Cavicchio (MONEY FORUMS: 4, Answers: 0)
Asked on December 7, 2015 11:13 am
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I agree with Will. See how little you can spend, while maximizing value. There are some great used cars out there!
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Posted by Melanie Lockert (MONEY FORUMS: 0, Answers: 66)
Answered: January 6, 2016 10:53 pm
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I prefer to instead look at how little I can spend on a car. Then I throw more money at the issue until it's a car I enjoy. Using this bottom-up approach makes sure I never overspend on something. Think about a bicycle as well. They're definitely legit if you live close enough to what you need!
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Posted by Will Lipovsky (MONEY FORUMS: 0, Answers: 37)
Answered: January 4, 2016 8:58 am
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Hi Camille, great question! I don't think there is one set answer to this question, but rather a variety of answers depending upon a person's situation.
The first consideration is how the car will be used. If the vehicle will be used for a long commute or big trips then reliability will dictate something fairly low mileage (unless you are a mechanic with the time and resources to keep up with an older vehicle). If you have a short commute with a viable public transit option you may be able to get buy with an older, less expensive vehicle.
Financial advisors tend to suggest two numbers like they are magic; one being to purchase a car which costs less than 50% of your annual income; the other is to allocate not more than 20% of your income to vehicle expenses, including your payment, gas, insurance, and maintenance. Neither of these is the best answer for everyone. But the second answer is probably better for more people than the first one is.
If you need a reliable vehicle and plan on doing a good deal of driving, then a late model used vehicle may be your best bet. Consider fuel efficiency, the current low gas prices won't last forever and fuel can be a significant expense.
Depending on your income and other obligations you may be able to keep your vehicle expenses well under the 20% rule. Some people will have to go over 20% to have a vehicle which meets their needs. Try to stay with as low of an expense as you reasonably can - while also keeping the term of any loan as short as possible. I rarely use the word never but here I go: Never take a vehicle loan for longer than you will keep the vehicle!
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Posted by Peter Neeves (MONEY FORUMS: 1, Answers: 59)
Answered: December 28, 2015 7:34 pm
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I would suggest your total transportation costs stay below 15% of your after-tax income. If you happen to be spending less than 25% of your income on housing, you could "borrow" from your housing budget to pay more for the car/transportation.

As Peter suggests, a lot depends on your situation, like how you will use the car, etc. It is also a good idea to save up some money to be used for the downpayment for the car. The more you save upfront, the less you have to borrow, and the more likely it will be that you can get your payment plus maintenance, fuel, and car insurance (don't forget to include car insurance in this picture) to meet your budget.
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Posted by Beth Tallman (MONEY FORUMS: 1, Answers: 61)
Answered: December 28, 2015 8:04 pm
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