Having wheels at your disposal can make life easier, whether you’re schlepping groceries, commuting to the office, or carpooling to a concert. But figuring out how much you can afford to spend on a car can be a real challenge, especially for first-time buyers.
“A car is the second biggest purchase most of us ever make, and it’s not something that needs to be done quickly,” says Sonia Steinway, co-founder of Outside Financial, which specializes in auto loans.
Not sure where to start? Here’s some clear advice to help you decide not only how much you can afford to spend, but also whether you should buy used or new, and why it's a good idea to keep your transportation costs low.
Let income guide your car purchase.
Your gross income (that is, your before-taxes earnings) is the first, best tool to determine what you can afford.
Dakota Brizendine, partner at Commonwealth Financial Group in Burlington, VT, shares a simple rule of thumb: If you make $100,000 or less, your car payment, interest, and insurance should not exceed 8 to 10 percent of your income.
Say your income is $50,000 a year. That would put monthly car expenses (not including gas) at $417 a month—or lower.
With a higher income, her recommended percentage for car costs dips even further. “If you’re making over $100,000, we generally want to see transportation come in at 5 to 7 percent of your income,” says Brizendine.
Too much math? Use an online car affordability calculator to help you see the breakdown.