What Percent of My Income Should I Spend on a Car?

What Percent of My Income Should I Spend on a Car?

What Percent of My Income Should I Spend on a Car?

For most people, getting to work means relying on an automobile. Economists recommend that no more than one-third of a person’s gross income should go to housing costs, but the percentage going to the cost of a car is more variable. Of course, without the vehicle, earning money often proves impossible. Before figuring out just what percentage of your budget can go toward a car payment, run the numbers carefully so you know just how much you spend on all essentials.

The Budget

Do you really know how much you’re spending on regular living expenses? You can’t determine what percentage of your monthly income goes toward a car until you have the hard numbers. How much are your monthly housing and utility payments? What are your costs for food, clothing, phone and cable? If you have student loans, credit cards or other debt, add that into the mix. Check your credit and/or debit card statements for the past year so you get a clear idea of what you’re spending. If the results aren’t looking good for your car payment, see where you can cut back.

The 20-4-10 Rule

In the past, the rule of thumb regarding car payments was 20-4-10. That involved making a 20 percent down payment and taking out a four-year loan, with the total amount not exceeding 10 percent of your gross income. It’s still a good frame of reference, but it is not possible for many potential car buyers. Car prices have risen while incomes have remained relatively stagnant. The result is that buyers are taking out longer loans, with 5 ½ years now the average. These days, 15 percent of gross monthly pay going toward car costs is more the norm, but the amount should not exceed that level. There are caveats with the 15 percent threshold: If you have debt besides a mortgage, 15 percent is too high. If that’s the case, try to keep your car loan at 10 to 12 percent of your monthly income, and do your best to pay down high-interest credit card debt as soon as possible.

Keep Other Costs in Mind

Car ownership involves more than just the monthly cost of the loan. When figuring out how much car you can afford, take into account your insurance payments and fuel costs and allow some money in your budget for basic maintenance. If your commute involves a lot of tolls, factor them in as well.

Leasing vs. Buying

Leasing is increasing and for good reason. It’s a more affordable way for many people to obtain access to a car, but leases don’t make sense for those who have long commutes, as the extra mileage fees pile up. Top car website Edmunds recommends not spending more than 10 percent of your income on a leased vehicle, although 15 percent is the limit for a purchased car. The average median household income is approximately $60,000, and after taxes that comes out to about $3,700 per month. That means the average person can afford to pay a total of $370 monthly for all costs combined for a leased car and $555 for a new car loan. If that’s more than you can afford for a new car, consider purchasing a used car in good condition with a limited warranty.

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About the Author

A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including PocketSense, Zack's, Financial Advisor, nj.com, LegalZoom and The Nest.