How Much Car Can (Should!) I Afford?

A simple and straight-forward guide to figuring out how expensive of a car you should buy or lease on your budget

Just because you can, doesn’t mean you should.

We hear (and share) this advice all the time. Maybe you can spend $10,000 on a diamond necklace, because sure, you have that money somewhere. But would that be a smart allocation of money? Ehh, for most of us, probably not.

The same thing goes for your assets, like that new car you’ve been daydreaming about. Don’t overspend just for temporary fun and an extra spark of “yay!”—that shiny, new excitement feeling is not sustainable. This isn't to say you should never splurge a little! Instead, we recommend you work within your means so another aspect of your finances, like your mortgage or credit card debt, doesn’t have to suffer.

Remember what a car is for!

Surely you daydream about having the coolest car; maybe getting compliments from friends and strangers alike. But spending an absurd amount of money on a car solely for the status symbol is not going to be a smart investment. Sure, you might be able to afford that super flashy car that people will ooo and ahh at—but at what cost? You could afford a lot of things if you’re willing to spend your entire life’s savings! But, then again, you’ll never be able to pay for education—yours or your child’s, travel, and unforeseen emergency expenses—that is, unless you never plan to retire. Plain and simple: remind yourself that the purpose of a car is to get yourself safely to where you want and need to be… not to keep up with the Joneses like it's the 1920’s consumerism race.

This is why it's so important to learn how to create a budget. First, figure out what portion of your wealth you can allocate to buying a car. If you go into the car buying process with a clear budget in mind, and stick with that thought, you’ll save yourself from the inevitable heartbreak of test driving something you can’t actually afford. Don’t set yourself up for a breakup with a car before you even have a relationship with it. Besides, there are so many cars out there, you can find a car that you want and that will be easy on your wallet.

Okay, you don't want to overspend on a car, but how do you decide what you should spend?

Many financial professionals will give you a rule of thumb to keep total car costs below 15% to 20% of your take-home income. That means, after tax, how much cash are you actually taking home each month.

And, we’re talking total car costs. This is all encompassing of what it costs to own (or lease) a car, and not just your monthly payments on your car loan. (Psst, we’ll dive into some of those hidden costs in a bit.)

This means that, even if the payments on your new car are 10% of your take-home pay, you still need to expect to spend another 5% of your take-home pay on other car expenses like general maintenance, service and repairs.

Remember those pesky fees and random costs!

Buying the car isn’t your only cost.

Car type

The decision you make on which car you buy impacts what your payments look like. For example, service fees and maintenance on foreign cars tends to be more expensive, since the car parts are pricier than American-made ones. (Now, some may argue that foreign cars last longer than domestic. We’ll leave that research up to you and the car experts!)

Loan type

When taking out a loan, you have to keep in mind that the type of loan you settle on matters. Not all loans are financed the same. You’re gonna have your monthly payment, loan amount, APR (annual percentage rate), the term, and total interest. A common mistake we see people make is only focusing on the monthly rate, and not factoring the other rates and costs. Sneaky, sneaky, sneaky. Don't fall into that trap. But hey! You’re reading this article right now so you won’t fall victim to the fine print. Remember, the loan you're able to take out depends on your credit score. Learn more about your credit score and how you can keep it up.

Annual property tax, and registration and inspection fees

These fees are unavoidable, unless you want to get fined for an expired inspection sticker or for keeping a temporary plate on long overdue. Guesses are, you don’t want that hefty fine. Depending on the state, you’ll owe a few hundred bucks each year for these fees.

Gas budget for gas guzzlers

Different cars have different gas mileage. Some require a higher level of fuel, some run mostly on batteries. Ask these questions before you make the purchase instead of waiting to discover on your own that you need to pay $20 more to fill your tank than your previous car. You’ll want to determine the average MPG (miles per gallon) the car gets for both highway and city driving. And, you’ll want to know how big the gas tank is. That way, you’ll determine how often, and how much, you’re filling your tank each month.

Random repairs

Just like any other product, especially those we use often, cars break. Engine lights come on, seat heaters stop warming your tush, smoke comes out from under the hood. While you can’t necessarily avoid having to pay for car repairs, you can help cushion the cost. For one, you can consider purchasing another warranty, especially if you’re buying a used car. And, you can consider whether a foreign or domestic car is in your budget—remember, foreign car parts tend to run more expensive. Foreign or not, certain models, especially some of the more innovative newer makes may require parts to be shipped which can be costly and time consuming.

Car insurance

Don’t forget about your car insurance! Especially when getting a new (or newer) car, your car insurance will likely go up a little. Keep in mind that the collision and comprehensive portions of your car insurance policy are likely going to suffer some price hikes. If you’re worried about high insurance costs, you could choose an older model used car instead of a just-on-the market car.

These car fees sure can add up and can’t always be predicted. But you can budget for them. When determining how much money you can budget for your new car, make sure to leave some cushion room in your budget for these popup fees.

Final thoughts

Function over fashion does not only pertain to clothes. This cultural proverb can extend to your car, too. Make sure your car functions within your budget and your means.

Pay attention to what’s going on in the car market. Do you need that new car right away? Or can you hold off until you find the perfect match for you? Regardless, keep these ideas in mind: budget carefully, don’t spend beyond your means, read the fine print, and watch out for pesky costs.

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