A question that pops up around the auto industry a lot from consumers is, “how much money should I pay monthly for a car?” The answer: it depends. We know that’s not very clear, so let us explain. It depends on how much money you pull in every month and how much of your monthly budget you can delegate to a car payment. Everyone’s situation is different and some people can’t put as much towards a car as others.
The 20 Percent Rule
For anyone with few debts and expenses who is in a good financial situation, it’s often recommended that 20 percent of take home pay goes towards car ownership. This means the car’s monthly payment, insurance, gas and maintenance should take up no more than 20 percent of a person’s budget. Many financial advisors say that 20 percent is the absolute maximum it should be.
So, with that in mind, a person bringing home $4,000 per month (after taxes, benefits, etc) should spend no more than $800 dollars each month on a car. If you look around the used car market or the new car market, it’s clear that you can get a nice car that fits this budget.
The 10 Percent Rule
If you have other debts or simply don’t want to spend that much on a car, many financial advisors recommend 10 percent of your monthly take home pay as a reasonable number. Again, this includes insurance, gas, maintenance, etc. So, if you make $4,000 a month after all deductions, and you've determined that 10 percent of your income is better for you, you should spend no more than $400 each month.
As you can see, that’s not necessarily a lot of money, but you should still be able to find a car. If, however, you're having trouble, you may need to step outside of the baseline rules. You may need to spend 15 percent or 16 percent of your take home monthly pay. No matter what you choose to do, make sure you do what’s right for you.
Assess Your Situation and Leave Room for the Unexpected
Always take the time to properly assess your financial situation. Factor in all your monthly expenses and determine how much money you have left over at the end of the month. Once you know how much you have left over, find out what percentage of your monthly income that is.
If you have exactly 20 percent of your monthly take home pay left over at the end of the month, don’t put all that towards your car. You’ll be spread too thin. Instead, find out what percentage you have left over and cut back from there, leaving a little extra room for savings and unexpected expenses. Always build a financial cushion into your monthly budget, that way you have money for anything that comes up.