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Car Buying

Buying a Car: How Much Car Can You Afford?

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author photo by Doug DeMuro July 2015

If you haven't bought a car in a while, you might be wondering exactly how much money you should budget for your next car. How much of your income should you devote to buying a car? Does that include fees, taxes, and insurance? What about fuel and maintenance? These aren't one-size-fits-all questions, but we have some answers that can help you decide exactly what to spend on your next car.

What Percent of Your Income Should You Spend?

If you're thinking about financing a car, as most drivers do, the general rule from experts is that you shouldn't spend more than 15 to 25 percent of your monthly net income, which is your take-home pay after taxes, on a vehicle. That's likely somewhere between 8 and 15 percent of your gross pay, which is your income calculated before taxes.

So, what does this translate to? If you're earning $50,000 per year after taxes, you're earning around $4,150 per month, and that means your maximum car budget should be around $850 per month. If you earn $25,000 per year after taxes, that figure is cut in half, down to about $425 per month on a car.

Does That Include Extras?

Of course, a car involves more expenses than just the monthly payment. There are repairs, maintenance, insurance, fuel, registration fees and taxes. Are they included in this calculation?

Financial experts differ on the answer to this, but we think the answer is simple: drivers who are already pushing their budgetary maximum should try to choose a vehicle that minimizes these expenses. For instance, if you're looking at a car that's nearer to 25 percent of your net income than 15 percent, make sure it's something fuel-efficient, reliable and cheap to insure, like a Toyota Prius or a Honda Accord Hybrid, rather than a pricey luxury model that may further eat into your budget. Meanwhile, drivers who choose a car that's more affordable may have a little extra room in their budget for additional expenses, like fuel or insurance.

Remember: this rule doesn't apply to just one car. If you own multiple vehicles, they should all fit within the income rules we've laid out. If your household take-home pay is $75,000, for instance, you don't get $1,250 per month to spend on one car. Instead, that figure must be applied throughout all the cars in your household.

Not One-Size-Fits-All

These rules aren't true for everyone. If cars are a priority for you, then you might want to spend a little more when buying a car and a little less in another area of your life. Likewise, drivers who don't spend much time in the car, like those who work from home, for instance, might prefer an inexpensive used car that only takes up a few percentage points of their income, choosing to devote the remaining budget on entertainment, home improvements or simply a savings or investment account instead.

This image is a stock photo and is not an exact representation of any vehicle offered for sale. Advertised vehicles of this model may have styling, trim levels, colors and optional equipment that differ from the stock photo.
Buying a Car: How Much Car Can You Afford? - Autotrader