Cars are one of the most significant purchases many people make. With the average price of a full-size new car almost $48,000 in 2023, it’s essential to determine how much you can realistically afford based on your income. The overall average manufacturer’s suggested retail price (MSRP) of the new vehicles in the 2023 YDC study is $34,876. This is $1,575 (4.7%) higher than last year.
Here is a further breakdown of the average price of a new vehicle by category month-over-month, according to Clark Howard:
| Car Manufacturer | September 2023 Transaction Price (Average) | August 2023 Transaction Price (Average) |
|---|---|---|
| Mid-Size Car | $32,190 | $31,911 |
| Full-Size Car | $47,802 | $47,805 |
| Full-Size Pickup Truck | $66,841 | $65,309 |
| Minivan | $48,689 | $48,098 |
Follow the wrong guidelines or succumb to temptation at the dealership, and you could end up with massive car payments that wreck your budget and derail other financial goals.
Fortunately, there are intelligent guidelines and rules of thumb that allow you to find an optimal balance – affording a nice car you enjoy without compromising your broader finances. By tailoring affordability based on your salary, focusing on used vehicles, and keeping payments low, you can drive the car you want while advancing the rest of your financial plans. This article will explore practical steps for determining your true auto affordability price, making smart purchasing decisions, and avoiding budget-busting mistakes. The goal is to help guide you to car ownership that aligns with your income, lifestyle, and the bigger picture.
What Car Payment Can You Afford?
- The 35% rule states that the maximum amount you should spend on a car is 35% of your gross annual income. However, this rule is more aggressive and better suited for car enthusiasts.
- A more conservative and reasonable rule is the 25% rule – spend no more than 25% of your gross annual income on a car.
- The 20/4/10 rule recommends:
- 20% down payment
- Finance for no more than four years
- Keep monthly payments (including insurance and maintenance) below 10% of gross monthly income
- For a $40k salary, max monthly payment is $333
- For an $80k salary, max monthly payment is $666
- For a $150k salary, max monthly payment is $1,250
This keeps payments reasonable and builds equity quickly.
Here’s the maximum monthly Payment By Salary:
Based on the 10% guideline, here are reasonable maximum monthly payments for 48 months:
| Annual Salary | Max Purchase Price (20% Down) | Max Monthly Payment (10%) |
|---|---|---|
| $40,000 | $10,000 | $333 |
| $50,000 | $12,500 | $416 |
| $60,000 | $15,000 | $500 |
| $70,000 | $17,500 | $583 |
| $80,000 | $20,000 | $666 |
| $90,000 | $22,500 | $750 |
| $100,000 | $25,000 | $833 |
| $110,000 | $27,500 | $916 |
| $120,000 | $30,000 | $1,000 |
| $130,000 | $32,500 | $1,083 |
| $140,000 | $35,000 | $1,166 |
| $150,000 | $37,500 | $1,250 |
| $160,000 | $40,000 | $1,333 |
| $170,000 | $42,500 | $1,416 |
| $180,000 | $45,000 | $1,500 |
| $190,000 | $47,500 | $1,583 |
| $200,000 | $50,000 | $1,666 |
You can use your salary to find your limit, then aim lower if possible.
The 35% Rule Overestimates Affordability.
The 35% rule states you should spend at most 35% of your gross annual income on a car purchase. However, this rule is aggressive and best suited for car enthusiasts who value owning an excellent vehicle above most other priorities with money. For most people, sticking to 35% leaves little wiggle room in your budget for other expenses and financial goals.
Aim for the More Conservative 25% Rule Instead.
A better guideline is the 25% rule – limiting your car purchase price to 25% of your gross annual income. This allows for more budget flexibility while still providing a solid car option. The 25% rule should be the maximum threshold, with lower being ideal for freeing up cash flow.
Buy Used To Avoid Depreciation
New cars depreciate rapidly, often losing 20%+ in the first year. This creates negative equity if financing 100% of a new car’s price. Also, insurance costs are higher on newer model vehicles. Considering a 1 to 3-year-old used vehicle can get you reliability and save you money. Used cars have already taken a significant depreciation hit from new ones. Let someone else pay for most of the car’s depreciation; then, you buy it at a lower price later. This saves you thousands.
Opportunity Cost Favors Financing Over Cash
While paying cash eliminates a monthly bill, you lose potential investment gains on that money. Even modest investment returns compound over time to significant sums. If you won’t invest the cash elsewhere, paying in cash for a car makes sense.
Call Around for Better Insurance Rates
Don’t auto-renew your car insurance. Call competitors to find better pricing. People save $100-200/month by switching providers. Shop rates yearly.
Choose Cars With Lower Maintenance Costs
Luxury and high-performance cars cost more for insurance, repairs, and maintenance. A Toyota or Honda may cost less to own long-term than a BMW despite similar sticker prices—research actual ownership costs.
Most People Are Overextending on Car Payments
The average new car price is around $48,000, but the median income aligns differently in reality than affording such expensive cars based on recommended guidelines. Many buyers should spend less of their budgets on car loans. Be reasonable with your car’s price tag to create better affordability in your budget.
Be Prudent – Don’t Max Out Your Budget
You can create car affordability guidelines for yourself and stick to them. Even if a lender approves you for a giant loan, you should still only take on that much debt with parameters for what you can really afford within your income and monthly budget. Be prudent and conservative with auto loans. A car is a depreciating asset, and its utility is simply getting you from point A to point B.
Focus on Long-Term Goals, Not Monthly Payments
The wise move is to minimize car payments to allow you to achieve other financial goals faster. Don’t let a reasonable monthly price justify a high-priced vehicle. Focus on your big-picture financial goals, not just what fits your monthly budget.
Key Takeaways
- The 35% rule is too aggressive; downgrade to the 25% rule for car affordability
- Make a sizeable down payment, choose a shorter loan, and keep payments low per the 20/4/10 guideline
- Refer to the income table for reasonable payment caps based on your salary
- Pre-owned vehicles are more economical than brand-new
- Finance the car to invest your cash elsewhere or use it as an emergency fund
- Search for the best auto insurance rates every year
- Let someone else shoulder the rapid depreciation by buying used
- Choose inexpensive maintenance costs in addition to price
- Many people overspend; remain disciplined and don’t overextend
- Just because you’re approved for a loan amount doesn’t mean you should spend that much
- Keep the big picture in mind and don’t compromise other goals for a fancy car
Conclusion
Being wise with automobile affordability, payments, and budgeting allows you to optimize cash flow for other aims. Follow prudent guidelines tailored to your income, choose an economical used vehicle, and invest spare cash to build wealth. With discipline, you can drive the car you want while advancing financially.