How much car can you afford? The 20% Rule

August 8, 2012 — 230 Comments

It was more than ten years ago, but I still remember driving to the car dealership in my 1993 Chevy Lumina with the maroon interior. It served me well through college and I even used it to drive my future wife on our first date to the Oklahoma State Fair… astonishingly, neither the car or the first date at the fair scared her away!

After arriving at the dealership, I walked up with confidence, ready to prove I was an adult. With my degree in Finance and a good job making $45,000 a year, I thought I deserved a new car. I didn’t think about how much car I could afford, but only about that new car smell.

They only gave me $500 trade-in on my Chevy Lumina, but it didn’t matter, I was ready to buy. They didn’t care either as they can see a sucker from a mile away! They happily complied with my “confidence” and financed my new $28,000 Xterra with no down payment and only a $500 trade-in, but with a “great” 2.5% loan.

Two years later, it all came apart. I was tired of working my butt off and not making any progress on paying 0ff my over $50,000 in debt. That’s why I now use the 20% rule to determine how much car you can afford based on your salary.

How much car can you afford based on salary?

The math is simple. How much money do you make in a year? Take 20% of your gross annual income (before taxes, social security, etc) and that’s how much car you can afford. Preferably, you should purchase with cash as well.

If you are in a relationship and you combine salaries, you should add up both incomes and divide by two. If you want, you can split the amount up differently (60/40, 70/30, etc), but make sure you don’t surpass the 20%.

Quick example: one person makes $40,000 and the other makes $30,000. The combined salary of $70k means $14k worth of cars can be purchased. If you need to buy two cars in one year, you can split up the $14k however you’d like – keeping in mind the majority will probably go to the wife.

Cheat sheet on how much car you can afford:

  • $20,000 salary = $4,000 car
  • $40,000 salary = $8,000 car
  • $80,000 salary = $16,000 car
  • $140,000 salary = $28,000 car
  • $200,000 salary = $40,000 car

That means when I purchased my $28,000 car, I should have spent $9,000 instead (based on my $45,000 salary X 20%)! I was $19,000 over which explains why I was broke.

Adopt a millionaire mindset

Even though I was a finance major, I never learned how to get rich. It took me three years of bad decisions and perpetual brokeness to finally realize I didn’t know what I was doing. Now, thanks to people like Dave Ramsey and books like The Millionaire Next Door, my wife and I are in the mindset.

According to Dr. Thomas Stanley, “86% of those who drive prestige makes of motor vehicles are not millionaires [having an investment portfolio of $1M or more – see Stop Acting Rich].” Contrary to the crap we see on TV like the Kardashians cruising around in new G wagons, the majority of expensive-looking cars aren’t driven by millionaires, they’re driven by people only trying to look rich!

How much do millionaires actually spend on their cars? Dr. Stanley’s research shows “the median price paid for the most recent motor vehicle purchased by a millionaire was $31,367 [for decamillionaires-$41,997].” That’s right, millionaires only spend on average of $31k on a new car, or 3.1% of their incomes!! We bought a used car last year at 7-8% of our annual income and it’s been great.

The next secret to buy a car you can afford is to pay for it with cash. That’s right. Cold, hard, cash. We’ve been duped into spending our hard earned money on expensive cars for way too long and it’s even easier now that we can get 72 or even 84 month loans.

I don’t know if would’ve done it differently ten years ago when I walked into that dealership if I had the choice. It taught me to hate car loans and only purchase cars I could afford. It propelled me to really start learning about personal finance and trying to help others make smart financial decisions. It helped us travel the world in 2013 and is helping us pursue early retirement now.

If you need to learn how to take control of your finances, I’ve detailed out the steps I used here.

Do you agree with the 20% rule to determine how much car you can afford based on salary?  We’re having a great debate in the comments section, so please add your own!

P.S. Do you want my opinion on if you can afford a new car? Add your comment below, and I’ll let you know what I think. You can also ask through tweet @YLTL

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230 responses to How much car can you afford? The 20% Rule

  1. I think I spent a about 45% of my annual salary when I bought my car. Yikes! I never thought about it that way. I make more now, but I would have to double my current salary for the price of my car to be only 20%

    But I took a different approach to deciding how much I could afford. Before I even looked at cars, I looked at my budget. I figured out how big a car payment I could handle. Then I assumed a high interest rate, calculated the principle amount for those parameters and added in my down payment. I reduced the total by about 10% to give me some wiggle room, and the result was how much car I could affort. After that I made a list of what I wanted and found a car in my budget. Admittedly, it was pretty close to the top end of my budget, but it was exactly the car I wanted and I intend to keep it for another 5-10 years.

    And, I just paid it off last month.

    In retrospect, I don’t regret spending so much on my car because, even then, I knew how to do the math and my allowable payment was based on the lifestyle I had back then. For someone that hates math, or doesn’t have a strong grip on where their money goes, the 20% rule could save their lives.

    If I had heard this rule 4 years ago, I might have done something different.

    • Julie – I still beat you with my ~62% car purchase to income ratio! You spent a lot more time thinking through the purchase than I did so you were in better shape. The best part is that you plan to keep it for a long time and live without car payments.

      I like the 20% rule because it forces people to think through the total purchase amount – not just the monthly payments. We’re so accustomed to buying really expensive cars and thinking its normal. Thanks for telling your story!

    • Stop talking on the ratio guys,Do you know how much we Chinese spent on car?
      In China,Mini Cooper,clubman starting at $32000,Mini paceman starting at $52000, Jeep Wrangler $70000, Jeep Grand Cherokee $100000.
      We spent our 100% of annual income buying a car.

  2. One thing is for sure, no one should never buy something that will give the appearance that we are in a better place financially then we are. I did what you did at one point tin my life and bought a Benz. That is was when other people started asking for more from me then I had to give, as if I were wealthy and I owed it to them to help them out.

    The Benz is long since gone and I now drive a very modest car. One that does what I need it to do and I don’t have a car payment. All that is a good thing.

    :-), Susan

    • Susan – that’s such a great lesson… and I’m sure when you bought the Benz you couldn’t drive around in old clothes or old shoes or an old watch… and the cycle continued!

    • I have thought long and hard about reprioritizing my monthly expenses. I work in insurance sales and put around 19000 miles a year on my vehicle just for work. Reliability and safety, along with gas mileage are my primary concerns. I buy a new car every 3 years. By then the powertrain warranty is gone and I get a little paranoid. Can’t quite get my head around a 5 to 10 year old car due to the risk of not knowing how it was treated, maintenance costs, and fuel costs. Also safety concerns. How were the brakes treated, brake line wear, oil change frequency, etc. I am very picky when it comes to maintenance and care of my car. My life depends on it

  3. I would recommend that people also research the cost of fuel (MPG) and maintenance of a vehicle they want to purchase. So when comparing purchase costs, also look at costs of maintenance and fuel over the next 5 to 10 years too. It could be that costs of a NEW car purchase beat a used vehicle. if your research shows that a new fuel-efficient vehicle at a low interest rate beats purchase of a used car, then by placing a large cash down payment (75%%???) and financing a small amount at low interest (under 5%) on the new car, you can come out ahead.

    Consider the whole equation. It’s not just 20% of today’s income, but 20% of of today’s income PLUS the cost of maintenance and fuel economy over the next 5 years.

    • I totally agree it’s the total cost if ownership that matters ans depending on tour driving habits, a car that would seem expensive for one person could come out cheaper for someone else.

  4. My wife drives a 1996 Toyota Corolla. I drive a 1992 Honda Civic. The cars are frowned upon by family in friends but it fits our means and they have been reliable thusfar. After all we are only 20 years old and don’t exactly have rich relatives to help out.

    I’ve actually started saving for a car in the price range of 15000 to 17000. But when considering your thoughss and the fact that money is really tight just from attempting to save $200 a month makes me think about it twice.

    With our currently combined salary of just under 30000 and the house payment, a car payment may be way out of our means.

    Great Read.

    • Raymond – you’re about 5 years ahead of me if you’re 20 and you’re already thinking this way! I went out and bought a car I couldn’t afford before I realized how dumb I was. Car payments suck… much worse than driving around in an old car.

      If you can continue to stay disciplined and drive your old cars until the wheels fall off, you’ll be able to save so much more money and get ahead of the debt trap. Cars are such a status symbol – that’s why everyone thinks you should get a new one. Continue to stay weird and not broke!

  5. Normally I buy cars for cash… but I’ve thinking of going for a performance ride, a used BMW 3 series about $23k. Trade in value of current car is about, $12k, annual gross salary is about $40k, net cash assets about $90k. Would mean I would have to borrow about $10k, with no house payments as house is paid for. not sure if it makes financial sense, though I have no major upcoming expenses.

    • Justin – it sounds like you’re doing great financially, especially with a paid off house! However, I assume you got to this point by staying frugal and making wise financial choices. I like cars, especially fast cars… life is meant to be lived and money is meant to be spent… but I still hate debt. How long would it take you to save an extra $10k so you could buy it with cash (and with your trade-in)? If you don’t have any house payments or major expenses, it seems like you could get there decently quick (1 year maybe?). This will also give you time to make sure that’s really what you want.

      • Dan – thanks for the reply. I understand what you say about debt, I usually avoid it, except for credit cards which I pay off in full and avoid interest. The extra $10k will take less than a year. I think I’ll defer the new (used) vehicle for a few months and build up some more cash.

        • Update – It’s a year and something later and I still drive the same car, got kept back because the engine died and repairs cost about $3k. But I’ve decided to hold on to it for awhile, looking to finance an MBA or Ph.D maybe.

          • That’s insane seeing an update like this, good luck dude and make sure the higher education is worth it in one way or another. don’t just do it for passion of furthering human knowledge etc etc.

      • Dan – debt is not always a bad thing. Investment companies leverage up investments to free up capital. Bottom line, if you can beat the APR with your ROI, debt is preferable to a cash purchase. Completely agree with you that cars are a trap that society pressures us into, a lot like spending $20K on a diamond engagement ring just without thinking “why, again, am I spending this much on a shiny rock that is not even the size of a dime?”. One of my favorite quotes, especially living in Dallas, is “See material possessions as a badge of dishonor. A badge that tells the world, despite all of your wonderful accomplishments, you have failed to find your self-worth outside of these possessions.”

        • Ryan – that’s a great quote! The majority of Dallas-ites who have the biggest “badges of dishonor” are so deep in debt they’ll never escape the trap. I agree somewhat with using debt wisely as I have a mortgage, but it’s easy to take that argument too far. Also, investment companies also get bailed out when their over-exposure backfires – we don’t.

  6. My household income is $220,000 per year. My last car purchase was 2 years ago when I purchased a 1999 Lexus rx300 for $8,500. I would never consider purchasing a car less than 5 to 10 years old or more than $10,000. I have great luck with the used Lexus cars, because they are usually own by responsible people that have them serviced regularly. If you think you are what you drive, you will never become that which you seek but buying a car.

    • Great advice… if you keep living like that, you’ll have no problem getting (or staying) rich! I agree that 20% can still be pretty high, but I tried to keep it realistic enough for people to follow. My last car was a used Volvo and it was less than 10%.

      • What’s the point of being rich if you can’t enjoy your money? Everyone’s going to die, we all end up in the same situation in the end.. Some will die with worthless money in the bank and some will die with a expensive worthless car. I can tell you that a expensive car will be more fun than cash sitting around or in the bank. Don’t get me wrong, I completely agree with saving and being modest etc, but if you don’t have a end plan for all that money and you didn’t have fun on the way, what’s the point?

        • I would like to see Dan Meyers’ response to this post. I share the same sentiment. What’s the point of having millions of dollars in the bank when you are too old, too sick to enjoy it? Yes, we should save for retirement, enough to have a decent retirement years, but we should not forget to enjoy life along the way. Dan is spending money to enjoy the “world trip” he mentioned , which I am sure is not free and will cost him money. The point I am making is , dont forget to save for the future but you should also enjoy life as it is now. If you think you would rather have to spend more on a nicer car than spend on travelling the world, then go for it.

          • Hi – thanks for the comment. You’re exactly right, I’ve chosen not to spend my money on a new car, but instead to enjoy freedom and travel. The reason I’m so bitter about spending so much on cars is because it’s one of the biggest reasons most people are broke and won’t be able to afford to buy their own freedom. We’ve been convinced that a $50k car with $600 payments for 6-7 years is normal. If you choose to keep yourself saddled with massive car debt, and you’re happy to continue working in your job so you can pay it off, then go for it. I’m just trying to give people a good rule of thumb to escape the trap.

  7. I’m 100% behind you with buying used cars instead of new – why waste!? Some people I know need to buy new, as they drive for a living (sales reps) but I’m happy to live in a better house and drive a used car. I see so many people over extending themsleves and for what exactly?

    Here in South Africa, we pay really high prices for cars, both new and used. It’s legislated that we are not allowed to import used cars, (to protect the local car manufacturing industry) so as a result our used cars retain their value far longer than expected – in some cases i can buy the same car new from the US or UK compared to a local 2 year old!

    Your 20% rule would therefore only work on used cars here, as new cars are just too expensive. I think on average people buying new are pushing close to 35% of salary here in SA. I see it all the time from car finance applications. If you are unsure what you can afford, then try this site for South Africans – see if you can stick to that 20% rule!

  8. I need some advice. I have a CLK430 Mercedez Benz year 1999. The KBB value of my car is around $4,000. The shape of the car is pretty bad; however, the engine still runs good. The radiator has a leak and I put stop leak in it to tithe me over and to keep the antifreeze from coming out. I spend around $200 a month in gas I think I get 18 city 24 hwy. An oil change run’s me about $100 per change and I have to change it 4 times a year. My annual salary is $40,000 and my parents keep telling me to buy myself a car. The car I have now is paid off but they are afraid it is going to die on me. I am not sure what to do. I would like to keep my car; however, I have to drive 50+ miles a day for work. I enjoy my benz and I think I would have a hard time converting to a non luxury vehicle; however, I am trying to make good finacial decisions. Any advice would be greatly appreciated and also if you have any advice on come attractive economy vehicles I would like that advice as well.

    Thanks for your time!!

    • Hi – the fact you’re scrutinizing this decision so much shows you’re good with your money. Don’t buy into the pressure that you ‘need a new car’ like I and many others have done. If you’re worried about it breaking down, get a AAA membership for $50/year and you’ll have a safety net so you’re not stuck on the side of the road if it goes.

      However, you should start planning for a replacement even if you won’t need it for a while. I’d take the amount you’d spend on a car payment (maybe $300/month) and throw that into savings. If you do that for a full year, you’d have $3,600 plus the value of your trade in. Next, I’d keep doing what you’re doing and driving your car until it’s pronounced dead… and if it lasts a couple of years you’ll have some good money saved up!

      Based on your income and the 20% rule, you could spend $8k on a car – plus your trade in. I bought a 2002 Volvo with 80k miles on it in 2007 for $10k cash. I’ve had it for 50k miles and five years with no major problems. I love the features that come with it, so I see where you’re coming from on luxury. Hopefully your Benz will last a couple of more years and you can have a good chunk of changed saved up and ready to go when you need a newer car

    • Get the repairs done to your car and keep driving it.

  9. $20,000 salary = $4,000 car? Get real. $20,000 salary = no car at all. Insurance, gas, maintenance, repairs, taxes/tags and depreciation will eat you alive. Unless you live in someone’s crawlspace and rent is $100 a month, and this assumes parking is free…

    • Your logic is totally backwards – you think you should spend more than 20% on a car because you only make $20k per year?? I’m also not sure why everything you mentioned would “eat you alive” on a car you can afford but won’t for a more expensive car?? If you make $20k a year, it’s even more important to only spend 20% of your income because you can’t afford more and you’ll end up living in your car because you can’t afford a house.

      • The point is, someone with a salary of $20k gross cannot afford a car while paying normal rent, even for a room in a shared house. It just doesn’t work, period.

        If you add up gas, insurance, depreciation, maintenance, repairs, taxes/tags, parking, etc. the car will cost AT LEAST $5k or $6k per year in most places, unless you just let it sit there without using it.

        What you are left with, after paying payroll and federal and state income taxes on 20k, is a remaining income below the federal poverty level.

        In the fall of 2008, I *temporarily* had a car on an income of ~22k, for a few months. Then it came time to pay for insurance and repairs. I had to sell the car, because I still need to eat.

        When I say you can’t afford a car, I mean, you can’t afford a car. End of story.

        • I disagree. I made a little over $19,000 last year before taxes and I was able to save $3,000 for a decent car, pay my rent of $500 a month plus utilities and feed and clothe myself. It’s all about managing your money and if that means being a tad frugal so be it. It can be done!

          • Wow, that’s really impressive!! It’s all so easy in “theory”, but I’m so glad you commented on here to let other’s know it’s possible in real life 🙂

          • The point is not that you can’t save money on that kind of income, it’s that if you’re paying for gas and insurance you won’t be able to save enough for the *next* car. Yes, you can have a car, but only temporarily.

          • I agree as well.
            I grossed under $20k last year (including GI bill plus working)
            I own 2 cars, have no debt, and have plenty to eat and
            So does my toddler daughter.
            I also have savings for myself and my daughter (I save $50 a week in her account, I hope that if I grow and invest it right she will not have to pay for any college.)
            It’s all about money management but the most important thing is patience.
            Our society is so about instant gratification that people feel obligated to put everything on credit. I have no credit cards and am one of the less than 10% of Americans who can afford an unplanned $400 expense.

      • Here is a great question to ask. I am a Marine who doesn’t have to pay for his housing, medical, dental etc. I am coming back to the states in a month and I want to know how much car I can afford. I have a wife and child and we will be traveling long distances to get to our home town for holidays. Now lets get down to the money i have 400 in debt. I pull in approximately $2600 a month in cash. The only thing that I pay for is food, entertainment, phones, internet, vehicle’s. What is your opinion for this situation as it is highly different situation than what you are referring to.

        • Rob – thanks for your service. I’d still use the 20% as a rule of thumb just so you don’t spend too much on a car relative to your income. If you have enough to pay for cash while maintaining a 3-5 month emergency fund, then you can also increase your total spend. Let me know if you have any more questions!

  10. While I applaud your financial conservativeness, if people followed your advice the auto industry would come to a complete halt as nobody would be able to buy anything but very used cars. The cheapest new economy car is approaching $20k out the door these days. Per your rule one needs to make $100k gross to afford this car. The statistics show that less than 6% of individuals in the United States make that much or more. So basically what you are saying is that less than 6% of people in the US can afford a new Toyota Corolla? LOL! It’s unrealistic.

    I would put the percentage more like 1/3rd of gross income and a good rule of thumb is that if you cannot afford the payment on a 36 month financing with 10% down then you cannot afford the car.

    I do generally agree with you about being financially prudent, and being more prudent than less is always better of course. But you are fighting a losing battle trying to educate people as our government is encouraging people to take on more debt not less. The message people are getting is cheap credit is available for the taking so go out and buy stuff you cannot afford. And people seem to be happy to follow along.

    As long as people can just shrug their shoulders and walk away from their loans (many people don’t give a crap about their credit) people will not take the amount of their loans seriously.

    • Haha, I don’t think I have enough influence to make even the smallest dent in the balance sheet of car makers! Also, there will always be enough Americans to overspend and keep the economy going, I’m more concerned about the people who want to break the cycle and do well themselves.

      The other thought is that people will be able to afford cars with cash once they get their money under control. It would be interesting to see how auto makers adjusted if everyone did follow the rule and the average car purchase price went down to $10-$15k. I wonder if they’d be able to adjust.

  11. I’m on $112K per year and my wife is on $100K per year. I bought myself a nice 2 year old car this year for $20K and my wife just bought a new Honda for $30K. We felt that $30K was a little high for a car (given that they are money pits) but we wanted something handy and reliable for the new baby.

    I’m always suspicious of people driving around in fancy cars. I have a hunch that most can’t afford it.

    Forget the percentages, I would say just save up and buy with cash, whatever you can comfortably save with cash is what you can afford. But, there is never a need to go above $30K. You can get a very good new car for that.

    • I totally agree on the buying with cash sentiment because as you mention, even if most people are within the “20% rule” when buying a car, not many of this are using the “cash” rule. It certainly changed the way I bought cars when I decided to buy with cash… it’s hard to spend your hard earned money on a really expensive car!

  12. Thank you for helping bring this taboo topic out in the open. I’ve been a public school teacher for 12+ in NYC and I’ve seen less than one 1% of the curriculum taught to our students involve financial management, which is ironic since my mayor is a billionaire. We tell our students to study to earn “good”, but the reality is the cost of education is so high that many of my “good” students won’t be able to afford college, but less a $30,000 car. And they’ll turn to banks to access loans with outrages interests rates. Although this not a educational forum, you are dealing with the education of finance, mathematics, metal health, and cognitive development. Personally, I accepted a long time ago that I can’t help every child that enters my classroom, but I can least try to give them the tools to survive and develop in our society. Thank you for sharing.

    • Rene – I can’t imagine how hard it is to be a teacher who wants to help each student become successful in the world – but when it comes to reality, knowing it’s not possible. I really do appreciate how you’ve reconciled that with “giving them the tools they need” which are no longer taught by many parents! I do wish more was taught on financial education, but we seem to be a long way away at this point.

  13. We are a 40 year old couple in India. We earn 1,00,000 Rupees a month ($ 1,818) and spend a quarter of that on routine expenses and save the rest as we have no outstanding loans or mortgages. So far we have saved 57,00,000 Rs ($ 1,03,636). We have two boys to educate. In India, private education and quality health care must be paid for from our own pockets. Considering our circumstances, would you recommend us stick to the 20% rule?

    (1$ = 55 Rs)

    • This Blog is obviously for people living in America. A person earning $1818 can never dream of saving $1,03,636 in the US. It can happen only in India. So different rules apply.

  14. I only make $48k, but I am a car guy. As a car guy, I am very particular about cars. The car I want, even 6yrs old, costs $35k used, so 73% of my annual income. I really want it and would probably rather just stick to my current $500 heap than buy something other than what I really want. There is really not one single car I can get for $9600 that I would bother replacing my current heap for. It sounds like a really stupid idea at first, but I have about $100k in the bank doing absolutely nothing. I don’t have kids, am already putting $500 extra every month into my house payments, and really don’t have anything else I’d rather spend the money on than a car. I kind of feel like I should enjoy that money while I’m still sort of young and still have my health. So, is this really a stupid idea to spend such a huge chunk of cash on a car relative to my income, even though I have the money and can’t see it hurting me financially?

    • Zhang – thanks for stopping by. A lot of it depends on how you’re doing financially. If you have no debt and obviously have 6 months of expenses in savings then you’re in pretty good shake. However, it also matters how much you have in your retirement fund… It mostly depends on your age but if you are contributing around 15% to your 401k or others retirement invests then I’d say go for it.

  15. HI, I think this rule is super helpful in getting a scope of whats best to spend. I have a huge dilema about the new Tesla Model s, its a 80k car but there are 10k tax incentives along with not needing to spend money on gas or servicing. I have no debt, and I make 150k a year. I dont own a home yet but in LA I spend about 70% of my time in the car for work. I am also about to down grade my rent by 1k a month. Does this seem like a good investment? As I would hope to have this car about 10 years and they also offer a 3 year buy back guarantee, and would be helping the environment….but not sure its super smart or just too much for me at the moment.
    Thanks for your help.

    • Sounds like you’re doing great with your income and lack of debt!

      Not sure if you saw my recent post “How Rich People Buy Cars” (link below), but in it the couple makes $300k+ and bought a 2006 Mercedes for $16,000 with cash.

      Since you’re asking my opinion, that’s how I prefer to buy cars :). What I’ve learned is when I buy with cash, I’m much less willing to spend all of that hard-earned cash on a car! If you have the cash and are willing to spend it on a car, then that’s cool. However, you mentioned you might eventually want to buy a house so the money might be better served for that purpose in such an expensive city as LA.

      On a side note, I really love cars and would probably be hooked if I went and test drove the Tesla Model S! Are there older models you could buy for cheaper? How about a nice hybrid slightly used Lexus for 1/3rd or 1/4th of the price? Or you could buy a Nissan Leaf for 1/4th of the price but definitely not as plush as the Tesla!

      • Austin Powers July 12, 2016 at 2:29 am

        From the diverse options you have provided, you’re obviously not a ‘car guy’. Nissan Leaf and Tesla Model S don’t belong in the same category.

    • Hey Ashlie, I am in the same financial situation as you as far as income and debt… I do have a house payment though. I have also been looking at the Tesla as I drive at least 22,000 miles a year. The Tesla was looking like a REALLY tempting deal despite the cost — factoring in the tax incentives… I did the math – over 5 years I’ll spend $20k JUST ON GAS… 1/10th of that for the electricity it takes to keep the Tesla going. so that’s another $18k “off” of the Tesla comparison.. Did you end up getting it? I’m close to going for it.

  16. I find the recommendation too reductive. With my student income, I would have bought a 5000$ car according to this rule, i.e. a very old and rusty car (we have bad winters here). Since I don’t know anything about cars, I expect to pay a lot in repairs (that’s what happened in the end with my last 12 years old car). There’s always the stress of not trusting your car. I looked at used cars and new cars and ended up buying new because in the end it was cheaper (low interest vs paying cash and losing on investment returns, better fuel efficiency, plus I know that the car will only be driven by the best driver around). Used cars are very popular and it seems the really good deals only exist if you know someone selling a specific car. The very low interest rates (3%) meant that it was better to finance it and keep my money invested, since I get on average much better returns than 3%. Payments are easy now and will only be easier once I get my degree and a real job.

    My dream car is the Tesla model S, and I hope that my next car in about 10 years will be electric. Not only do you save on gas, you also save on maintenance.

    • When we started our round the world trip last March, I decided to sell my car – a 2002 Volvo S60. It had 136,000 miles on it but was spotless on the inside, had few very minor dents on the outside and ran like a new car. I sold it for $3,600. I disagree that you can’t find a great running car for under $5,000.

      In fact, even when I bought my car in 2007 with 80,000 miles, I was also concerned about the reliability of a used car. However, over the 6 years I owned the car I maybe put $2,500 into it with new tires, new battery, replaced A/C unit, water pump – but nothing compared to the $10,000 – $15,000 of depreciation I would’ve lost in six years on a brand new car.

      As far as investment returns, it does sound feasible to guarantee a greater than 3% return, but when you take the example of what happened with investments in 2008-2009, you’ll see that a ~30% drop in the stock market quickly negates that rule. I do believe in investing for the long term, but I don’t agree with borrowing money to invest in the stock market (essentially what you’re doing if you borrow money on a car while investing other money). I’d rather be debt free.

  17. Hi, I recently researched this topic, and I believe the 20% rule refers to how much one should pay on an annual basis, and not the total price of a car. For example, a person who earns $20,000 a year can afford to spend $4,000 annually, or $333 a month on a car (including insurance, gas and repairs). Several websites show a similar breakdown.

    • Hi – I was more intending the rule to be a quick and easy “how much car can you afford to buy” rule. The 20% total expense rule does make some sense, but everyone’s driving habits are so different that I think it’s hard to apply to all. For example, if you drive 60 miles each day for work, your number is going to be a lot different than someone who only drives 10 miles. Interesting concept though!

    • I too feel that the 20% rule should reflect what a person can pay per year. As a single mother with two children, I would not like to think of what I could get with 20% of my income as the total purchase price! Reliability and future car repair costs of the vehicle would out weigh the disadvantages of having a higher monthly car payment. Knowing what payment you can afford, which is simply done by knowing what costs you must cover before a car payment, should be the deciding and most inportant factor in buying a car. I also am able to save money better if I “have to”. If I were to say, “I will put aside $300.00 a month from my pay to save for a car” – I inevitably would fail by spending the extra income on unnecessary purchases. If I know I “have” to make a $300.00 a month car payment, I will spend the money on a car payment! A responsible person who requires a reliable vehicle without having to incur repair costs for years can, and I believe should, purchase a car well above 20% of your yearly income .

    • Thank you for this info. It makes more sense! I live in Hawaii and according to this method with my income I am suppose to have a used car that cost $8,000! Come on! Realistically a car at that price range will have major issues and in the long run you will not be saving.

      • Alejandro Martinez June 11, 2017 at 8:01 pm

        I think this logic is flawed in the sense that THAT 20% of your yearly income (annual or total or any way you want to look at it) might not even be available to use, i.e it could be already compromised for other debts and expenses. I really think it should be treated as disposable income, how much disposable income I have or can have left per month? 0? Then I can buy ZERO cars no matter my yearly salary. Now I don’t know what’s a good disposable income percentage relative to the price of a car.

        • Alejandro – I like where your mind is, but most people probably wouldn’t be able to tell you their monthly disposable income numbers! I came up with this rule because it’s easy to calculate… but I agree, if you don’t have any extra money each month, you damn sure shouldn’t be buying a new car!

  18. I think you guys are looking at it from the perspective of owning a new car. Most luxury brands that have super high MSRP prices can usually be leased for less BMW for example has 36 month leases for around $350 a month. And most people like to have new vehicles so leasing a vehicle is the best bet yes in a way u will always have a car payment but in turn you will always have a car less than 3 years old which in repair cost past the warranty for most cars can get quite pricey. So I agree 20% if you feel the need to own the car. But I would lease if u want a nice car within a budget.

  19. So let me get this straight. I make 51k a year. 20% of that is 10,200. I’m not driving around in a $10,000 hooptie are you insane? I’m a grown ass man. If that’s all I had aspired to I would have offed myself years ago.

    • This is a hilariously awesome comment… in fact, I’m going to write a separate post just to respond to it!

      Here’s the post:

      • Your article has made me question my reality… I am 33, engaged with a $90k income… Ladyfriend brings home $50k.

        Cars are awesome! Having always enjoyed them as an enthusiast, I’m feeling dismayed about future purchases. I was planning to spend 20-30K which I thought was MODEST. Are my expectations for what I want in a car that out of whack? I spend time in the car…. a 91 mile schlep EACH WAY to work. I stay overnigh sometimes, so its not a every day drive, but I will easily put 30,000 miles on my car this year.

        Buying new sounds like a terrible idea after reading this, but with a commute like that isn’t the premium worth it for reliabilities sake?

        • Matt – wow, that’s some major driving, have you ever thought about moving closer? We’re about the same age and while I enjoy cars, it just kills me to spend so much on them… especially now that I pay cash for them. When you’re paying cash, you experience the true cost because you realize how hard you’ve had to work to save up so much money. Last year, we bought a used Volvo XC60 with 80k miles on it for $19k cash. It is a really nice car – definitely the nicest we’ve ever had, and we’ve already put around 30k miles on it with no issues.

    • I’m in exactly the same situation. 51k a year, and I really cant see myself buying a $10,200 car. I’m very passionate about cars and I feel like I will be okay if I get a 25k car. I can pay that off by the time I’m 31even if I didn’t put a downpayment.

  20. This is a great rule of thumb and the principle is that we should not live beyond our means. I saw some great points about taking a hard look at ones budget and financial goals, as well as factoring in the maintenance costs of a used car. A car that costs $10k might be due for a timing belt replacement soon, or other unknowns that a $15~20k car would not need. It all goes with doing your research and where you put your value.

    To some, cars are a means to get from A to B. For others, like myself, we love the ‘getting to’ and I’d rather live in a smaller place and eat out less than drive something I don’t enjoy. Especially living in Atlanta where we have long commutes (bad) and awesome mountain roads less than an hour away (GOOD).

    Good article!

  21. I’m 25 currently running a company on week days, and having part time job on weekends. I am making roughly $60,000 a year (give or take). The last few weeks I have been on the edge of buying a brand new $22,000 car (give or take). After going through this blog many times I am not really not sure if I should do it or not. I totally can see how spending less than 20% of my yearly income on a car is definitely a super smart thing to do.

    But for the longest time I want to look a certain way. (I guess on this blog we call that the disillusion of being successful).

    Anyhow, I really want to live life a certain way. I want to wear wool suites, driving clean looking cars. By all means the car doesn’t have to be really expensive. My current car is a hand down from my parents. Toyota Yaris, which I have to admit I’m quite embarrassed when my employees and friends see me driving it.

    Definitely feels a bit torn right now….

  22. Hey Dan,

    Do you believe this 20% rule is on the conservative end of the spectrum?

    I’m in the market for a car now and been doing tons of research. I saw another credible website use the concept of total debt not totaling over 36% of your gross income. Not saying I’m for your approach or theirs, but they are factoring total debt (House, student loans etc.)

    Here is my scenario. I make $160,000 a year, my wife work part-time and brings home another $21K a year. Based on your calculations we should spend $36,200 roughly. Is this financed? Or cash? I believe we intend to do both.

    • Hi Shay – the 20% rule is a conservative rule that works pretty well across all income levels. The 36% of annual income rule is typically used by mortgage lenders to see how much of a house payment you can afford.

      That being said, I give advice based on what I would do. My wife and I are down to one car because we sold my older car before we set off on our round the world trip. We’ll probably buy a newer car in the next couple of months and we’ll buy it with cash – and it will probably end up being between 5-8% of our combined salary.

      I say pay with cash because when you finance you’re more likely to spend a lot more on the car. It’d be really hard for me to write a check for $36,200 to buy a new car. I truly believe expensive cars are one of the most detrimental things to our financial future.

  23. I bought 2010 cobalt brand new, very bad idea seeing i was making 1000$ a month 400 with rent included, the loan was 180$ for 5 years 45%. i had a very tough time living like that for 3 years but i love putting no real maintenance into the car and i will never buy used again, you know how the car is treated and have an advantage when you need to sell. right now my car is ~1300$ above kbb. the only thing i suggest is keep in mind you need a place to live and factor rent into your income (even if you dont pay rent now) or expect your income to rise within 6 months. now im making ~2600$ a month, 2000$ with rent from welding and i got my payment% down to 9. im considering buying an FRS cause im into sports cars, id have a winter car and a summer one. combining the two loans would bring me to 20% exact, in a year and a half ill have welding, auto tech and diesel mechanic certificates. so i believe im going to pull the trigger and buy it

    • It’s never a good idea to spend based on predicted future income. Also, we drive a 2003 Toyota 4 runner and we haven’t paid maintenance (or car payments) for years… I don’t buy into the “you know how it’s been treated” excuse either – when I had a new car I surely didn’t take it in for all of the scheduled maintenance… but when I bought my used car I made sure other people did! I really think you should reconsider buying a second car with additional insurance, taxes, maintenance, etc… unless you’re buying the car with cash.

  24. I’m not personally wealthy, but my dad is moderately affluent and I’ve learned the power of frugality and living below one’s means from him over the years. He’s been driving japanese econoboxes and minivans for as long as I can remember. He’s driven 3 cars in his lifetime (all of which he wrote a check for in full at the time of purchase except for his very first car which he financed) – an ’84 Toyota Camry, a ’95 Nisan Quest, and an ’06 Honda Pilot. That’s it. He write checks for cars in full and drives them until they break down.

    Currently he’s 55 and will pull in, oh I don’t know, anywhere from $550k to $700k per year (AGI – federal income tax takes a hefty $150k-$200k of that each year. I’ve seen the checks to the U.S. Treasury!) or so and yet he spends maybe $6k-$7k per month on total living expenses in a relatively low cost of living area (Texas). As a result his overall net worth is between $5M and $10M and yet he doesn’t harbor any notions of ever driving a luxury car. In fact, he doesn’t even consider himself to be wealthy. If someone were to ask him what social class he’d consider himself to be in he’d probably say “middle class” and then begrudgingly add “upper middle” as a qualifier if pressed.

    After his Pilot he’s already told me that he has plans on purchasing a Prius as his next vehicle.

    Granted this is not to say that he’ll never spend money on anything. He values experiences more than material possessions. For example, one of his dreams is to ride that Virgin Atlantic aircraft to space ($250,000 per ticket!) But really, more than anything else he values financial freedom. He says the feeling of working only because you want to and not because you have to is just amazing and is worth working towards.

    But, I mention this because I’ve noticed a trend where a lot of people seem to doubt the pentamillionaire and decamillionaire statistics (not in the comments section of this article, but just in general), but they definitely ring true in my dad’s case. The ’06 Pilot is the most expensive car that he’s ever purchased and it was in the high 20s or low 30s I believe. He also never gets navigation with his cars because he thinks a handheld $100 garmin does the job just fine and you can save a good $3000-$4000 this way. FWIW he wears a ~$200 Seiko, wears $~100 dress shoes, and the most expensive suit he owns is maybe $400 or $500 (because to my knowledge stanley’s books mention pentamillionaire/decamillionaire stats for various items like these in addition to large purchases like cars and homes).

    • Wow, this is incredible and inspirational!! Thanks so much for sharing!

    • My life goal is die exactly pennyless. I admire your father with $5M~$10M net worth, but I wonder how much will he bring with him when he is six feet under??????
      Money is earned to spend. If he doesn’t feel the need to spend on the items he deems necessary, kudo to him, and donate the rest to the people who needs it!

    • Save every penny of your money so you can die a rich man LOL. Honestly what is the point of working hard and saving if you don’t procure the things you want. What exactly are these extremely frugal people saving up for? Most of them die with piles of unused cash. I’m not saying spend 70 or even 50 percent on a car. However 20 percent is extremely conservative. I guess if you’re not a car guy then this rule is fine, but I don’t plan on working hard just to drive around in a crappy car my whole life.

      • To die a rich man is not what I aspire to. I aspire for freedom, the opportunity to live my live the way I want to without worrying about working to pay bills. To retire early (like at age 35-40) and live off my net worth… I’ll gladly sacrifice a new car for that.

  25. With an annual income of around 43k a year I decided to purchase a 2014 Subaru WRX Premium.
    The total cost out the door was $30,421.00
    I put down $11,000.00
    Therefore, my loan amount was $19,421.00
    Now, for the sake of your argument; that is about 45% of my annual income.
    My total household income comes to 71k a year. This brings down the loan to about ~27%
    While over 20%, it is nowhere near debilitating. I believe that as a “rule” those who plan well can spend whatever they please on a new/used car. It’s better to spend 30% of your income on a car that will have resale value than 15% on one that won’t!

    • When I sold my 2002 Volvo last year, I sold it for $6,400 less than what I purchased it for – that was after driving it for five years. You’ll nearly lose that much in depreciation as soon as you drive it off the lot, so even though your car may have a resale value, you’ll still lose a heck of a lot more money for buying a brand new car than I did for buying a used car. However, I do agree with you that you’re not too far off the mark and if you are good with money you can make better decisions… but this is just a rule of thumb 🙂

  26. Meh I disagree with this thought. It’s extremely conservative. If I followed your guidelines, I would purchase a car that cost 5k lol. It’s great to be conservative when you have kids, pay rent/mortgage but otherwise idk. Live life, buy what you want. You only live once in my opinion. Once you die you don’t get the chance to live. Id rather live aggressively. Basically, you can die any day, why not live life purchasing things that make you happy rather than spending on something you can afford and thinking gloomily about the future

  27. I think one point worth examining is the interplay of fixed vs variable living expenses. The 20% rule is just right for incomes under $50k, but above that you typically have more disposable income because by and large the normal living expenses of any individual are fairly fixed. This means you may have to choose not to eat out as much or visit Best Buy as often (variable expenses) if you spend 30-50% of your salary on a car, but it won’t bankrupt you (not able to pay fixed expenses). I also wonder about the paying cash bit. Food for thought: if you are saving up money and it is earning a normal return (historically 8% on stocks), unless a new auto loan is at greater than 8% interest, you are better off financially letting that money grow and taking the auto loan at a lower interest rate and pocketing the difference between the 8% return on investment and the lower auto loan interest. Of course, its advisable to always keep your auto loan above water but I have had a “car savings” growing for years (car has been paid off for awhile) and determined when it is time to trade up it would be much better to leave the money to grow and take out a lower interest loan. In essence I just take an offsetting position on my “personal balance sheet.” But I would agree most people today buy way more car than they can afford which leads to stress. My rule for this would be if you’re not comfortable you can make the payment, you can’t afford it.

    • Tom, thanks for adding to the discussion. On the first point, I agree that in theory people who make over $50k should have more disposable income, but from my experience and observations, most people spend as much money as they have. So even though they’re making more, their mortgage payment, food bills, vacations, credit card bills, are always much higher – leaving them in the same predicament as the person who makes under $50k.

      As far as taking out a loan instead of paying for it with cash, I don’t agree with that position. First, you can’t guarantee an 8% return in the stock market (ask anyone who was invested between 2000 and 2009 when the return wasn’t even 1% for many over that period) – even harder is guaranteeing a positive return in the stock market in a five year period (typical length of a car loan); way too much volatility. Also, that 8% return in a taxable trading account would typically mean taxes of 15-25% on capital gains and you’re also not factoring in the risk (known as beta) which basically takes a few percentage points off your return to account for the fact that the market doesn’t always go up. That’s why I advocate paying cash – and staying under 20% of your income (in fact, my next car will be purchased with cash and probably be between 8-12% of our total income).

  28. Your position is great for the average person but your lack of knowledge on how debt and time value of money applications in personal finance can be used to increase someone’s net worth and happiness. Trying to be debt free at all times is poor person’s mentality, you have this. Ie. Investable debt and tax free accounts can be used. To bring up the second greatest recession, which actually happened 2007 till now to justify not putting assets in stocks instead paying down debt works for risk free people but not people that can live with a small loss, aka people with some cushion money. Sure you can lift someone into the middle class with your advice but not make anyone extraordinary while maintaining happiness.

    • Ah yes Ryan, you are a scholar and a gentleman. Please enlighten us poor people on how to use debt to get rich… should we use Kiyosaki’s advice (rich dad, poor dad) and become highly leveraged in debt to purchase real estate that we can’t afford and then pray the real estate market doesn’t crash (again)?

      I majored in Finance and I’ve studied personal finance for the last ten years (including my own experience in getting out of debt and building wealth) and it’s worked great for me and many other people. For most people, their income is their greatest wealth building tool, and I do my best to advocate people to maximize their income while minimizing their debt so they can build wealth. Seriously though, I’d love for you to guest post if you know something I don’t.

      • Actually, Dan, your approach is a one size fits all type of deal…this might do more harm than good for people not financially astute. It’s the same reasoning as ‘how much money do i need to have when i retire?’. No credible financial planner will straight out give you an amount like you are doing, because prudent advice takes into account personal factors and situations which you ignore. This 20% rule might work for you, and i am willing to bet that it is how you came up with your number based on your personal budgetary limitations. Two people, both making 100,000 might be in drastically different financial situations. How old are they, are they awash in debt? So really, i’m actually shocked to hear that you’ve studied personal finance for 10 years, and this is the best you can come up with? Not good my friend.

  29. I do truly appreciate your comments and your stances on the value of keeping ahead of debt. I have been following the mrmoneymustache blog for a few years now to cut back on expenses. He’s a man who managed his finances and wealth to the tune of retiring in his 40’s.
    I will say we did cheat slightly on our most recent car purchase however. My wife and I are 26, with no student debt, we’ve paid for more than half of our 220K house we purchased two years ago and do well otherwise and net about 110k a year. We tried to look for cars in that 20% range but ended up spending 31% of our income to get what we wanted. I agree that you need to not overexert yourself and leave in debt, but at the same I must say it boils down what was already discussed, functionality, needs, etc. We are starting a family and both had two sedans that are paid for and ended up trading on in on a 30k SUV. However, it fits well into our budget leaving plenty of room for investment and other disposable income. We will ideally need the space for children, our large siberian husky, and leisure, as its not always comfortable cramming into a small sedan when you’re 6’2″. Generally speaking though your 20% suggestions is spot on with what most financial advisers would suggest and a good rule of thumb, but everything in life is circumstantial. We will have this car for 10 + years, it is AWD for midwest winters, and we really wanted it. 🙂

    • Sounds like you guys are doing awesome, great work! I love Mr. Money Mustache’s stuff – really inspiring and we’re planning to do something similar. Only thing I’d say is to be careful with your justifying… as Ben Franklin said, “So convenient a thing it is to be a reasonable creature, since it enables one to find or make a reason for every thing one has a mind to do” 🙂

  30. I am a big proponent of buying within your means, however with interest rates below 2% and in many cases down to under 1%, buying a 15-20k+ car cash is absurd. Look at it from an opportunity cost standpoint. Let’s say for a moment, that I am about to purchase a 30k CPO vehicle. I could buy it cash, but I can also finance it for under 2%. I’ll put the 5k down and and put the remaining 25K into some diversified, stable, investment grade securities to preserve principal, and capture ~1% on the spread after taxes over the next 5 years. Sure, my monthly savings is reduced by ~450/month thanks to the car payment, but a dollar today is worth a dollar tomorrow. I’ve now taken this lump sum “advance” on my savings over the course of the loan and employed the power of compounding earlier than it would have been if I was saving the 450/month. You can effectively make money by financing the vehicle, being mindful of the risk assumed in doing so.

    If you can’t pay cash, you shouldn’t be buying the car, but the ability to pay cash doesn’t always mean it’s the best option for you.

    • Using your 1% assumption, your $25,000 cash would yield you $250 per year or roughly $1,250 over the life of a five year loan – that’s before any financing fees and origination fees, but I’m not exactly sure how much that would be.

      You’re also assuming you’ll be able to safely achieve a 1% spread over the life loan – a very conservative estimate, but still, an assumption. What would you invest in to get this guarantee because savings rates are .85%, bonds can plummet once interest rates increase, and treasury rates are only 1-2%. I wouldn’t advise stocks for this short term investment, but that’s just me.

      So, even with your assumption, you’ll make $250 per year. I’m willing to bet most people would spend much less on a car when they buy it with cash, quickly overpowering any “gains” from your strategy. That’s why I buy with cash.

      • You are neglecting to factor in the advantage of having cash on hand. Even if the cost of the loan winds up being a net loss compared to paying cash having said cash on hand is massively advantageous in unexpected circumstances. In a high cost of capital market that is no longer true but if one thing is certain about the current economy it is the cost of capital, cheap.

        • Dennis I totally agree! I paid cash more or less for my current car because I had to (old one was totaled). I ended up getting a pretty high interest rate loan because I didn’t want to put cash down since I had the insurance check coming (but not yet in hand). One thing I learned is that if you pay ahead it doesn’t reduce the life of your loan, but it makes payments effectively not due for a long time. I will always follow this philosophy because then even if you miss a month you are never in default. I paid about $300 to finance the vehicle but had the loan been at 0% I would have definitely invested the money and raked in the spread, just keeping about 6 months ahead on payments. Another thing to consider is how quickly the car will depreciate. 6 months into owning it I took a new job with a 100 mile commute. While the car is still in great shape, it has a laughable residual value due to mileage. I would still be paying on a car with 157K miles had I not paid ahead. I think this is the smartest way to go, buy a car you could pay off, but then bank the cash and get the cheap loan and pay it off as you please. Another thing to mention in this blog would be maintenance! After accumulating all those miles trouble-free, and with a car that for all purposes drives looks and sounds like new I would never stray from maintenance, both by the book and off the book for things like the bogus “lifetime” transmission fluid.

  31. According to this I am pretty much screwed. I have a nice 200k house and a tesla S, but I only make $120k before tax. I have about $2k surplus each month after all the insurance, food, utilities and other necessities. I went over my limit by 400% it seems.

    • I think I’m sensing some sarcasm 🙂

      You should be fine as long as you have a good job… I use this formula to determine how much car you can afford, not how much of a car payment you can afford.

  32. I make 46,900 a year, mortgage/utilities are $975 month. Based on your 20% rule max car I could afford is $9380. I currently drive an 99 Chevy Tahoe with 200K miles on dashboard and average about 11 to 13mpg and I drive round-trip 60miles to work. Its paid off but needs about $1500 in repair but still runs. I looking to put down only $1000. I’ve been looking in that price range and everything that I found has close if not over 100K miles on it or is super old. I will have to finance so the likelihood that a bank would would finance a car that is older than 5 to 7yrs old with that type of mileage is pretty slim. What suggestion/advice do you have?

    • Sam – if you went for the new car, would you sell the Tahoe with our without repairs? Based on a quick KBB look up, it seems the Tahoe my only be worth $1,000 running, is that right? Based on that assessment, it’s probably not worth dumping a bunch of money into it.

      We’re actually looking for a new(er) car now, and I’ve found quite a few cars within 65k-90k miles around the $10k-$14k price range. If you get a dependable car with 80k miles on it, you can still get a lot of miles out of it in the future. Have you tried talking to a credit union to see if you could get a loan on a car in that price range?

  33. This is so beneficial to me as a young business man I am bring home 108K on a salary plus commission and i have considered making a car purchase due to I have a 03 Honda Pilot paid for that my wife is driving and my company gives me a vehicle allowance. i think the best part of the responses i got is do not trade the 03 cash paid car and make sure I find a car I can pay cash that is dependable or find one less then 15,000! This subject here can save alot of heart ache to all ages !

  34. The 20% rule is good, that’s for sure – but there are more things at play here methinks. I recently found article that explains the 20% and other consideration that apply to car affordability and all that. Take a look:

  35. I don’t agree with you. What’s the point of having $1 million or more in my bank account while I drive a cheap ugly car?! For sure we are not going to spend that $1 million while we are in our graves!! Let’s enjoy this life, we are living it once only.

    • I can assure you, I’ll have a million dollars in savings within ten years, and we’re fully enjoying life. It’s possible to both, but you have to be smart with your money to get there.

  36. I’m really confused. I make $50,000 per year Based on this I can only afford a $10,000 car? What about financing over 3 years or more? Or is the article meaning that you should plan on a payment of 20% each year? That would make way more sense. If I can get 3 years interest free the simple math would put me at $150,000 @ 20% = a $30,000 car, right? This article makes it seem like you should buy a car outright with cash. Someone please clarify for me.

    • Scott – I recommend only spending 20% of your gross annual income for one year. So yes, I’d only recommend you spend $10,000 even if you have to finance. I recommend that because it stops you from spending too much of your income on a depreciating asset (a car)

  37. I’m 19, work full time, currently taking college classes, and just cashed out on a small clothing line I had for 1 year. I currently don’t have any expenses other than my phone bill, some food, and gas. Rent and all of that is not a concern at the moment. Nor is college. I work at a corporation and make around 1200 every 2 weeks after taxes. My parents get me a black 98 honda civic LX stick shift car. It’s in okay condition, but I want something newer. Recently, we looked at the 2014 BRZ and I must say, the car is a beaut. I like to consider myself a responsible college student compared to many friends I have. My parents want me save most of my money, and I agree with them. However, they don’t want to buy me a new car and I feel that if I manage my money correctly, I can pay for a new 24K car no problem. Either way I am going to work 40 hours a week, and possibly work more during the summer because I wont be in school. I need some advise on if I should just wait, or buy a new car and enjoy the money I’m making at the momeny. PLUS, by the time I get out of college, I’ll have good credit. My boss is currently working on a way for me to continue working for her while off at a University. Not full time, but just enough to make a car payment and have some extra cash. Thoughts???

    • The worst money mistake I ever made was when I bought a brand new car one year after I graduated. I made good money and was able to pay the monthly payments, but it didn’t allow me to save very much. It also made me feel like I was forced to stay at my job because the dang car payment. If it were me, I’d keep the old car until I could buy a newer car (not brand new) with cash. It’s very tempting to buy one after school when you start making money, but if you can wait and start saving that “car payment” instead, you’ll be in great shape in the future.

  38. Sigh. My multimillionaire dad drives a 1999 Honda Accord with the paint peeling off. It drives my mom crazy.

    • Haha, I’m not quite that ‘frugal’. It does seem like some rich people do it just to prove a point… or he’s just so enamored with not misusing money that he’ll never be able to spend it on a depreciating asset!

  39. I make 32,000 a year Which means I can only afford 6,400 I am 19 years old and I live with my parents I only give 150 a month to my parents and I pay my fone bill thats it. So how much can I really afford? Thanks fer the help! 🙂

    • Javier – you probably won’t like my answer, but I’d still advise only spending 20% of your income! That’s great you’re making so much money at 19, if you can make the right financial decisions now, you’ll set yourself up for incredible success with lots of money in the future. However, if you spend it all on a car instead of saving and investing, you won’t be ahead of anyone else. Get a decent car, save your money, and reap the rewards later 🙂

      • Hmmm well it makes sense. Well thanks I guess ill jst buy a little 5 or 6 thousand dollar car. I sounds like I will thank my self later.
        Thanks for the advice! 🙂

        • Javier – you’ll be in great shape if you make the decision now to make smart money moves… I didn’t start until age 25 and at that point I was already $50k in debt!!

  40. I’m pretty sure you should be basing what you can afford off discretionary income, ie: what you have AFTER taxes, expenses, food, etc..

    if you monthly payments are over 1/3rd of that then you’re spending too much on your car

  41. I think your formula is wrong. If someones makes 70k a year and they’ve paid off their mortgage, food is the biggest expense. after taking the lady out, shopping, movies, restaurants, taxes, utilities, condo fees and vacations out of that 4k a month they get to keep about $2,200 a month that they have no idea what to do with so if for example they want to buy a corvette at 70k (100% of my annual income), putting 30k down payment that’s a 40k car loan, after 3 years of financing 1/3rd of their discretionary income towards it, it’ll be paid off… they’re way over and it doesn’t sound painful at all even with parking, insurance and gas.. most people i know struggle to spend 5 years trying to pay off their car

    • I still disagree. If you’re doing that well financially, I think it’s because you have discipline and don’t purchase things you can’t afford. If your mortgage was paid off, why not continue with the discipline and save up the extra $2,200 per month and then buy a car with cash? If you still want to spend that much on a car, then great, but I prefer to use that money towards investments that will make me rich faster – rather than buying expensive cars that won’t.

    • i agree with you STFU. It’s better to determine amount of car you can afford based on an annualized cost. this takes into account alot of factors than just a $ amount of car. 20% budget…for how long, every year, every 5 years, 10?
      Instead if you say, i am willing to spend 6000 a year (500 a month), then it’s easy to make a real budget and plan on how long you have to keep the car. This is important if you like to drive new cars (say before they start getting maintenance issues) or if you’re like me, you like driving nice cars, but have to get them secondhand…this allow you to estimate how long you need to keep the car based on the amount you’re willing to spend per year. So i can say, i’m going to buy this 40,000 used benz, i’m budgeting 5000 a year….this car needs to last me 8 years….so based on how old it is, reliability, will i want to drive this for that long? Do i still want to buy it?

    • The approach is fundamentally flawed. It’s the kind of short sighted thinking that keeps poor people poor. It’s just based on short term thinking. Which is why poor people drive nice cars, spend lots of money…but really have nothing to show for it. It’s because they can’t see how they can afford a decent home or to fund an investment account…everything is for the short term. For example, I prefer to wear Prada shoes at work. Alot of my co-workers remark how much i spend on shoes. But my response is, how much do you spend per year on shoes….some of them go through a pair of moderately priced dress shoes a year at 100-150 bucks per pair. I pay 500 for a pair which lasts me 4-5 years easy. Not only is my actual shoe expense actually lower than theirs, I’m wearing nicer shoes that feel like i’m walking on clouds. Don’t focus on the $ amount….it doesn’t tell you squat. Focus on the value you are getting for your purchase.

  42. A guy in Chicago June 8, 2014 at 3:13 am

    So I’m in the same dilemna and glad to see there’s a good amount of reasonable people with great advice.

    My story is I’m 28, I make about $130k. Condo is paid off, no wife no kids or substantial bills besides student loan. I’ve been considering buying a car and trying to find what a suitable price range will be. I save 50% of every paycheck and the rest I invest in one way or the other. I feel I can comfortably afford a car up to $40k but on the other hand I don’t think I should go that high as I get bored quickly and I know I’ll be done with it in 2yrs.

    What would be an ideal price range for a car?

    • You’re doing awesome! Honestly, you sound like the kind of guy who will do something crazy like travel the world. Sure, you can afford an expensive car, but is that really what you want to spend your hard earned money on? If I were you, I’d get the student loans paid off, buy a car with cash (we bought a used Volvo XC60 for $19k cash), and continue building up your nest egg and savings. This will give you more flexibility next time you get bored.

    • My opinion only…i think you’re in awesome shape. Given your preferences and means, why not buy a luxury USED car…say 3-4 year old. Half the value is already depreciated. You drive it for 2 years and sell it, you won’t lose that much value over it. I once bought a used Lexus SC430, drove it for three years and sold it for $2000 less than what I paid. It cost me less than 700 per year (55/month) to own it. You can’t even lease a Ford Fiesta for that amount.
      I’m 38, but was in the same boat as you a decade ago. Condo paid off and rented out (i lived with my parents) and with a good salary, i was awash in cash…but then you get married, move into the burbs, have 2 kids…and your cash pile is turned into illiquid pools of assets (home, education funds etc)…so keep saving, it’ll make your life sweet and easy later in life….but don’t forget that life is short and if you can afford it, you gotta do the things that make life worth living.

  43. I like your approach of being on the conservative side on how much car one can afford. HOWEVER, i disagree with your rule of thumb of 20%. It does not take into account how long you plan to keep your car, how much you drive it etc. Instead it makes much more sense to come up with a car expense per year which takes a little more complexity. 20% of 100,000 income doesn’t say much about your annualized cost of owning a car – all we know is the initial outlay which doesn’t tell you much at all, which is you just bought a car for 20 grand. I’d rather pay 30 or -40 grand if i get a car that lasts longer and perhaps more reliable, making the cost of ownership potentially lower than your rule of thumb scenario. So instead of basing a purchase on your salary, make the decision based on the cost per year of ownership as a % of income. This way, you can say, based on my current income level, i’m comfortable with a car that costs me 4,000 a year to drive. This approach actually lets you make better bugeting decisions on how much car you can actually afford.

  44. I make about 90k yearly, and purchased a used M3 for about 45k. I paid about half the car in cash, financed the rest. The monthly payment is cake. I love cars, always have, always will. I just make other sacrifices so it doesn’t impact my financial quality of life.

  45. I’m 26 ,i have a lil girl, she just turned 4,i earn 160k a year basically what the 20% rule is saying is i can afford a car that will cost me 32k a year or a car that is worth 32k?

    • Hi Ms. Fortune – the rule says you should spend $32k max on a car (and cash if possible)… it does not assume you’ll spend that much every year though. I tend to buy cars and keep them for quite a while.

      • This 20% rule doesn’t make any sense. It is even more worse when you say ‘pay it with cash’. I believe someone making 160K/year can afford car around 60-70K. You are telling the whole time not to spend more money on assets that depreciate. How come you recommending to pay for a car with cash?
        Can you explain

        • When I was broke, I spent approximately 65% of my annual income on a new car. Now, my wife and I are doing quite well and we just spent 8% of our annual income on a new(er) car – using cash. Also, the newer car we just bought with cash is about 35% less than the car I bought when I was broke.

          I give advice for people who want to take control of their money – and limiting your automobile spending to 20% of your annual income is a great rule to keep you in line. Can you explain why you think the 20% rule doesn’t make sense?

  46. Wow, with this reasoning, I wonder when would we read here an article titled “How much babies can your afford?”. If the object is to become a millionaire or at least be kind of financial problems free in one’s life, given that once a baby is born it will continuously draw a constant and every time bigger amount of money for the next 20-25 years, how many millions to do you need to make a year? Don’t even get me started in having two or more children. This car-buying-rule restrain you for basically enjoying a decent car even if you are making good money working hard. It’s a sacrifice to become rich. So we should also sacrifice something even more expensive as having a kid, right?

    • Wow, I know some people call cars their “baby”, but I think you’ve reached a little far with this analogy! Also, I’ve done previous research on how much kids cost (below), and there’s a direct correlation between how much people make and the amount they spend on their kids… so people already learned that lesson! However, the same should apply for a car… way too many people are driving around in cars they can’t afford which continues them in a perpetual cycle of poor due to car payments and balloon financing. As Dave Ramsey says, “Live like no one else now so you can LIVE like no one else later”.

  47. Hello, though I don’t live in the USA I find this rule very interesting and would like to know your insight about how much car can I afford. I’m a 40yo. lawyer married with another lawyer and we have one little kid. My regular monthly income is about U$5.000-6.000 though from time to time whenever we got a trial case I receive an additional fee. We live in a US$250.000 house which is mortgage free. We have a US$125.000 house which is also mortgage free and we rent it and receive US$850,oo monthly. I have no debts and both my wife’s and my car are debt free. I use my credit card for absolute everything and each month pay the bank to set it back to zero debt. I have in Certificate Of Deposits in the bank about US$350.000. I am very conservative and don’t like risk investment at all, that why my personality don’t go with doing investments in the stock market. I’m probably going to buy with my as of today earnings of US$350.000 a U$175.000 house to rent it as well but I have no rush. I spend on technology (my hobby) and dinning. I don’t travel much, just one trip each year to the US for dinning and shopping. My total expenses are at most $2.500-$3.000 per month including my kid. My wife doesn’t earn as much as me but nevertheless her practice allow her to buy all her personal stuff and expenses and basic stuff for our kid. That gives me the opportunity, thankfully, to be able to save the rest of my monthly incomes each month. Since my hobby is not at all expensive (video games, movie watching with my home cinema, listening to music) I can maintain my hobby quite well. Given those facts, how much car do you think I can afford? In my country, cars costs twice as much as in the US. Right now my car is a US$60.000 Toyota Land Cruiser 150 and said car maintain it’s value quite well and it’s almost maintainance free. I’m always tempted to buy a BMW or MB because I love cars and I have had those brands before but somehow I don’t like the idea of losing that much money because of depreciation. My friends or colleagues told me that I should not keep my desire to buy the premium car that I would like and that I should splurge a little buying said car. I would like to know, given my financial status, how much car do you think I can afford? Thanks!!

    • Any insights?

    • Diego – you’re obviously doing quite well in your career and with your money. You don’t clearly state how much you make gross per year, but I’d still stick with the 20% rule if at all possible. For example, if you and your wife make a combined $150,000, your rule of thumb would be to spend $30k. I wouldn’t let your friend’s advice play too important of a role in your decision as a lot of times we just tell each other we should buy new cars without thinking about the long term ramifications. If it were me, I’d stick with the rule and stay somewhat conservative. There’s a reason you’re doing so well… because you’re not spending all of your money on cars!

  48. I disagree with your 20% rule; Your rule isn’t based on sound logic. The rule, if any is necessary, should only be based on an individual’s fixed expenses – not income – (less an emergency fund).

    There are others, like myself, who would raise a similar argument: I bring home $85,000/yr. I have no kids, no mortgage, and student loans ($55k) – 2 Bachelors, 2 Masters. The only bills I have are cell phone, rent, life insurance, internet, food, fuel, utilities. Why the hell would I not be able to afford a car that cost more than $16k? After taxes, I still gross over $74,000/yr (with 401k deductions of $1000/month). I drive a used, paid for, 6 year old car. On occasion, I drive a financed 2010 Audi R8 ($95k). I eat my steaks, I travel, I go out with friends and girlfriend. I’m 31 yrs. old.

    Most people who are assholes, like many of the authors of the comments above, immediately judge me when they see step out in a $1500 tailored suit and $400 shoes the night of my anniversary. Give me a break. I have like 6 outfits and buy most of my clothes from Target or Old Navy. They see me park my weekend toy in the garage of a townhouse complex and they laugh and make jokes “didn’t want the house did you?” Hell, I could buy house at anytime with 20% down and pay less than my current rent with property taxes included in a new construction suburb. The problem with people today is that they’re too buy worried about what other people do with their money and pass judgement, not knowing, that some of those people have more financial means, education, and technical career that affords them certain freedoms.

    The only time any ridiculous rule, as the one you proposed in the article, makes sense is when my girlfriend tells me she’s pregnant. I would ditched the $1200 car payment. Yet, I would have roughly $3000/mon left over after all expenses at that point. Yeah…I’ll keep my 401k contribution, the car, the girl, and the townhouse.

    • I read a quote once that most people will either have a chance to look rich or be rich… the 20% rule supports the latter.

    • Thanks for your YOLO attitude and realistic advise. I’m about you me age and I posted the question if I should buy a used 2015 Z06. By reading your post, I think I should only beacouse I want to enjoy having a bad ass car, but I’ve been such a saver that I’m having a hard time making the decision. I have a 2014 Honda Truck paid off, and a 2000 Mustang Sallen paid off that I drive to work.

      If you have time, I would like your input on this.

      Should I buy a 2015 corvette Z06? I know it’s not a Smart Choice, but I always wanted a killer sports car.

      I’ve always preached about making smart choices and I am a saver. I have over 200% in savings of the price of used 2015 corvette Z06 I’m trying to convince myself in buying. I also have over $200k invested in real estate with 1 house paid off and I owe 30% of my current home. In retirement I only have about $50k, but I have another 25 yrs in the workforce. My Income including rental property is about $85,000 and will about $100k next year (God willing). Interest rate on the car will be under 2% because I don’t want to use my cash for it, I plan on putting $20k down and financing about $60k.

      I feel I should continue to invest in real estate, but I also want to enjoy my life by having that car of my dreams before I’m married or have kids. I’m a planner and think much about the future and savings, which is why I’m having such a hard time making this decision.

      If possible, please share your thoughts and your opinion.

      Rick M

  49. I remember my first car was a 1997 Lexus LS400, that I got a loan out for 8k and had about 100k+ miles on it, but man did I love that car. Plus my payments where about $85 a month which was fantastic as I was making about 2,500 a month with no out of pocket expenses other than that car payment and a cell phone bill. But my mother convinced me to trade in that car that I had almost paid off after two years and get a 16k Scion XB. Its a great car and it gets me from point A to point B but I went from a $85 a month payment to $315 a month payment and I absolutely hate it. If it were up to me I would have kept my Lexus, it had some electrical problems that would of been expensive to replace but atleast the thing would of been paid off already! I still have two more years with this XB until its paid off, never going to buy a new car again unless its 100% cash.

    • Victor – great that you learned your lesson, but like me, you learned it by making the mistake! However, after I finally took care of my mistake and bought a car I could afford with cash, I haven’t had a car payment in over seven years!

  50. Lol, that’s because most millionaires spend most of their money on their houses.

  51. What a fantastic article!, I make 36k a year, I saved 17k while living normally paying my $ 500 rent and paying for food and clothes. I want a new car- because i use my used one for work and I will keep it for that- with $ 550 a month. Can I afford that, BTW I want to put 10k as a down payment. What you think Dan?

    • Wow, great job of saving all of that money!! If you use the 20% rule, it’d put you at $7,200 for a new car. So you pay $550/month now on your other car?

      How are you doing with other debt and an emergency fund? The first step is to pay off your short term debt and build a healthy emergency fund (3-6 months of expenses saved up). If you have both of those covered, then I’d worry about getting the used car paid off before buying the new one.

  52. We make $28000 a year. But, since we don’t have social security or medicare in India, we save 75% of our income to pay for quality education, healthcare and retirement. Your 20% rule perfectly applies to us in India as well. After reading you, we feel all the more cosy in our small car which our parents had gifted to us 9 years ago. We can easily use it for another 6 years. Besides, it won’t fetch more than $1700 today and for $5600 we won’t be getting any car bigger or better than the one we already have. Thanks for opening our eyes.

    • Jeethu – thanks for bringing in some international perspective and congrats on your decision… overspending and wanting more than we can afford is definitely a global problem!

  53. In 2009, me and my wife were in out late 20s and did not have any kids. I had just moved to canada and we were both making about $40K each. I bought a $40K SUV. Now we make about $198K and have 2 kids. My wife drives the SUV and I have been driving a $1650 Dodge for 3 years. I am having car fever right now. 3 years ago I promised myself I will never ever spend more than $10K on a car and I am hoping I will be able to control myself. I know buying that $40K car was the biggest mistake of our life. Peer presure! All my friends drives new fancy cars and I am the only one who drives a crapy car. I am sharing this story hoping I can convince myself not to make a stupid decision and buy another car. my dodge runs fine, it is just old.

    • According to the rule, you could spend up to $40k (again), but it sounds like your financial sense is stepping in and stopping you. Our last car purchase was around 8% of our annual income, so just because you qualify, doesn’t mean you have to spend it. Are your friends strong financially or do they just look rich? One of my favorite quotes is that most people will have a chance to look rich or be rich… very few will have both.

  54. I have followed the rule for years, but it is a subconscious thing for me. Basically i have had 3 cars over the past 13 years all written off by weather or other people. First car was $2500, second was $3000, third was $12,500, my next which i am getting this week is $19,000 (Income has increased significantly over the years). A few other rules i have are 1) Never take a car loan out, if you can’t buy it outright means you aren’t very good at saving or aren’t making enough money. 2) Always second hand especially if you are younger 3) Buy something that is renown for its reliability as you will spend less time and money getting it fixed. (An example of a bad purchase would be buying a second hand bmw/mercedes for cheap. They cost a ton to fix and maintain. They are nothing special to drive and your insurance premiums will be higher. They don’t really hold their value either.)

    • Really great advice Andy, thanks for adding this in. The rule is definitely common sense for some… but it took me a while before it became common sense for me! We haven’t had a car loan in over 7 years now, it’s amazing to think how much money we’ve saved because of it.

  55. I love this article and all of the comments. It’s inspiring and keeps me on the right path, after wasting my money for so many years. I earn $90k a year and may partner $110k a year and we only have one car which we purchased with cash for $14k. It’s perfect. We now have zero debt and a big savings account. Most people can’t afford to drive what they are driving. It’s a status symbol. It’s debt and over-reaching. Simple. Love the 20% rule!

  56. (sorry if my english is not perfect, I am an immigrant in Canada)
    It is a very good article. I don’t follow the 20% rule (because I think the car payment would suck most of the money for the average Joe).
    I think my next car should not cost more than 5% of my net worth. I will also take in consideration my salary and job outlook at that time.

    For the past 5 years (since my mid twenties) I have been really careful with my money and I think it worked for me as I got habits and saw my investments grow (a simple excel file to track investments and balances can do)

    To each is own, but I think it is easier to live a lifestyle where options grow along the size of the bank account (to retire sooner etc.) than to spend everything now and have to painfully adjust later.

    Also to go back to cars, I drive a 11 years old Korean car which is really cheap to maintain. I has enough safety features and is relatively confortable.
    For my next car I think I will look at a 4/5 years old Japanese car like Lexus (known for reliability and confort) with just one owner and full clean history. Then I will drive it for about 10 years..

    To me, if there is one good reason to buy recent used vs new is that you can read reviews and filter out the ones with design flaws (something you cannot predict if it is new) which are really hard to fix.

  57. LZ is kinda stupid at all. To think a person making $200k a year only buy a car worth $40,000? How about $100k salary, no new car affordable? Silly post!

  58. Some years ago I bought a used car for $30k with my $60k salary. It took me one year to pay off. At the time I felt so stupid spending beyond my means, but fortunately my career worked out, and I’ve owned the car for over 15 years now. It was thee car I HAD to buy. To this day I still love it and don’t regret my decision one bit. Unfortunately it’s only got another year or two left on it before the repairs are worth far more than the car, so I’m starting to look at alternatives. My salary is a lot higher now but I can’t fathom spending over $50k on a car.

  59. All of this is a matter of perspective, as is most things. I have always been, and always will be a car guy. I could honestly care less about where I live, or how nice my house is as long as I have a garage. If I do not have the car I want / like, I will not be happy. I make 50k a year, and am more than happy to spend 30k on a car because it is exactly what I want. I have owned 21 nissan 240sx’s and have spent up to 13k in the motors of several of those cars. Reason is, is it is what I really like, and my passion. Some people really want nice houses, and clothes and things of that nature, cars are what I care about, so following a “rule” that at 50k a year, I can only get around a 10k car? That is absurd, there are no new cars out there for that price. Only those who make 100k plus can get a nice new car? If you say so.

  60. I don’t agree fully with this 20% rule and here is why. First the prices of cars these days, you can’t even get a car with 60-70k miles for less than 16-17k. My income doesn’t allow for even a 12k car, but need a reliable car with low miles because I drive my car 1500-1800 miles monthly for my job. And getting stranded in the middle of the desert at 118 degrees is not my idea of a fun day.

    Second, people can make 50k, no major expenses and have emergency funds, retirements, 401k, can’t afford a 15k car? But I’ve seen people that make 100k scrapping for pennies. The 20% rule is not meant for anybody. I’m tired of everybody pushing their agendas on everyone else just because it worked for them. I’ve learned long ago what works for me may not work for you.

    And if these “experts” would learn how the banking system works, they would find that in order for the financial system to work you need to incur debt. If everyone was debt free the economy would be disastrous. Then you money in the bank would be worthless pieces of paper. So it’s the people that incur debt that keeps the economy going and your money in the bank. I bet most of the experts have never heard of fractional reserve banking, or who actually controls the U.S. Currency.

    But that’s ok when the world economy crashes all these financial gurus will be just as poor as the rest of us.

  61. Surely, how much car you can afford comes down to how much you are willing to spend, and how much you can actually afford to pay, be it up front or each month.

    I love cars. Love driving. My passion, if you will but I’m only on a fairly basic salary. So to buy the cars I want, I save a deposit big enough to lower monthly payments on the car to an amount I can afford.

    Cars for some are just a means to get from a-to-b. But for those like me, cars are a passion that allows us to warrant us spending much more on them without regret!

  62. So I’m 19yr old and I make about 52k a year before taxes and shit I save 300 every week I have no expensive as I still live at home my question to anyone who can reply is I saved up 25k and invested it with the help of my finical advisor now that money is making me an add 150$ a month so I’m saving roughly 450$ a week. In 1 years time I want to be able to save 35kish and put it as a down payment on a 2008 Lamborghini gallodo while I’m in business school for a 7 year contact can someone tell me if that a good idea or stupid

    • Harry – you’re doing great financially!! You have a very unique chance to keep saving and building your nest egg… at this rate, you could fully retire by age 35. However, if you buy the Lamborghini, you won’t be able to. Most people in their lives will either have the chance to look rich or be rich, very few will be able to do both… but it’s your decision.

  63. 20% rule sounds great, but don’t forget that older cars, usually, cost you more than you think in the end with repairs. Just make sure you add that into your final decision.

  64. This is a great article : Thank you,

    I’m considering a new car excessive sport model not that I need it, so would love some advice and comments please?

    My situation, single, mid-life, have saved enough to buy the car cash.
    I have more than one property and my current expenses are 80% covered with my rental income.
    This makes majority of my salary disposable.

    The conundrum I face is, One never knows the future, have a high profile career today and none tomorrow, gas price may sky rocket tomorrow or oil may drop to $20 barrel? , I am mid-life 40yrs old, may life to 55 or 90?
    So my point is, how much is enough and how much should one save and live conservatively building wealth to leave it to who ??
    Agreed if I was married with kids, it would be very different situation, but being single?

    I already drive a luxury semi sport two seater and have a cheap run about, considering getting rid of the cheap run about for the new. Not that any of these are troublesome or costly to run or maintain.

    But then, like I said … one never knows the future, so should I not keep the nest egg for a rainy day and how much of a nest egg should I maintain considering I don’t know how long I will live and currently have nobody to support or bequeath my savings too?

    • Just by reading your information and the tone, the easy answer is that you can definitely afford it. This is based on your current financial standing and the caution with which you’re approaching this big decision. Poor people would often take a different approach – I can buy it because I deserve it – rather than making it a rational decision like you.

      However, I also like to answer the question as if I were in the same situation. If you love your job and want to do it forever, then great… but that’s not the same position I’m in. My wife and I make great money and could easily afford to buy a new car for cash, but instead we’re saving like mad to try to enable early retirement. We traveled the world two years ago and will probably do it again once we save up enough money to live off of. If you’re all set where you are today and want to stay in your career, buy it. If not, you may want to reconsider and continue to put your money to work (real estate, stocks, etc). If you need some inspiration on early retirement – check out this site –

  65. I am against everything in this article, I have a passion for cars thus 60% of my salary (108k) goes to my car. I still have a nice house and can afford food.

  66. i need to buy a car in less rate cause am earning small amout of money likeR6000 per month

    • Hi Kedibone. I’m assuming you are from South Africa? With a R6000 salary you won’t be able to afford a car easily. For one, banks will be very hesitant to give you a loan for a car, and if they do, you’ll end up with a very high interest rate. The American readers need to understand that interest rates on car loans are upwards of 10-12% in SA, with riskier profiles usually ending up between 15-18%. Your best bet would be to use public transport such as taxi’s or busses until you can save up enough money to buy a car. Even a 100 000+ mile car that is 10-ish years old will set you back 40-50k. If you can’t put away R2000+ a month, you’ll definitely not be able to afford the fuel, repairs etc.

      Let’s do the math:
      -Car loan repayment on a R50 000 car (assuming you get a loan at 14% over 72 months) is going to be R1100.
      -A tank of petrol is R750 give or take.
      -That is R1850 just to get it moving. General maintenance is going to cost you another R250 a month. So you are at R2100 a month with enough petrol to drive 600 kilometres and some very basic maintenance (oil change, oil filter etc.). Your loan is also for 6 years, so unless you are going to get a significant pay raise in the near future, you’ll have to drive this car for at least 3 years before you can sell it. Granted, it won’t depreciate much, but with the high interest rate you’ll own more on the car than you’ll be able to sell it for within the first couple of years.

      The problem here is that there is no wiggle-room if something breaks. My 2005 Almera’s fuel pump is costing me R6500 to fix. Can you imagine what it will do to you financially if you ended up with that type of repair cost; which, by the way, is a likely scenario given the price range that you are going to have to consider.

      My advice to you would be to try to save R2000 a month. If you can’t do that, you are going to have a very bad time when you try to buy a car…I guarantee it. You’ll probably be able to afford a car if you get a loan, but you’ll end up on a very slippery, not to mention downhill, road to bad credit and a financial ruin.

      If you saved up the money to pay for the car (or even half of it) at least you’ll have a buffer of sorts when (not if) a repair is needed.

  67. I agree and disagree with this article. I think you should take 20% of your annual income a year and divide that over a 12 month spread. In other words, I don’t think anyone should exceed 20% a month of there debt to income ratio on a vehicle payment.

    Let’s take a 35,000 salary (which lets face it, this is probably pretty close to what most of us out there make average).
    $35,000 / 12 = $2,917. ($2.917)(.20)=$583.40.
    I believe that is the most you should ever spend monthly on a car payment at that income. I personally take out taxes, social sec, etc. out of the yearly salary when I figure out my budget for a newer vehicle.
    ($35,000)(.15)=$5,250 – $35,000 = $29,750 Now using the same from above…
    $29,750 / 12 = $2,479. ($2,479)(.20)=$495.80 so this figure would be the most a person should spend at the annual salary.

    The smart thing to do would be to take things like insurance premium cost, fuel cost average, maintenance, etc. and work that into that $495 as well if you really want to budget tight. Lets say insurance is $100 a month, gas is $100, and you set aside $45 for maintenance costs. Then you could say your car payment should be no more than $250 a month so you can continue to live within your means.

    Also, if you want the more expensive car start cheaper. Put a nice down payment and shorten the term. Most Americans opt for the 60mo term. So maybe do a 36mo instead after a nice down payment. Once the car is payed off continue making payments as if you still were paying on the car so you can go and have a higher down payment on the next one.

    There are so many different ways to do these calculations. Everyone is different and not everyone manages their money the same way.

    • Errr….that sounds like a really bad idea to be honest. What if some emergency pops up? Then your car is the first thing to get repossessed. Also what about taxes??? 35,000 is much more like $28,000 a year after you get taxed.

      I don’t know how someone could feasibly afford rent, food, gas, AND a car payment over $200 a month making that.

  68. Better idea- save for it..yep it may take a couple of years of slow saving for someone to buy that new car, but it is worth it. I think the concept has been lost on a lot of people, which is why the car prices have skyrocketed in the last decade. More and more people are shopping on credit for things they cannot afford, just like houses. Eventually it has to all collapse.

  69. I earn 460k HUF gross a month, which is not bad in Hungary. That is 5.5M HUF a year. I bought my 2004 Mazda 6 diesel for 1.1M+registration+winter tyres. It was bought for loan. I pay 40k a month for financing it, I spend about 50-60k on fuel a month and I also have to spend some on maintenance, 10-20k/month so far. That is about 110/month, but the company pays 30-40k for gas. So the full cost of the car is about 15% of my gross annual salary.

  70. Hello all,

    I’d like to start by saying this was a serious eye opener, thank you Dan! My parents have been a proven model of over reaching financially, and apart from their recognition of their mistakes I have no basically zero guidance in making this decision.

    I recently (finally) got a real job having graduated from college two years ago. I’m making modest 34k a year and am driving about 120 miles round trip each day while commuting from home (living with my parents).

    I have been grappling with the decision to buy a car having spent at least 2k in the last year on tows/repairs. I wonder if this is a greater money sink than a car payment, given my vehicle has essentially no value. Where do we draw the line? At what point does my exercise in frugality become one in futility?

    I guess my real question here is how to truly factor in repairs and maintenance for the vehicle you purchase. Living in the northeast the brutal winters take a serious toll on the undercarriage of a car, especially when driving as much as I do. I plan on garaging my next car and doing everything I can to keep it in great condition, but in my experience the majority of owners don’t do the same, making me significantly distrustful of anything more than 10 years old.

    The other factor I’m considering is that I’ve never owned a car newer than 15 years old, and that my experience with maintenance costs may very well just be dependent on the vehicles I’ve owned.

    At 150k miles I might be able to squeeze another year or two out of my current car, and despite actively hating it, I have been patient and trying very hard to keep on keeping on. Any guidance at all that anyone can offer would be great! Everything I had been told previously suggested 20% of monthly income being the ceiling, needless to say I am seriously reconsidering the trip I had planned to the dealership this weekend.

  71. This sounds good but let’s be real you can’t even get a slightly used Toyota for $8000 I think we should have more discipline and save for a car as opposed to getting a loan

    • I agree…this sounds very good, in theory. But finding a used vehicle in that price range in good working conditions is rather difficult, not impossible, but difficult. You might end up spending even more on repairs.

  72. No I don’t agree… this all depends on your debt to income ratio. If my son only makes roughly $1,000 a month with no bills other than his car, the car he could afford would be $2400………. FIND him a car for that!!.. oh and it must last at least 4 years without becoming a money pit! OR spend $10,000 on a barely used car have it last 10 years with very little in repairs which would give him roughly 3 years of NO car payment…. OR find a car for $2400 hope and pray it lasts him 2 years ($2,400 every two years would cost him $12,000 + repairs in 10 years and have no value for trade each time). WHERE do you get 20%?????? HOW about 20% of your gross income per month for a car payment…. NOW that I can understand!! which would be a $200/month car payment or a vehicle that costs around $10,000 with a 5 year loan. And depending on your debt to income ration maybe you can afford 28% ($280/month or roughly $14,000 vehicle). OH… just make sure you buy a Toyota or a Honda which holds their resale value and you can have a 10 year old vehicle still worth $5,000 in trade (or more).

    • Sounds like you’ll help your son go deeply in debt. I just found a 2002 Toyota Corolla with 112k miles on Craigslist for $1,000. Sure, it’s not the prettiest car, but if your son is only making $1,000 a month, then maybe that’s about right? I drive a 2003 4runner with 188k miles and haven’t spent much at all on repairs the last few years. If your son really has no other bills, then why not start with this crap car (and save $1,500 in two months). If the car can last a year, he should be able to save $8k pretty easy and buy a newer and nice car!

  73. I want to buy a classic car; it’s one of my dream cars. I found a good deal. Many of the models of the same year are selling at classic car auctions from $65,000 – $1,000,000. I found a guy who needs the money now and wants $40,000. I have financing for that at 2.99% interest. Even with financing, I would still max my 401K and IRA with money left over. What should I do?

    Salary: 75K
    Monthly Income: $5058 (After Taxes)
    Student Loans: $23000 at 3.8%
    No other debt

    After the first of the year, I will be promoted to a new position. My salary will be $87K.

    • Tyler – if you’re financing the full amount, you’ll now have $63k in debt which is a whole lot even if you are making $87k starting in a few weeks. Also, it sounds like the classic car will be a second car and you’ll have to factor in the extra costs of maintenance, insurance, taxes, etc. If it were me, I’d keep the dreams in dreamland and get my debt paid off and enough cash saved up to by it straight up in the future… it’ll be easy to justify that you’ve always wanted it and you’ll never get this price again, but this puts you in a very dangerous position financially.

  74. Ok, so I’m pretty much a beginner when it comes to car buying. I’ve never owned a car at all and I’m trying to get some advice from experienced people to see if I can actually afford the car I want, despite the whole 20% rule. So the car I’m interested in goes for MSRP $34,810 I’m a bit undecided as whether to finance it or lease to buy but I’m leaning more to financing it, and if I do I’m planning on putting $3,000 down maybe even 4k if I can. My annual income is about $23,500 I’m in the military so I live on base and pretty much have no bills other than internet which is $50/month. Insurance wise I’ll be paying about $220 since I’m 21, plus the annual registration fee of $550. Do you think I’ll be able to afford it or should I not even attempt it?

    • Daniel – thanks for stopping by. If you buy a cheaper car for cash ($4k-$5k) and invest the $700 extra a month you would’ve spent car payments (and extra insurance), with a 7% annual return, in 30 years you’ll have over $850,000. Or you can have a fancy car now and no massive cash pile in 30 years… your choice.

  75. hi, i came from Dominican republic to USA in 2011 and since there in DR a car is so difficult to have for a low class people, so here in NY I bought a Nissan sentra 2009 in Oct 2012, the car is under my wife name beacause i had no credit since i was new living in this country, the car with taxes and stuffs was like $18,900. $326.00 monthly. APR 9.63% at 72 months with only 1000 down, and my income is 23k year. im paying the car every month but not so easy, some people tell me i have to buy another car around 7000 or something, so the APR could be little less and so my monthy payment could be less and it will be easier for me to pay it. the trade-in value is around $5,500.00. should i do it? or it is better keep paying this car until Oct 2018,

  76. I drive a lot and use my car for work. I regulatly pick up bosses, clients, etc so a good car with some amenities like leather seats and a nice are always essential. Still, I shop smart. I don’t buy new and I save to put as much down as possible. Also, I look to get pre-approved for my loan. Then I know exatly what I have to shop with, have more choices as far as vehicles and also I can strike a better deal at the lot.

  77. I like the twenty percent rule. How did you come up with it? I too am a follower of Dave Ramsey.

  78. I used your advice. My 20% was $6800. I bought a car for $5500 plus tax. Thank you so much for putting up this page. I won!

  79. 20% is 20%. Some people here are liars. I make 70k a yr paid off my car have an extra $2200 a month. If you paid off your house you have been given money or you are frugal. Second of all if you buy a car cash and save a little bit more you wouldn’t have to work at all.

  80. This is an interesting article. I recently purchased a new truck but it is well above the 20 percent. In fact well above 50 percent of my gross income. Now that I am in this situation I am worried moving forward. How would I get out of a situation like this if I need to because I understand the depreciation of the vehicle will create a vast differential in the amount I owe to the amount I can get for it were to trade it in. Any advice on how to move forward if I were to say, look to purchase a 15000 vehicle instead? Thank you!

    • Hi Logan – check to see how much you could sell it for now. Could you cover the difference yourself? If not, you may have to check with a credit union to see if they could give a small loan to cover the difference. You’ve already made the mistake so you need to deal with it now… otherwise the mistake will just keep getting bigger (as will the difference between what it’s worth and what you owe).

      • Hi Dan, Thank you for getting back to me so quickly! I am looking to purchase a home in the near future and this mistake is not helping! I would be able to cover the difference myself, if not I would be very close. Would you advise selling it privately or just negotiating used with a dealership? Also, do you know if it would be best to use my money that I have saved on a down payment for the next vehicle.. or use it to pay the difference of the existing loan? I suppose it may depend on the rate. I hope that question makes sense (I am pretty green when it comes to finances). Thanks so much for your advice!

        • Hi Logan – you’ll usually get more with a private sale. Do you have enough money to pay off the difference and then buy a cheap car with cash? If not, it’d probably be easier to get a loan for a car rather than a loan to pay the difference… But don’t let it allow you to spend more than you should!

  81. I was interested to see your How Millionaires Buy Cars article linked to here. Our annual income is about $1.25MM. I love cars and I also love disruptive technologies, so when I recently drove the Tesla Model S I was hooked. Thing is, I’ve never spent more than $30k on a car, and I’ve always paid cash. So even though we can technically afford the $100k Model S I want using the 20% rule, I’m hesitating.

    We have no debt other than mortgage, we have >$500k in savings, and annual income is 99% likely to increase over the next 5 years. Tesla is offering a 1.49% APR financing option which is really attractive. I’m confident that I can earn a much better return than that by investing the money in my business, and just putting 15-20% down and financing the rest.

    Am I overthinking this? I want to be financially responsible, but I also want to enjoy the fruits of my labor, so to speak! Buying the Tesla doesn’t seem like a stretch for us. But then again if we bought a $30k car, invested the remaining $70k we would have spent on the Tesla and earned a 7% CAGR, that would be a substantial sum in 20 years. That’s probably why millionaires spend $35k on their cars.

    • Chris – you’re doing great! I can tell you have a millionaire mind by how you’re analyzing the purchase. The reason I purchase with cash is because you feel the full pain of the purchase… where financing lets you have a bite without realizing how much you’re actually paying. I’m assuming you have a lot of money invested in addition to your $500k cash. You can afford to purchase the Tesla (and yes, I think they’re amazing), but your biggest decision is if you can live with yourself once you buy it.

      • Thanks Dan. The $500k I mentioned is part savings, mostly invested in combo of taxable and tax free accounts. We’re fortunate to be able to save $300k+ a year so that will only increase over the next few years.

        There’s another way to look at this, which is what are the long term goals? In our case we are clear on how much we need to save each year to reach those goals assuming modest 5% annual ROI on investment portfolio. If buying (even financing at 1.5%) the Tesla does not in any way jeopardize those goals, then maybe the enjoyment it would bring in the present is worth it. After all, there’s more to life than money and once our financial goals for retirement are met (which include considerations for philanthropy and estate planning), I don’t really care about accumulating more.

        Of course assumptions are just that; there’s no guarantee that we’ll make a 5% ROI and maybe my business will fail. But I’ve chosen not to live and plan for absolute worst case scenarios.

        All good food for thought.

        • You’re absolutely right, it’s all about what you what to do in the future. We choose to keep our paid for cars (currently 315k miles combined) because early retirement is much more important to us. I invest all of our extra so we keep building the net worth so we could retire very soon if we choose to.

  82. I make $112k a year and drive a 09 Yaris hatchback that I bought used on craigslist for $5k a little over a year ago. I had to spend $500 for new tires and battery though. $5.5k is about 5% of my annual income. Before that, I was living in a city that did not require a car. There are other benefits to driving a cheap reliable small car like the Yaris, like lower insurance cost, lower maintenance cost, not worrying about keeping it in perfect condition, not getting unwanted attention, better MPG, easy to park, etc. Also, I don’t mind the risk of doing my own repair because it’s so cheap, so I end up learning more about car maintenance. I’m a nerdy software engineer, so getting dirty and learning about car is considered fun.

    I agree with some of the posters where it’s important to calculate the cost of ownership instead of just the purchase price of a car. A $10k 8-year-old Mercedes sounds like a good deal, but maintenance is where it hurts unless you DIY car repair. Even then, the parts themselves are much more expensive than, say, an 8-year-old Camry’s. My total cost of ownership is about $1k per year @ 10k miles.

    • Good point, you should definitely think about the brand of car and what it does for maintenance costs. You sound like you’re well on your way to being a millionaire!

  83. Hi, I strongly agree with the 20% rule, even though I live in a country where cars are given smaller incomes (2-4 times lower than US) little less affordable. The problem is that my family bought recently 2 cars in less than one year worth 100k. The company car (70k) though is not actually bought, it is leased (monthly fees). The annual income though is around 85k. This sounds to me more like a f***ing 120% rule (Actually cars are important to us maybe just a tiny bit more than how you describe the 20% rule). I don’t understand why the family says we have no extra money, which would be thousands of millions times more useful than a 100k cars vs let’s say 50k cars.

  84. I’m currently at a point where I make about 20k yearly after taxes taken out and my car is on its last breath. I don’t have much saved so I likely won’t have much saved by a few months til my car dies but if 20% leaves me at 4K how would I buy a car?? I was tempted to buy a used 2011 Audi for 15k to look nice but my uncle gave me a long talk about dangers of used cars and said at my age it’d be smart to buy new without worry of looking cool and have it last a good 5-10years without trouble since by that point in life I should be in a better job by then. If used isn’t too good/risky and I only have 4K to spend on a car what should I do?

    • Hi Ulysses – I sold my last Volvo S60 for $3,600, and it was still a great car. I bought our next Volvo at 80k miles and our current 4Runner has 194k miles. Used cars aren’t something to be afraid of, especially if that’s all you can afford. If you get a new car or an expensive used car, how can you ever break the high payment cycle and save enough money to buy one with cash?

  85. I purchased a 2016 Honda HR-V for 24K and have it warrantied up the ass (6 yrs / 100K miles). My pay is 70K with regular OT. My condo plus condo fee is about 900 a month. car payments come in at 465 a month. i also contribute 15% of my pay to retirement fund. My wife doesn’t work and we live very well. I also plan on driving this vehicle for at least 10 years. I’m 52 and have a tad over 200K in retirement fund with about 10 more years of work to go. When i retire at 62, condo will be paid off, i will draw about 1500 a month after taxes and healthcare through my pension, 1300 a month after taxes in social security and will be sitting on at least a 300K nest egg. True, I’m NOT a millionaire but that’s OK!

  86. Should I buy a 2015 corvette Z06? I know it’s not a Smart Choice, but I always wanted a killer sports car.

    I’ve always preached about making smart choices and I am a saver. I have over 200% in savings of the price of used 2015 corvette Z06 I’m trying to convince myself in buying. I also have over $200k invested in real estate with 1 house paid off and I owe 30% of my current home. In retirement I only have about $50k, but I have another 25 yrs in the workforce. My Income including rental property is about $85,000 and will about $100k next year (God willing). Interest rate on the car will be under 2% because I don’t want to use my cash for it, I plan on putting $20k down and financing about $60k.

    I feel I should continue to invest in real estate, but I also want to enjoy my life by having that car of my dreams before I’m married or have kids. I’m a planner and think much about the future and savings, which is why I’m having such a hard time making this decision.

    If possible, please share your thoughts and your opinion to help me balance the enjoyment of life and cultivating the peace in mind by saving and investing.

    Rick M

    • I forgot to mention that I have a 2014 Honda Ridgeline paid off and a 2000 mustang saleen with over 150 miles that I drive to work. I also have a sports bike that is paid off… I definitely don’t need the corvette, but I want it. Thanks for your advise and I enjoy reading everyone’s opinion. Rick

    • Hi Rick – my only concern is with the amount you have in retirement. It’s somewhat offset by the money you have in real estate, but if I were you, I’d build it up some more first as this is. pure luxury… a sweet one at that!

      • Dan, thanks for the feedback. I will invest more in retirement little by little since I’m about 35 and I appreciate your emphasis on that. I guess I was counting my retirement plus liquid and real estate assets.

        So I did buy it this weekend because I had almost 3 times the cost in liquid assets, but I financed most of it at a 1.8%; I fought it hard, but the deal just felt good despite the cost. If things get really bad which I hope it won’t, I have enough savings to pay my current home off and still have over 2yrs of living expenses.

        Now it’s all about the retirement savings.

        Thanks again and I enjoy reading everyone’s input; they are all great comments.


  87. One month salary after taxes is what I am willing to spend and that is much less than 20% of the gross income you are calculating. It works for me, buying a car is a waste of money anyway but we all need it.

  88. A lot on insecure back patting going on here. You’ll struggle to buy a new bottom range car (like a Ford Focus for example) for £15,000. Now, that £15,000 buys you a heck of a lot of car on the used market. It’s the insecure thinking of the “poor” mindset which sees people convincing themselves that buying a modest car and buying a cheap car are the same thing. I drive a Jaguar. It was very cheap, gets 50mpg+ and cost less than almost every car on the street, yet I constantly get comments about how my job must pay well. It actually costs me LESS to run than my Honda Accord did.

    There are a LOT of assumptions going on in these comments. DON’T let a car badge fool you.

  89. And just to add to that, buying a car is very important to some people. I use my car every day, it’s not just a transport tool to me, but a cherished possession. Before you make snarky comments, perhaps think about the things you spend money on or that you cherish but which could be done differently. Lots of people will have a nice guitar when they could have a cheap one, but you’ll never hear someone say “it’s a waste of money but I need one”, which is a complete oxymoron.

  90. Here in the Philippines, this is our income and the price of a car…

    A resident physician on a government hospital earns 34,000 Philippine Peso (Php) per month, which is equivalent to US$ 1,667.61. Which means, he/she earns Php 408,000 (US$ 8177.78) annually.
    A brand-new top-of-the-line Honda Civic with all of the bells and whistles costs Php 1,398,000 (US$ 28,020.92).

    We’re already used to the reality that we have to sacrifice almost everything (like skipping meals, abstaining from purchasing new gadgets, etc) just to have the decent and good-looking car we’d always wanted. Cars are considered as a luxury goods here, or a status symbol. They may be considered as necessity if you are managing a business that requires a fleet of vehicles, or when you are now on a higher position on a company you’re working which makes you earn so much more money.

    I’m quite surprised that the average income of an American is around US$ 51k while most mainstream cars and even entry-level luxury vehicles is priced below US$ 50k. Which means, their annual income could already buy them a decently-equipped Mercedes-Benz C-Class.

    Following the way Filipinos manage their income, I’m fantasizing of owning a certain entry-level compact luxury SUV with options (costs around US$ 51k), and I’m planning to get a job there in the US (according to what I’d read, the salary of that job starts at US$ 49k per annum).

    • Middleclassman May 18, 2017 at 2:17 am

      That is an average of the entire usa. So imagine a high percentage of “high” class people make 100k while there is a small middle class and majority of people probly make minimum wage which is more like 20k…

  91. Okay, I believe in saving but I also believe in living life as well. The 20 percent rule is a nice idea, but just not realistic. If you make 20k a year so you buy a 4k car and that will have a load of miles on it. So you better have a way to fix it yourself. The clutch, transmission, etc etc could eat you up and keep you off the road. your job is what puts food on the table and you need good transportation. So a car more in the range of 10 to 15 k would be better. You could buy that 4k car and put a another 4k keeping on the road. Penny pinching can really cost you more. You will be buying a car every few years so you might as well buy the more expensive car with less mileage on it. Look I bought a truck for 16k with 16500 miles on it. I paid it off in 4 years and still have it 11 years later with 137k on it. so if you divide 16500 by 11 that comes out to 1500 a year not including the interest in the loan for 4 years but it was not much. I’m getting ready to by a used Porsche for around 27000. I’ll drive it for 5 years and probably sell it. But I get something I’ll love to drive and maintenance and work on. I’m still saving for retirement but yo low u only live once. Rumple stilts skin can keeping county his gold its not always about the MONEY its about the Ride man. Of course I make around 80k a year and I’m single (toys are us kid never want to grow up.) I own a boat truck car and I’m buying a Porsche cayman. I’ll sell my car might keep it though. My house payment is only 342 to a month. I put away 12 percent of my pay plus my company give me another 7 percent of gross pay and a company match of 4 percent up to 1000. I’m also socking another 25k in cash away every year. So can I afford a Porsche cayman in the 25 to 35k range hell yes I can. So I’m saving for retirement, I’m putting cash away so whats the problem.

    • Middleclassman May 18, 2017 at 2:30 am

      Your living the life, how did you end up spending time on this site is beyond me. 80k is great mula…not rich but better than average, i make alot less than that, but still plan on buying a house, a boat and take care of my daughter by putting her through college and i do it with my personal motto that you said you only live once, so i put away for everything I want dollar by dollar and by next year I will have a house and a boat in a couple months and a growing account for my daughter, the main thing that set me back though was not following the 20% rule, when i got my new car I knew better, i knew it would set me back in the long run but the slimey salesman convinced me a new car was the way to go… idiot right? I could’ve already bought the boat and the house a year ago, and had more money for my baby but instead it went to a car payment and the interest on it.

  92. Hello Dan,
    I am planning to buy a preowned BMW for 20k. I make about 110k pretax( $4350 monthly); no loans to my name. I pay rent for 1300$ per month. My monthly savings are about $1300. My monthly driving is 250 miles. Am I going beyond my reach to go for a 20k car?

    • Piah – will you be able to pay cash? You’re within the 20% rule, but if you can’t pay with cash, I’d suggest finding a cheaper car while you continue to save more money. Are you investing as well?

    • Middleclassman May 18, 2017 at 2:36 am

      you should get rid of that rent and buy a house, if you need a car go cheap and unclassy for a minute even if people don’t like your car you save money and still get from point a to point b. 110k you should not be paying rent you should be collecting rent. If you managed your money right you could be…
      I know I could with the much mula.

  93. I’m no expert by any means, but I’m guessing the reasons millionaires and billionaires spend such a small amount of money on cars is because why would you travel by car when you can travel by your own personal jet, helicopter, or chauffeur? I certainly wouldn’t want to spend any kind of money on a car if I could just afford every other mode of transportation. 🙂

    • Middleclassman May 18, 2017 at 2:42 am

      No, it’s because there smart with there money. They sacrificed the high class car for the cheap one because thats what they do in every aspect of there lives to save that million dollars. They fly in basic seats and buy economy cars to save money. The average millionaire doesn’t make a ton of money they just build credit and buy smart. Watch interest rates and don’t bend to typical social “b.s” like fashion or flashy car…

  94. I have to disagree, by your logic every millionaire with a luxuary car is not really a millionaire?! Also, some people don’t care about their car because they are not into them, but there are many people who love cars such as me, we enjoy the adrenaline and all the looks, the price is worth it.People buy huge houses with tons of rooms they will never use..? Its all about what you enjoy, you are not taking your money with you after you die. Life is too short to drive boring cars..

    • King – I’d need some more explanation of why my logic means every millionaire with a luxury car isn’t a millionaire. I agree “car people” look at cars differently, but if people want a guideline on how much car they can afford, it doesn’t matter their preference for cars. Also, I agree others spend way too much on a house, but I stick with the 2x annual income on a house which helps keep spending in line with income.

  95. Cars…hmmm…I am in my 70’s now and about to make probably my last car purchase. Listen up all you young eager folks and take it from someone who has driven just about everything out there over the years, some good, a few not so. Save cash first for most if not all of the cost, swallow your pride and buy something you can afford to keep and that is reliable. There are countless materials out there on the web to guide you. If you really want that mustang convertible, then rent it! Unless you have a business and a write off stay the hell away from leases or image. It is your character that counts, what is inside, not the shiny stuff on the street. Just saying…

  96. I simply don’t buy those millionaire stats, and nor do I agree with the 20% rule. A well thought out, manageable loan to pay off a car you really love over a few years is absolutely fine. By your logic the average wage earner should only buy a car which costs around £6,000! A loan requiring you to pay off, say £200p/m over four years, when you earn, say £27,000 (about £1600p/m after tax – guess how I know all this 😉 ) is perfectly reasonable, provided you have job security.

    Buying cash is not always a good idea either – you’ve lost that cash, it’s gone, so if you need a big lump sum you won’t have it and would have to get a loan. I’d rather the loan I planned than the one I didn’t. To add to that, if you finance a car you can take out gap insurance, so that if you write it off, you don’t owe the rest of the loan – and will get the money for the car back from your insurance co. On the flip side though, if you buy a car outright you don’t have to worry about a monthly payment and can save up again. So there are pros and cons.

    • What I would like to know is how these, literally, thousands of people afford £40K cars. I see at least ten cars a day which cost that. How are there so many people out there who can afford to buy – or make the payments – on that?

  97. Are repair costs factored into the 20%? Could it be advisable to eat the costs upfront on something more expensive to avoid major repair costs throughout the life of the vehicle?

    It’s my personal experience, because I’ve never owned a new vehicle, that in almost any case (superb maintainence/poor maintainence) across the spectrum of most major automakers, between the 150k-200k mileage marker, at least one major repair will need to be done.

    I purchased my very first vehicle for $1800. Two months later I dropped $2500 for a transmission. Approximately six months after that another $1000 for major cooling system repairs.

    My second vehicle, a Nissan that I paid substantially more for than my first vehicle, also needed major repairs within 2 years of owning it.
    My third, fourth, and so on and so fourth have all suffered the same fate.

    Of course, I’m not suggesting I would have ever been in a better financial state by buying a brand new $25000 truck at the age of 18 but, considering the average price I’ve paid for all of my vehicles in the past was $5000 and the average cost of repairs for each one has been approximately $2000, in the long term, wouldn’t it have been a “smarter investment” to go ahead and purchase something I really couldn’t afford? 5 vehicles at $5000=$25000 + $2000×5(repairs) for a grand total of $35000 over the course of 12 years. I just can’t see a positive in all of this. I’ve tried being frugal by taking that approach but I just can’t seem to find a positive.

    I’ve been researching several (new) used vehicles and even something with a great mechanical reputation like a Toyota 4Runner for $12000, still has on average about 150k miles on it which again, in two years I’ll be shelling out a couple of thousand for repairs. Can you help me justify continuing on my “path of frugality?” Thanks!

    • IJB – that’s a tough one. When we buy new (to us) cars, we try to keep the mileage between 50k-80k because as you mention, once you get over 150k miles, you’ll usually start facing some repair bills. We definitely saw this with our 4Runner when we had to replace the transfer case at 195k miles at a cost of $3,500.

      Our last purchase was a three year old Volvo XC60 for $19k, which had 79k miles on it. We drove it for two years before selling it to go on our current road trip, put 40k miles on it, and didn’t have any repair bills.

      Are you trying for a specific class of car (i.e., SUV)? If that’s the case, you’ll probably be stuck paying more to stay in a good mileage range. If your budget doesn’t allow you to go much higher, can you look at a sedan instead of a SUV? If your frugal side loses, I’d still try to buy something a couple of years old so you’re not facing the steep depreciation of a brand new car.

  98. Hi!
    Thanks a lot for this article.
    I would like to have some advice, as I’m in the same train as a few others: single, not a single standing debt and looking from the lens of disposable income available. How would the 20% rule apply with disposable income?

    My current situation is:
    I’m a 33yo living in Canada, single, love my job and side projects and a few months ago decided to cut on most expenses, the amount of disposable income exploded (depends of how much self control I manage to exercise).
    I also have a house in the US that pays for itself and then considerably more, but I would prefer to not take that into account for the purposes of buying a ‘toy’ car.
    It’s been almost 6 years without a car, went to a car dealer, had a test drive of what used to be my dream car, fell in love with it and got the craves to buy it. It’s probably the stupidest decision I’m about to take (guess middle life crisis is very true overall).

    So, for example, say you have between $2.2k~$2.5k disposable income per month after taxes, everything else is taken care of, no standing debts, only the uncertainty of the future and it’s surprises, what would be a reasonable monthly payment for a car? $800? $700? etc would be too much? (I could use maybe cash for a big downpayment, but I would rather not, as I would prefer to have money around for emergencies or to buy another house).

    Thanks a lot for your time.

  99. Hey Dan! Thanks for the article. It was a very interesting read. I’ve been looking at a used 2015 Corvette for 40K but I was going to use a 15K down payment and trade in my Ford Fusion for 5K I make about 32.4K a year. Would it still be a bad idea to buy this car? I’m 23 and have no other expenses other than rent and utilities (650/month) and the payment I could make is 300/month with the insurance being about 200-250 depending on the coverage. I don’t have a significant other or kids. The real problem is that I’ve loved Corvettes for so long that I really really want it. It’s been getting to the point to where I’m so close to being able to buy it outright, but also if I do decide to get married or buy a house then I don’t want to be locked down into a car payment and have to buy a trailer of some sort to live in.
    Any help would be appreciated!

    • Robert… your angels on one shoulder are wrestling the devils on the other! I’m glad you’re thinking this through – especially the future implications. I’ll answer the question based on what I’d do now – knowing that what I did 12 years ago when I was your age was different than what I’d tell myself to do now.

      I’d continue to save the money and start investing (if you haven’t already). If you put $15k in the stock market now (open a Vanguard account, buy VTSAX) and start investing another $300/month, you could be very rich when you’re older. If you look at an average stock market return of 8%, if you did that for 30 years, you’d already have over $500k! If you did that for 40 years, you’d have over $1.2 million. I know it seems a long way away and you want the Corvette now… but this one decision will have major implications on the rest of your life.

      If you still are buying the car, I think that one is way too expensive for you right now. You’ve done a great job saving up cash, and I’d stick to spending no more than the $10k-$15k. I know the answer sounds crappy, but if you want to be rich, sometimes you have to live poorer for a little longer.

  100. Hello,

    I am 26 years old and on the market for a car and have my eyes set on a 2017 *used* Tacoma. It is a high end model (TRD Offroad 4X4) and is going for $$35k but is also a very reliable vehicle. I would make a $12k down payment and I currently make 90k/ year. I would be able to afford payments over 4 years while still contributing 8% to 401(k) and saving 500-1000/month cash. CAN I AFFORD IT!?!?!? I know its not as ideal as buying a *suggested* value car of ~$18k but it is my DREAM TRUCK and will give me experiences (camping/offroading/etc) that I would miss out on otherwise.

    Will I regret my decision.

    • Hi Jake – I’m eyeing the same vehicle for my next purchase.. as we’ve traveled the last year, I’ve learned it’s the official car of outdoorsman! You’re in pretty good shape, but I think you’d be better off getting one a few years older… the more you can save and invest now, the more freedom you can have later. The car can’t give you freedom, only financial independence can.

  101. Wow, great forum and discussion.
    It’s something I’ve been thinking about myself for quite some time now.
    Here’s my situation. I’m 38 years old, single, no dependents. I’m making close to 50k a year now and I have about 120k in my bank saved up. I’m not rich by any means, but I also do love my job so it doesn’t feel like work at all. I want to buy a 2015 model used benz (low mileage) selling at around 38-40k. I can pay it off all at once on the spot so I’d have no car payments except for maintenance (gas, insurance, and general servicing). Of course handing 40k over in one shot is a HUGE amount of money for me, but the good thing is I’m paying now and not later so I’ll just be saving up a lot faster again than if I had monthly payments (of course, this all assumes that I won’t get vandalized or have accidents etc). It’s a car that I also want to keep for a long time. I’m not the kind of person that likes to buy something and change after a couple years due to fashion or trends. When I like something, I tend to keep it for a very long time. So I also know that while I’m spending a lot at one time, I’d keep this car for a very long time. BUT, if I had to sell this car again after only 2-4 years, I also know that this brand retains its value very well. I also don’t put in a lot of miles per year (less than 10,000 miles per year). So IF I had resell it, I’d imagine in 2-4 years I could get somewhere close to 50% of it back on the used market (15-20K)…maybe even more? That’s the good thing about expensive brands. I’m also pretty good with my finances (sound budgeting). I don’t have any debt, I never have debt on my credit cards, I save between 60-70% of my income (I’m not a big spender, but when I do spend, it’s often expensive). So based on my current salary, even if I’m only making about 48-50K per year, I’m saving about 30-35K of it after all expenses paid (food, rent, bills, general expenses).

    I don’t have any investments…(I probably should), I just tend to keep everything in my bank…yes yes I know “savers are losers” (Robert Kiyosaki)…and I guess it would be nice to invest my money, but I’m at the point where I feel like I need to enjoy my life bit more. I always grew up thinking my life would be this picturesque outcome of being married young, have a house and family etc but now that I’m in my late 30s, no prospective of getting married and having kids, I feel like what am I saving all this money for? What if I don’t even live beyond 55-60? Maybe the rules have changed for some of us and while it’s always safer to ASSUME you’ll live to 85 years old and will need all that money, as many have pointed…what’s the point of being miserable and then when you hit 65, have lots of money to enjoy at the end of your life? I don’t know, I’m at this mid-life crisis and thinking about all kinds of stuff like this. Any advice would be appreciated.

    • Joe – sounds like you’re killing it! Your mind is definitely in the right place, and you’re asking the right questions. That’s exactly why I only buy cars with cash – it’s hard to turn over that much money! I’ll give you my best advice, which of course, is my opinion.

      Our last car purchase was more around $19k, but we definitely could’ve afforded to buy more. Instead, I save more money and invest more… and we’re definitely not waiting to enjoy it when we’re old! My wife and I are currently traveling North America in our vintage Airstream thanks to our money decisions. I’d try to come down to about half of what you’re planning to spend, following the game plan of one of my rich friends:

      He bought his Mercedes, but shopped around for a 7 year old car with 50k miles that was in great shape. He spent $16k when they make well over $300k. That was four years ago, but the car is still in great shape. Let me know if you have any other questions and good luck!

  102. Hey Dan! Thanks, I appreciate the response. You sound like a very reasonable and experienced person in this, so I’m grateful to get any advice or your opinion. I’ve always learned that cars are not an investment but a liability. But after watching some videos of the similar theme you mentioned “How rich people buy cars”, I’ve noticed that some of them call it an investment, which got me a bit confused. I do like the idea of having a car that retains its value well even after a few years and mileage on it, but I guess I still have to factor in maintenance costs (more expensive the car, more expensive the maintenance/repairs/parts), and insurance. I have decided that I should hold off on this again for now. I feel a little let down of not getting my “end game” car, but I do feel good that I’ll at least have a lot of money saved for perhaps other options to seek on how to invest it wisely. I’ll definitely come back here again if I have anymore questions. If you guys have some sort of facebook group or youtube channel, that would be great to join/subscribe, too. I like what I’m reading on your page. Thanks again Dan!

  103. Just stumbled on this excellent thread. Sounds like a 25 year old me making a dumb decision, and getting a terrible deal because I could technically afford it, as I was a well paid techie! Interestingly 15 odd years later I make more than twice as much, have bought new again, but never hit near the same payment as I had back then! Even accounting for inflation.
    I love cars, and with family life crimping my ability to travel or partake of other hobbies, see my car as something more than just getting from A to B. Driving is a great escape from home and office. Ergo I choose to spend more for the enjoyment and am contemplating leasing something with a sales price about 33% of my income, naturally making sure our savings/investment rate stays close to 20%. But that experience means I find myself in constant debate with myself over whether I should indulge in some thing that’d cost me 4.5% of gross monthly.
    As much as that experience hurts in retrospect, and cost, it was a great life lesson that’s forced me to evaluate what I spend. As you might guess by me being here.
    Only niggle with any of comments are those suggesting buying with cash. If you’ve got 10-20k of cash sitting around, invest it. Companies shifting old stock will still give you 0.9-1.9 financing new, used can be had sub 3 if you shop around. You’d beat interest on new even with TIPS for crying out loud. Last loan I negotiated down to 1.8%, made more on my cash in 9 months than the interest I paid in 4 years.

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