How much should you spend on a car based on your salary?
Is there a ratio of how much you should spend on a car in terms of how much money you make a year?
Your car purchase should not be based on your salary at all. It should be based on DISPOSABLE INCOME because, after all, aside form the utility of transportation (and a Civic provides the same utility as a Ferrari in that respect) a car is a purely depreciating asset.
Think about your goals and what you are currently paying for. Take your net salary and remove all of your ongoing financial commitments (utilities, TV, loans, rent, Netflix, etc.). Now, remove the average amount that you like to spend on entertainment, eating out, booze and other frivolities. Lastly, think about the amount that you should be saving (minimum of 10% of your paycheck after you've maxed your IRA) for future investments like a house or, if you already have a house, for your kids or perhaps for an emergency.
If you have any trouble finding out this information, then DO NOT buy a car yet. Get a free Mint:http://mint.com account and find out where your money is going. Mint has to be the best free financial resource online and it's won countless awards from reliable services (e.g. TechCrunch).
With the remaining funds, you can begin to consider your car purchase. Personally, I have no car payment because I don't mind rollin' in a paid for '98 Honda Prelude. However, with the remaining funds, you can pretty much go wild with your car purchase because you've already considered your other financial commitments. Just remember that money into a car is like burning half of it (unless you're leasing and then it's like burning all of it). The bottom line is that the smart thing to do is to spend as little as possible on your car with the caveat that it is reliable and short of embarrassing, especially if you're single and/or need to transport clients.
7 Answers
It depends on your situation; if you have student loans, a mortgage, and potentially high insurance costs like I do, I wouldn't go above 1/6. I'm personally at 1/10 and wouldn't want to exceed that anytime soon.
Honestly I don't think there is a set amount of your salary you are suppose to limit for expenses on car. You should go for a car payment that is going to allow you to maintain the the level of living you are accustom to. You should not have to sacrifice several items from your lifestyle for your car unless certain areas in your life are heavily out of control.
...But I have heard many say that no more then 10% of your salary should go towards a car but if that were true most people would not have the vehicles they have or be living beyond their means...
The CCCS recommends keeping your debt-to-income ratio between 15 to 20 percent. So with that said, you have to try and fit a car payment in with whatever other debt you may possibly have to be under 20%.
Your car purchase should not be based on your salary at all. It should be based on DISPOSABLE INCOME because, after all, aside form the utility of transportation (and a Civic provides the same utility as a Ferrari in that respect) a car is a purely depreciating asset.
Think about your goals and what you are currently paying for. Take your net salary and remove all of your ongoing financial commitments (utilities, TV, loans, rent, Netflix, etc.). Now, remove the average amount that you like to spend on entertainment, eating out, booze and other frivolities. Lastly, think about the amount that you should be saving (minimum of 10% of your paycheck after you've maxed your IRA) for future investments like a house or, if you already have a house, for your kids or perhaps for an emergency.
If you have any trouble finding out this information, then DO NOT buy a car yet. Get a free Mint:http://mint.com account and find out where your money is going. Mint has to be the best free financial resource online and it's won countless awards from reliable services (e.g. TechCrunch).
With the remaining funds, you can begin to consider your car purchase. Personally, I have no car payment because I don't mind rollin' in a paid for '98 Honda Prelude. However, with the remaining funds, you can pretty much go wild with your car purchase because you've already considered your other financial commitments. Just remember that money into a car is like burning half of it (unless you're leasing and then it's like burning all of it). The bottom line is that the smart thing to do is to spend as little as possible on your car with the caveat that it is reliable and short of embarrassing, especially if you're single and/or need to transport clients.
While there are quite a few fantastic points above, something else to take into consideration is that driving might be one of your hobbies. I know personally I would prefer having a fun car to drive than dumping money into vacations or trips.
But, as said above, it doesn't matter unless you have the disposable income and the budget to afford the car you want.
The cost of the car should not be based on your salary. It should be based on how much you currently have available, outside of retirement savings.
You should not finance a car. Even at a 0% rate, you're likely coming out behind. Generally if the dealer is offering 0% financing, they'll offer a lower vehicle price to a cash buyer.
Here's what you need to do.
Ride your bike for a couple months, and save money. Now buy a good reliable used car for cash, and keep saving money. After a few years, if you really want a new car then buy one using the cash you've saved. Hopefully by then you'll have realized that it feels pretty cool to have $20,000 sitting in the bank, and you'll decide that a new car doesn't feel quite that cool. Maybe you'll buy a different used car, but you'll keep saving.
Most of the answers posted here are far too scholarly for me. From experience: no more than $300/month for 48 months. If your payments come up higher, you need to save up more for a down payment.
My first new car was $468/month for 68 months. I thought it would kill me. I ran out of warrantee far before 68 months was up, so I was paying for repairs, in addition to normal maintenance, on top of the $468 each month.
Don't forget you'll need tires before your loan is paid off. In the case if my first new car, about $1000 the same month as a $468 car payment. Ouch! For the Ford Focus I drive now, tires were $450. Installed. Pretty difficult to spend less than that.
On top of that, you need to add car insurance, which is never cheap, costs you money when you don't use it (premium), costs you more money to use it (deductible), then causes your premium to go up after you use it. There are a lot if factors that affect premiums, but $100/month is pretty cheap. That's with a $500 deductible, on top if your car payment, in the month you make an insurance claim.
Assuming you drive 40 miles/day, and you buy a fuel efficient car with a combined 25 mpg rating, you will burn 1.6 gal/day in fuel, or 48 gal/month. At $3.00/gal, you'll spend $144 in gas each month.
Lastly, your car will get scratched, dented, and rocks will get kicked up by semis and chip your paint or crack your windshield. You'll probably run over road debris at some point that will cause body damage (shreaded retread from semi tires is the worst).
All if these things make a car more expensive than people initially think, and contribute to what others have already said: a car is NOT an investment. It's a financial vampire. But a useful vampire as well.
Good luck!
Monthly payments should be a maximum of 1/3 your net salary. Don't be a fool like I was, cars are a bad investment. Stick with the car you have and invest in property, stocks and other GOOD investments.