Those pencil out to $120 a month for fuel and about $140 a month for auto insurance, which means John's total monthly automotive expenses are actually $802, or 25% of his monthly take-home pay.

He's already over budget and hasn't yet factored in fuel and insurance costs.

The monthly payment will be $542 because John has opted for the most common loan term of 72 months. John made an 11% down payment, which comes out to about $4,075. We'll assume he has solid credit and that all aspects of the deal mirror the industry average. Let's say John bought a new Honda Pilot for that amount.

In September 2019, the average amount financed for a new vehicle was $32,928, according to Edmunds data. If we follow our 15% rule, John could handle a monthly car payment of up to $472. Paying an estimated 20% in income taxes would translate to a monthly income of about $3,148 for a buyer we'll call John. This amount translates to an annual income of $47,216. was $908 in the second quarter of 2019, according to the U.S. The median weekly earnings of a full-time worker in the U.S. To make this budgeting less abstract, let's plug in some real-world numbers. The first owner takes the depreciation hit, and you'll have a car that's new enough to avoid major repairs for a while. Leasing also lets you get a nicer car for less money.įinally, are you trying to make the most financially sound decision possible? Then buy a lightly used car, pay it off, and keep it for many years. You'd be better off leasing and paying less per month. What good is it to take out a six-year loan if you're going to trade in the vehicle during the fourth or fifth year? You'll likely owe more than the car is worth and will have to roll that balance into the next loan. That's smart.ĭo you get bored with a car after a few years? Then leasing is your best bet. In addition to the formula for car affordability, recognizing your own car-buying habits, good and bad, can offer clues to the best strategy for you.įor example, are you someone who buys a car, pays it off and then keeps it for a few years? Buying a new car would work for you: You have a track record of shopping within your means, finishing off the loan and going payment-free for a while. Here's how you can get a more customized number for yourself. While the 10%-15% rule may not work for everyone, it's a good starting point for finding a target price that won't leave you scrambling to pay your bills every month. So, all in, you're looking at a total budget that is ideally, no more than 20% of your monthly take-home pay. We put those costs at another 7% of your take-home pay. You'll need to factor in the costs of fuel and insurance, and many people overlook that. The reason for finding a vehicle that falls below 10%-15% is that the payment isn't the totality of what you will be spending. If you're leasing or buying used, it should be no more than 10%. There's no perfect formula for how much you can afford, but our short answer is that your new-car payment should be no more than 15% of your monthly take-home pay. Pretax, post-tax, annual income these terms are enough to make a person ask: 'How much car can I afford?' Then some frugal personal-finance gurus say you should spend no more than 10%-15% of your annual income on a vehicle purchase. Other experts say that a vehicle that costs roughly half of your annual take-home pay will be affordable. One school of thought holds that all your automotive expenses - gas, insurance, car payments - should not exceed 20% of your pretax monthly income. Fitting a car into your household budget is no easy task, and financial experts do not agree on how to determine its affordability.

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