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Smart Shopper Percentage of monthly income spent on a car?
390 messages, Last post on Mar 21, 2009 at 5:50 PM
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Replying to: jlawrence01 (Aug 16, 2006 6:40 pm) Besides, I'm just not disciplined enough. And I think I have the morning-after disease or something. I get a new (or even lightly used) car and shortly after I begin thinking, "geez. why did i do that? i could drive a beater and save all that money each month." But I inevitably forget that feeling the next time I want to go car shopping. oh, and let's not forget about repairs on that used car. |
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Replying to: biancar (Aug 16, 2006 5:06 pm) See, now that is very different than what was posted on the other board when this started. I believe the previous number was something like, "the price of the car (not monthly payment) should be 1/3 of gross annual pay." At a payment of 10-15% of take-home, I'm right there at about 11.7% (average between my and my wife's payments/take-home). And that puts the average family sedan ($25k) in striking distance of someone with ~$50k salary (if i did my quick calculations correctly - i'm sure someone will double check me).
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Replying to: qbrozen (Aug 17, 2006 6:09 am) Let's say gross income is $60,000. Minus Social Security, minus taxes, minus maybe retirement contributions, health insurance, one thing and another, net take home income probably around $45,000 - $48,000 (depending on deductions for kids, mortgage interest, etc.) Let's be generous and say $4,000 a month take home. Ten percent is $400. A $20,000 car, financed at 5.25% for 5 years, would be $380. So that works pretty exactly - the car cost is 1/3 the gross salary, and payments are about 10% of net. The same loan for 3 years would run $602 a month, meaning someone should have net income of around $6,000 ($72,000 per year) which would be a gross income of probably something around $90,000. The first guy, with the five year loan, will pay $2783 in interest; the second guy, with the shorter loan and higher monthly payments, will pay $1660 in interest. There are lots of ways to fit a given price into a given budget, really depends on whether people want to owe more, for longer, for the sake of lower payments, or have higher payments but be done with it sooner. The folks who take the lower payments AND try to trade in early are the ones who are headed for trouble.
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Replying to: biancar (Aug 17, 2006 1:37 pm)  You're right, it still seems to be about the same. So this still brings up my original stated problem of someone with an above average salary not being able to afford the average car. It just doesn't make much sense.
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Replying to: qbrozen (Aug 18, 2006 5:33 am) Someone with an average salary needs to buy, at least once, a car that costs less than what they, on paper, could afford. Keep that car long enough to pay it off, keep on saving for a few more years, and presto, they can start getting nicer cars. Especially if their salary has also gone up. Obviously I am very biased because that's the method that has worked for me! Again, all the disclaimers - if your mortgage payments are a stretch, then you've just got to cut down on car payments. If you've owned your house for a long time and your salary has gone up so your mortgage payments aren't taking a huge bite, then you can afford more on a car. I think the rule of thumb of "no more than 1/3 your gross income, no more than 10 - 15% of your take-home income in car payments" is still a pretty good one and very workable, as long as people don't let their car lust overwhelm their pay grade. It's certainly what I would recommend to any young person just starting out and trying to get financially established.
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I heard once as well that total car expenses (payment, maintenance and insurance) should be no more than 10% of your take home income. From a financial responsibility standpoint I think that's a pretty good target. For most that means buying used, or saving a chunk for the "new paint". Like Biancar said, you have to control the "car lust". While I'd like some newer wheels I'm at 8% at the moment so I better start saving. |
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Replying to: biancar (Aug 18, 2006 9:32 am)
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Replying to: gasman1 (Sep 05, 2006 3:49 am) Parents often don't include the kids in financial discussions, so the kids really don't appreciate or understand how Mom and Dad put a roof over the heads, groceries in the fridge, a car in the driveway. It all just sort of "happens." Then they think it will all "happen" just that way when they start working, not realizing it took Mom and Dad plenty of years to get to that point. Well, we all learn. When the pain of having too much month left at the end of your money gets overwhelming, then people can start to wake up and say hey, something's gotta give here! |
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Replying to: biancar (Sep 05, 2006 7:53 pm) seriously, though, my wife definitely doesn't know the meaning of the word. |
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Replying to: biancar (Sep 05, 2006 7:53 pm) A Cell Phone salesman made a great point while I was at a trade show several years ago. We were discussing the difference in people paying for their cell phone usage (a luzury at that time) and paying for their propane gas. He told me that cell phones were sexy and a must have for the "see what I have" as opposed to propane gas just being a necessity. Today, the "see what I have" must be $3K+ televisions and automobile leases that they can't afford. It could also be the $100+ concert tickets or the Hawaii vacation... It's a free country so people can spend their money as they wish. I just wish they knew what they were doing. Their poverty (today or tomorrow) doesn't help them or us.
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Smart Shopper Percentage of monthly income spent on a car?
