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  • Writer's pictureStephen Boatman

How Much Should You Budget For a Car?

Like any good venture, we'll evaluate the cost before taking any action. If we can put a price on what a reliable, used, base model car costs, it will help us keep an appropriate perspective throughout the car buying process.


How much does a car cost?


A reliable car that can take you from point A to point B will cost around $10,000. This is what I call utilitarian value; it gets the job done but likely won't get you any dates. Unless they are very attracted to fiscal responsibility. I found a great example of a reliable used car on Facebook Marketplace in the image below. Buying anything above the $10k level typically pays for some sort of added luxury, such as a better body style, lower miles, cool wheels, SUV, truck bed, horsepower, 4WD, etc.


If you need a car and don't have enough saved to part with $10k comfortably, I recommend finding an auto loan. However, the more expensive the car, the less inclined I am to recommend financing the vehicle. When auto loan shopping be sure to ask a few locations for a good loan. I've personally found reasonable rates at Penfed Credit Union.


Why Not Buy More?


The goal is to increase your net-worth enough so that you can live off of the income it can buy you. And more expensive cars often delay this growth. Not to mention the net-worth benefits of buying a utilitarian car are hard to deny. Assuming you buy a one-owner, well-maintained Toyota Camry or Honda Accord that's worth around $10,000. You can expect to look forward to the following benefits.


  1. Avoid/diminish depreciation that can cost some luxury car owners (BMW, Porsche, Audi, Mercedes) over $10,000 per year!

  2. Lower monthly payment and/or less cash locked up in your vehicle

  3. Lower maintenance expense and a longer life than most other cars

  4. Lower property taxes

  5. Lower insurance cost

When Is It Okay to spend more than $10k on a car


After you check the following boxes, increasing your car budget above $10k is okay.


- Net worth above $100,000

- All consumer debt besides mortgage and student loans is paid off

- Comfortably, saving 20% of your monthly income towards retirement and hitting your other financial savings goals, such as saving for a house or travel.


Once these boxes are checked, we will look at our excess cash at the end of the month and decide what we want to spend these dollars on. Would we prefer a nicer residence, better or more frequent trips, nicer dinners, and more clothes/shoes? Or would we like to upgrade our car? If we want to upgrade our car, I recommend using the chart below as a guide for a maximum car budget based on your income level.


Income level


The average household income level in the USA was $74,580 in 2022. The chart below isn't saying you should spend 40% of your income on your household's cars if you earn $100,000, but that should be your upper limit.



This means that if you earn $200,000 and have hit the checkboxes discussed earlier then the maximum car purchase price for your household shouldn't be over $70,000. This $70,000 number is total cars in your household. It could be one $70k car or two $35k cars or three $23.3k cars. The lower the better but that should be your upper limit.


Cash vs. Loan


Outside of needing reliable wheels and receiving a loan to buy the utilitarian car for $10k or under, I recommend using cash to purchase a car. This is because when you pay cash, you are less likely to increase your budget. If you are using a loan to buy a car, then a $5k budget increase may only increase your monthly payment by $50/mo. This small monthly cost is much easier to stomach but also leaves you prone to overspending and being hurt by depreciation in the long term. If you can't afford to pay for a car with cash, then I would argue that you should stick to the $10,000 car until you can afford to pay cash.


There is one exception here, and that is if you have access to a high-return investment. Say you regularly flip cars, houses, or some other inventory that requires a large amount of capital, and you can expect over a 20% annual return. Then, I suggest finding a loan for your vehicle to keep more cash at home to be invested.


Conclusion


There are a lot of variables we can't cover with cars here, such as rate of depreciation, maintenance cost, and how often you buy a new car... But the point I hope to get across is to focus on the total cost of the car, not the payment. And to take care of your financial foundation before considering any luxury in the car department. And even then, evaluate if it's the spending category that provides you with the most joy. If not, then I encourage you to spend it on something that fills your cup. Historically, my clients have found the most satisfaction through giving away their time/money and travel/shared experiences.




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