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How much car can you afford? Answering this question is critical to your finances. To help, we've analyzed several rules of thumb along with our own approach so that you can decide for yourself how much to spend on your next car.

Buying a car should be a calculated decision. It’s a major purchase and for many it’s the next biggest purchase to buying a home. There’s much more to consider than just the cost of the vehicle and the monthly payment.

Other considerations should include the cost of car insurance, gas, and regular maintenance. With just about any vehicle, whether it’s brand new or just new to you, it’s going to mean higher insurance rates. If you’re buying used, you can expect to pay maintenance costs sooner rather than later.

But that still leaves unanswered the critical question–How much car can (or should) you afford?

Rules of Thumb

The general rule of thumb is that you should not spend more than 20% of your monthly take-home pay on cars, according to Edmunds.com (via Bankrate). So if your after-tax monthly income is $4,000, your total cost of car ownership for ALL of the cars you own should not exceed $800 under this rule.

I don’t want to put a damper on your dream of having a flashy sports car. But to be clear, this percentage includes the cost of all those other things mentioned above like insurance, gas, and maintenance.

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Dave Ramsey takes a balance sheet approach. Rather than looking at monthly transportation costs, Dave recommends buying cars that cost no more than 50% of your annual income. So if you make $50,000 a year, you should not spend more than $25,000 for a car(s).

The Dough Roller Approach

Here’s my rule of thumb–pay cash. Now I can hear what you’re saying. You just graduated from college and have a great job making $60,000 a year. But if you pay cash, you’ll be lucky to drive to work in a car that cost $2,000. Everybody else will be driving new cars that cost “just” 60 “easy” payments of $500. So you want me to drive a sled (as they use to say in my day)? Yep.

DR, is that what you did when you got out of school? Nope. And I regret it. Do everything in your power to pay cash for your car. And if that means driving around in car that doesn’t compare well to the cars your co-workers and friends are driving, so be it. That’s the advice I’ll give my children. And that’s the advice I wish I had followed.

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Other Car Purchase Calculators

Recognizing that you may not follow my advice, here are some additional online car calculators to help you decide how much car you can afford. You plug in a few pieces of information. Then the calculator tells you what you can afford.

MSN Money Car Loan Calculator
Edmonds.com Auto Calculator
Bank Rate.com Auto Calculator
Cars.com Calculators
Car Loan Calculator

Tips For Staying Within Your Budget

Now that we’ve faced the cold, hard truth that buying a car is more about what you can afford and less about what you wish you could have, here are some tips to stay within your budget:

  • Arrange Financing In Advance (assuming you ignore my advice): You don’t have to rely on the dealership to get you financing. You can compare rates between banks, credit unions, and loan organizations before you even head to the dealership. Find out ahead of time what you can get approved for. This way you can keep the financing out of the negotiation process. Dealerships often offer very attractive financing rates, but not everybody qualifies for these rates. If you don’t qualify, you might end up getting locked into a loan with a higher rate if you rely on the dealership for financing. Also, once you have a car loan, your goal should be to get it paid off as quickly as possible. One thing to consider is whether you can save money by refinancing your auto loan.
  • Avoid Paying For “Extras”: Don’t go for the extra fees and service offered by car salesperson. Often you will be offered things like rustproofing, fabric protection, paint protectant, etc. Try to determine ahead of time if these are things you really need so that when under pressure you don’t make a rash decision.
  • Don’t Pay Sticker Price: There is always room to negotiate, so don’t assume the sticker price is what you have to pay for the vehicle. This is why you should do some research before taking your test drive. You want to find out what the dealer paid for the vehicle and start your negotiations from there. A reasonable price to start negotiations is 1 to 5 percent over what the dealer paid, depending on the demand for the vehicle.
  • Negotiate, Negotiate, and Negotiate More: Once you have your heart set on a vehicle (that’s within your budget) be sure to negotiate each point separately. Salespersons like to wrap it all into one big negotiation: the financing, trade-in value, monthly payment, etc. Break down each of these pieces of the deal, and negotiate them each as individual factors.

As a final tip, I’d suggest you begin the negotiation long before you enter the showroom. Get prices via fax, phone, or email. It makes comparing offers very easy, and you avoid hours in the showroom while the salesperson runs back and forth between you and the “manager,” a process specifically designed to put you at a big disadvantage.


Author Bio

Total Articles: 1080
Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Article comments


Don’t forget to shop used! You can get a nearly new car for a deeply discounted price and shave thousands off of the new car price!

Rob Berger says:

Nice point. That’s what I did on my last purchase and saved about $6k.

Great article! Many years, a college professor told his class to invest in assets that appreciate. He further stated the “fancy” car comes when you are financially secure not after graduation. I’m extremely grateful for his advice so I thought I’d pass it along.

Rob Berger says:

It’s good advice! Thanks for sharing.

T.A. says:

I found this post so relevant and easy to understand! I am a high-school student – junior, to be specific – who is currently taking a Personal Finance class at the Singapore American School. Just a few weeks ago, we just finished a car project that dealt with the same sorts of things that you mentioned in this post. Our assignment was to find a financially smart car for someone who had just graduated from college. We were then to choose two other cars that people may be tempted to choose and show how, when all costs were taken in account, they were not, in fact, smart choices. We considered several different factors such as insurance, taxes, gas, mileage, depreciation (assuming we resold the car 5 years after purchase), oil & filter changes and break pad & lining changes. After doing research and calculating total costs, our #1 choice was a second-hand Honda Civic. We also kept in mind what percentage of a college graduates real income (ie. after taxes) this car would take up. We used $45,000 as a benchmark. Not only did we consider all the costs that I mentioned, but we even kept the car’s environmental effects (“green-ness” and its practicality in mind. By practicality, I mean whether or not this car is common and whether it could be easily serviced in almost any car garage. Our two “worse” options were a new Lexus CT and a Volkswagen Jetta. We took this even further. Rather than stopping at the difference between the smart car and the two less smart cars, we decided to invest this difference in the stock market (we assumed the average rate of return to be 9%) for 30 years in order to find out the opportunity cost. The opportunity costs ranged from $25,000 to $325,000. That’s A LOT of money that could be saved by making a smart decision on which car to purchase. In my class, we have also been talking about the fact that cars are depreciating assets so it is better to allocate money into appreciating assets such as real estate or an education.

It almost scares me just how similar your blog post is to the project that we did! Additionally, I found your real thumb particularly simple, yet clever because by paying in cash, the consumption payment link is not severed, so the consumer knows exactly what the effects of a purchase are on his/her take home pay. The car purchase calculators are also very useful, and could have helped us a lot had we known about them when we were doing our project about a month ago.

All in all, I can very much relate to this post and I think it is so cool that I actually understand everything you are talking about. The way you organized it in a clear manner just makes it that much easier to comprehend.

Tim says:

This has probably been the best comment I’ve ever seen. Very informative and insightful.

Ish says:


Javy says:

Hey Rob,

I’m a high school student taking a personal finance class in Singapore, and I really enjoyed reading this post. I find it especially relevant because the situation your kids are in (trying to pick out their first car) is the same predicament I’ll face in the next couple of years. I completely agree with your strategy of paying cash for a first car; I think that’s great advice. But my parents won’t commit to help pay for my first car, so I’ll have to save up in order to buy the car with cash, and I was just wondering if you had any tips for me about saving and budgeting wisely. Thanks, and great post!


Jason says:

With a 50K annual salary, I’m getting a car loan of $16,000 for 0.0% to be paid off in 36 months. I believe this would be an exception to go ahead and get that loan right?

Annoymous says:

Buying an expensive luxury car is the best investment one can make! Sure there is the depreciation factor; but that goes along with being the owner of the luxury car. Owning a spanking new luxury car puts you ahead in life and is part of telling the world your lifestyle of who and what you are as a person. In other worlds; you are a somebody in this world as oppose to a nobody! That counts for a lot in my book! Go buy the car of your dreams and don’t let income limit your choice on cars. Let the dealership that you buy your luxury car do the worrying since they are the one’s that are responsible in making it all happen. You just in it for the “ride”.

Lavalier Lakefield says:

What a sense of humor. Hope nobody took that seriously!

mike says:

At 0 or near 0 percent, if you can afford the payment, keep your cash and pay the loan.

Jon says:

What would you say to someone getting an economy minded CPO Japanese car, good on gas. Around 20-22k on a 45k before tax salary? Something i would plan on owning for many years. Or would the cash option really be your primary advice?

J says:

Yup save up that money so you can drive a nice car when you’re 65.

No, I save 20% of my income and I spend 25% on a car. I choose to enjoy life while I am young, tomorrow isnt promised.

Mocheen says:

I know several people who purchased/leased new cars that they could not afford. They have to have the latest cars in their driveways. One person would buy three new cars totaling almost $80,000 while on a $60,000 income. Another would purchase a $70,000 car while on a $80,000 income. This does not make any sense to me.

On the flip side I know people making over $280,000 that complain when they have to spend $25,000 on a used car. The people who make $280,000 purchase used and take a 1.8% loan from the bank. They then use their cash to invest in real estate and stocks. They also write the vehicle off as a company car. They have millions in savings and live a very frugal lifestyle. They assume that the people driving around in the $70,000 cars must be much wealthier than them.

James Buchanan says:

US News and World Reports runs online articles/analyses that show the lowest 5-year cost of ownership vehicles of each type, as well as runners-up. This can help in coming up with the relevant “total cost” numbers, as well as in purchasing efficiently.

Billy says:

In Arizona, most dealerships add a $2,000.00 dealership fee. I would only do business with AutoNation dealerships because they are upfront with fees that are only $499.00

Gianni says:

Yes I am planning on getting a Range Rover and they are with auto nation thanks for that info and another thing good luck finding a car these days under 40,000 even camrys are running 40s I even in my search saw a Honda suv 70,000 I couldn’t believe it but these are the going prices now

MIA says:

Funny article, reading you advice was not in my favor and then you saying “Recognizing that you may not follow my advice” ha! That was funny. I enjoyed reading this as well as the comparing yourself to other owners.

hj630 says:

The advice to only use cash is totally wrong. Apparently you have no knowledge of finance and the idea of time value of money. If you can get a interests rate lower than the investment return you will get, then take the loan and spend the money on investment.

duck says:

its pretty simple why you want to pay cash
cars do not appreciate in value. cars are not an investment but a liability. you cannot make money with a personal driver. paying cash will cost you the smallest amount as a loan will have an interest rate. the only good financing a car does is help you with your credit, which is useful, but you have to consider the benefit to your credit compared to the cost of the interest.

Dave says:

You missed the boat. If I have $20k in the bank, I can either spend that on a car (which will save me from paying 3% interest on the auto loan), or I can invest it in the S&P, which has a historical 9.7% return rate. Anyone with basic mathematical skills and financial intelligence realises that financing the automobile would be the prudent move in such a case (as long as you’re not spending more on the vehicle because you’re not paying up front). Misallocated capital is throwing money in the garbage just like buying a new car is.

Jessie says:

So I am a frugal person typically. Up until today I have paid cash for older used cars. My car has been having issues and is 14 years old. Today, after working the night shift at the hospital, I went into a car dealership and before I knew it I was signing buyers paperwork for a $33,000 car and my old car’s title over to the salesman. I didn’t take the car home. They said it would be ready in the morning. I am freaking out. WHAT DID I JUST DO?! Is there any way I can get out of this and just blame it on sleep deprivation?! Or is this legally binding and I’m screwed? Please help and please be kind. I’m very fragile right now.

BonBon says:

Did this once, bought a car, was not ready, was to pick up next day. Big buyers remorse. I called different dealership that had the car I wanted and asked for advice how to get out of this car. They said legally! you don’t have any obligation to get this car. Even if you signed all contracts all payments etc. But if you did NOT drive the car home or more precisely if you did not drive the car off the lot after signing the documents the car still can be returned without any penalties.
We did just that. Great relief.

BonBon says:

And also NEVER go and buy a car under any impulse and unprepared. Do your research, see how much are the cars like this selling for. Visit online all dealerships in the area, see the car you want how much they ask,
negotiate with all, get from who sells lowest.
Read online “how to buy a car” follow the tips. You don’t go to a gunfight with a knife. Buying a car is expensive business and you need to be prepared well not to make a mistake that can cost you thousands of dollars easily. Patience, diligence and time. Go when you are ready, don’t buy under any preassure. Never buy a car on a first visit. Walk around, talk, test drive, and then walk out, they will be throwing deals at you so say, you need to think about it, go home do the numbers. If they could give you a deal, even if they say, only today, the next dealership can give you the same deal too.

kelvin says:

Using our example, with a $450 monthly payment, $2,000 down payment, a sales tax rate of 8% and no other fees, this family could afford to spend $90,898.