In America, having your own car is synonymous with having complete freedom—a car lets you go wherever you want, whenever you want.
If you can pay for it, that is. (Freedom ain’t free, after all.)
Cars—even the cheapest ones—are expensive. A junker that breaks down twice a month will still set you back a few thousand. A nice one with leather seats and a sweet sound system costs more than most people make in a year.
For most people, having a car isn’t a choice. It’s required to get to and from work, to go the grocery, to see friends—basically to go almost anywhere in our public-transit-deficient country.
So how much should you spend on a car? How can you keep this required purchase from breaking your monthly budget and get a car that makes you happy?
The answer to this question, like so many questions, is it depends. It depends on your income, on your lifestyle, and on how important having a nice, cool car is to you.
How much should you spend on a car?
In general, the answer to “How much should I spend on a car?” is “As little as you can.”
Morgan Housel, a great writer for The Motley Fool, says saving money boils down to making good choices on the three biggest expenses in your adult life: the house you buy, the car you buy, and how much you pay for college.
It doesn’t matter if you bring your lunch to work everyday, Housel writes, or never, ever buy lattes, if you spend more than you can afford on your mortgage, you car payment, and your student loans. Those big bills will eat into any extra money you might have, making it harder to build up savings and grow wealthy through investing.
The most frugal people I know go out of their way to spend as little as possible on their car. It’s not just smart money; it’s a point of pride. They buy a used car, probably with cash. They drive their cars to 200,000 miles or beyond. They own one car for a family instead of two or three. And some really frugal ones don’t own a car at all.
So, really, how much should you spend on a car?
The frugal rule: 10% of income
For many people I think that will be between 10–15 percent of your income. So if you earn $25,000 a year, that’s going to be a high-mileage used car for $2,500–$3,000. If you earn $80,000, that’s a used car for around $10,000 or $12,000. (Yes, this is the harsh reality of being good with money).
So here’s the thing: I’m not that frugal. I know that’s weird coming from a personal finance blogger, but I’ve always been honest about the fact that I’m more of a natural born spender than saver. I’ve checked myself in a lot of ways and become better at making frugal decisions, but I don’t have that driving passion for spending as little as I can at every turn (though I’m often jealous of those who do).
I also value cars: I enjoy driving and taking care of vehicles, so I’m willing spend a bit more—without going crazy—on my vehicles.
The compromise: 20% of annual income
For me, if I’m going to buy a new car I want something that’s as safe and reliable as possible for my needs. Especially with a young family and two busy working parents, reliability is key—sending the car to the shop all the time would be a hassle. The last two vehicles I’ve bought have been between two and three years old with around 20,000 miles on them. The newness of the cars was good for their reliability, but the fact that they were used took thousands off the price of buying new.
“How much car you can afford?” is a different question than “How much you should spend on a new car?”
A loan officer will look at your income and credit report and say: “You can afford $650 a month.” You could finance a new Porsche for $650 a month if they stretch the loan out long enough, but you certainly shouldn’t spend that much on car.
If you take pride in your frugality, 10–15 percent of your income sounds about right. If you value the reliability a newer, more expensive car brings, then 20–25 percent is a good benchmark. This gets you $5,000 to $7,500 on a $25,000 salary. Still not a lot, but you’ll have more options. At a salary of $50,000, you can spend $10,000 to $15,000 which should be plenty for a basic used sedan under 100,000 miles.
Used car buyer’s checklist
When you are inspecting vehicles or going for a test drive, use this checklist to make sure you note the car’s most important features to help you make an informed decision.
On your test drive
- The gears are smooth and can be moved quickly
- The engine power is appropriate to the car’s size
- The car tracks and brakes steadily and in a straight line
- The electrics and dials are fully operational
- The temperature dials do not show any signs of overheating
- The speedometer is functioning and displays your speed accurately
- There is no irregular engine noise
- You’ve checked the suspension and the transmission
- You’ve checked the brakes and the exhaust
The car’s body
- There is no sign of accident or rust damage
- There is no sign of hail damage
- There are no panel irregularities
- The door and boot seals are intact
- The upholstery is in good condition
- There are no chips or variations in the paint
The car’s interior
- The seatbelt shows no signs of wear and tear
- The lights inside the car are functioning
- The electronics, including the air conditioning, the audio and the windows, are working
The car’s exterior
- You’ve taken note of the engine VIN and body number
- You’ve checked the exterior of the engine
- You’ve checked the engine oil and the radiator coolant
- There is no corrosion of the tubes and brackets
Documents you’ll need
- PPSR certificate
- Transfer of ownership documents
- Registration papers
All the factors that come into play when you buy a used car can seem overwhelming, but you want to make sure that you’re buying a quality vehicle. Once you know what to look out for and after you’ve done your own research on what cars are available, you can make an informed decision.