When it comes to buying new vehicles, many people wonder how much of their annual income or monthly take home pay they can afford to spend on a new car.
Unfortunately, there is no set rule on how much to spend on a car. There are other costs to consider such as down payment, car insurance costs, registration fees and the price of gas. This will also differ depending on whether you are paying cash or taking out a car loan.
You should also consider what you are needing your car for and how often and for how long you will be using it. The cost will also vary depending on whether you are purchasing a new car or a used car.
This guide will talk you through some points to consider before your car purchase, give some helpful tips to save money in some areas and give you an idea of how much of your gross annual income or monthly income you should be spending on your new car.
What do the experts say?
Advice from experts varies regarding how much of your salary it is wise to spend on a car.
Much of this depends on what you are planning to use your new vehicle for.
The 50% rule
Some experts believe that spending 50% of your salary on a vehicle should be affordable. With a salary of $75k this would give you $35,000 to spend on a car which is enough for a brand new car. However, not everyone will be comfortable with spending such a large portion of their salary on a car, and some people will not have this much to spare due to other financial commitments regardless of how much you are making. For these reasons, this option is not for everyone.
Experts don’t recommend spending more than half of your salary on a new car.
The 35% rule
Some car buying experts dictates that 35% should be an upper spending limit. If you are very into cars you may be looking to invest in a nicer car. In this case you can spend 35% of your gross income on a new car. On a salary of $70k this should afford you a brand new car with the latest technology and exciting bonus features.
On a salary of $70k, this would give you a budget of $24,500 to spend on a car.
The 25% rule
If you are not super into cars but still want a nice vehicle to get around in, perhaps even with an upgraded sound system, you can instead spend 25% of your annual income on a car.
With a salary of $70k, this would equate to $17,500 to spend on a car. For this budget you will be able to get a new or used car.
The 15% rule
Perhaps you are not looking for an expensive car but just need something to get you from A to B. In this case, you should be able to spend 15% of your salary on a car.
This would afford you $10,500 to spend on a car. For this price you should be able to purchase a reliable vehicle. Don’t be tempted to save money by buying a high mileage used car, as although you may be saving money in the short term, you may have to spend more on insurance costs and car maintenance as older cars will have more issues that may need fixing when compared to new cars generally speaking.
The 10% rule
The 10% rule may be the most popular rule to follow when buying cars. This rule relates more to leasing a car than to buying one outright. The 10% rule works on the basis that you should not spend more than 10% of your salary per year on car payment. With an annual income of $70k, you should aim to spend no more than $7k per year on car payments.
The 20/4/10 rule
The 20/4/10 rule is useful because it also takes into account your down payment and the duration of your loan as well as your annual salary. This rule says you should be putting down a down payment of 20% on your new car. Your loan term should not exceed 4 years and your payments should not exceed 10% of your annual income. Car payments should also include the cost of insurance and any maintenance expenses as well as the interest on your loan.
Should you pay cash or take out an auto loan?
Buying your car outright vs making monthly car payment will impact how much you are paying overall and each have their pros and cons.
Paying in cash for your vehicle means you don’t have to make monthly payments which leaves you more money at the end of each month to put towards savings or your retirement account.
In order to pay in cash you will need to have a large lump sum of money in your bank account. Not everyone will have the spare cash to be able to do this so this won’t be an option for everyone.
Buying a car on finance means you will be spreading the cost of the car loan over monthly payment. This means if money is an issue for you in the short term, perhaps you have had to buy a new car unexpectedly and haven’t had the time to save up, you should still be able to afford a decent car.
Financing also means you will have an extra debt to pay off and will be paying more in the long run than if you had paid in cash due to the interest rate you will have to pay on your loan amount.
If you have a poor credit rating, you may struggle to be approved for finance on your new vehicle, so keep this in mind. However, paying your car loan payment on time each month could also help to boost your credit score.
Average cost of a new car
The average cost of a new car has been steadily rising and according to Kelley Blue Book, the average cost has recently topped $47,000 in 2021.
This is well above 50% of your salary on an income of $70k per year so if you are determined to to get a new car you may need to shop around for a better deal or consider purchasing a used car instead.
Research shows that a new car depreciates in value very quickly in its first year. A car can lose 10% of its value as soon as you drive it off the forecourt. Depending on the make and model of the vehicle and how many miles you have done, your car can lose up to 40% of it’s value after the first year.
If you are planning to trade in your car after a few years of ownership, buying a new car may not be the best decision financially as you will be losing a lot of money due to the depreciation.
Consider buying a used car
There are benefits to buying or leasing a used car, especially if you plan to trade it an after owning it for just a few years as it will not depreciate in value as quickly as a new vehicle.
Keep in mind that used cars add up to be even more costly than new cars as they often come with maintenance expenses which newer cars may not.
They are also often accompanied by higher gas and insurance costs so you could find yourself paying higher car expenses overall when buying a used car.
If you do choose to purchase a used car, make sure you have checked it thoroughly for issues and priced the cost of the insurance before you agree to the loan terms or sign off on the purchase.
Getting the best deal on your new car
Of course it is important to get the best deal you possibly can on your new car.
Once you find a car you like, shop around for the best deal, don’t just accept the sticker price on the first car you see.
Look for the same make and model elsewhere for the best mileage and age you can afford within your budget.
Try to negotiate the best trade in value on your old car too. Research how much similar cars are being sold for and don’t accept a low offer from the dealership. If you’re having a hard time finding a fair offer for your old car and you can afford to buy a new car without a trade in, hold off trading your old car in for now. Most of the time you can actually find a better deal for your old car by selling it independently. Many people choose the convenience of letting the dealership handle their trade in over the extra effort of having to organise a private sale, however, if you are looking to save as much money as possible this is definitely an option worth considering.
Saving up to buy a car
If you don’t need to buy a new vehicle immediately, you can take some time to build your savings before you make your purchase.
There are many effective ways to grow your savings so you’ll be driving away in your new car sooner than you might think.
Establish your budget
Before you can decide how much of your monthly budget you can afford to spend on a car, you must first assess your outgoings to establish your budget.
Make a list of everything you spend money on each month and split these into 2 categories – essential and non-essential expenses.
Essential expenses will include things such as rent, utility bills and medical expenses.
Non-essential expenses will include areas which you are spending money which you don’t necessarily need to. This will include things such as meals out, expensive coffees, beauty treatments and cosmetics and clothing.
If you are spending a lot of money each month on non-essential expenses, it may be time to cut back. Writing down all of your transactions will highlight the areas in which you are consistently overspending so you can see exactly where you can save money.
For a salary of $70k, this article will provide you with some tips on how to manage your finances.
Use a budget planner
Budget planners are increasing in popularity and with so many to choose from it’s easier than ever to find the perfect one for you.
They now come in many different forms including books, apps, printables and wall charts.
For more information on finding the right budget planner for you, take a look at this article.
Cut back on your spending
There are some quick and easy techniques you can use to cut back on your spending to quickly grow your savings to buy a car.
Stay at home
You might think you need to go out in order to have a good time, but this isn’t the case.
Invite friends and family over for a movie night, game night or even just a home cooked meal. You will have just as much fun spending quality time at home as you would going out and you will quickly save money to put towards the cost of your car loan.
Find free activities
There are plenty of activities you can do without having to stay home.
Whether you live in a city or a rural area, going for a walk is a great way to spend your free time which doesn’t cost any money.
There are also plenty of free activities such as museums and parks you can spend your time doing. Have a look online to see what’s available in your area.
So, how much car can I afford?
There is no set rule regarding how much of your $70k salary you should spend on a car. Even the financial experts can’t agree on this. Advice varies with some experts believing you should spend as much as 50% of your salary on a car while other insist it should be as little as 10%.
How much you choose to spend on your car will depend on what you need your car for, how often you use it, what your current outgoings are and whether you are buying the car outright or leasing it.
Keep in mind that there are hidden costs to consider such as car insurance and registration fees. The price of gas will also vary depending on which car you buy.
You will have to choose between buying a new or a used car, with a used car being the wisest option financially if you are only looking to keep the car for a few years before trading it in for a new one. However, keep in mind that used cars can also be costly as they tend to have higher insurance costs and maintenance expenses.
If you need to save up a bit more cash before buying a new car, there are plenty of techniques to help you set a budget and grow your savings quickly and easily.