Car to Income Ratio

"iaintafraidofnoghost" (iaintafraidofnoghost)
05/04/2016 at 21:06 • Filed to: car buying

I have pondered this many times over as I try to keep my finances in check, especially when purchasing a ‘new’ vehicle. Everyone talks about the ratio when purchasing a house and what your monthly mortgage payment to monthly earnings should be (25-35% of your gross monthly income depending on who you ask), but no one ever talks about cars.

There has to be many individuals that blow the budget on their ride to keep up with the Joneses. Speaking from a United States perspective (sorry rest of world, I have to talk to the country I know best) the !!!error: Indecipherable SUB-paragraph formatting!!! in 2014 was $53,657. On the flip side in 2014 !!!error: Indecipherable SUB-paragraph formatting!!! was $32,386. With the current !!!error: Indecipherable SUB-paragraph formatting!!! racking in around 2.86%, that means a monthly payment with no cash down would be $580. Further, that makes an auto payment about 13% of your average monthly gross income. That is a little over half of what some say your spend should be on your mortgage! A payment that has no tax benefit, unless you are a self employed / small business owner / etc. Even worst it depreciates over time!

So what kind of income does it take to afford that super desired car you put on a pedestal that you’ll never buy new, but might buy it used 15 years later?

What kind of income does it take to buy a modest reliable people mover brand new?

DISCUSSION (15)

My speed3 is happy > iaintafraidofnoghost
05/04/2016 at 21:21

I think the rule of thumb you’ll see often on lifehacker is your transportation costs should be limited to 10% of your monthly income. Transportation costs though, so it includes gas and insurance.

My personal rule is if you can’t afford it all cash then you can’t afford it. But I am a frugal bastard.

iaintafraidofnoghost > My speed3 is happy
05/04/2016 at 21:23

I like the cut of your jib.

Gone > iaintafraidofnoghost
05/04/2016 at 21:32

Everyone is different. We don’t spend much on cars. I wouldn’t buy a new car that was more than our gross income/4.

Biggus Dickus (RevsBro) > iaintafraidofnoghost
05/04/2016 at 21:43

Part of it is if you consider your Car being part of your hobby or enjoyment, it is certainly Ok to allocate extra money to it.

Gone > Gone
05/04/2016 at 21:54

And to clarify that’s:

Yearly gross/4 = Out the door price. Which for a lot of people is probably a good rule of thumb.

I say that, but realistically I’d never even spend more than $600/month per car (including pahment, tolls, gas, ins, maintenance) in today’s dollars.

FTTOHG Has Moved to https://opposite-lock.com > iaintafraidofnoghost
05/04/2016 at 22:09

Something that blurs the lines a little is how often people buy and how much their current vehicle is depreciating. If you’re household income is $53k, you really aren’t making enough to afford a “modest, reliable” new Accord for $30k with no money down. But if you’re similar to me, you’re upgrading over time before your car is a worthless clunker. I traded my 5 year old Fit that was my first new car at $17k in 2008 with nothing down and still got over $8000 for it in 2013. With that money down, I financed $19k on my 2013 Outback (just over $27k with all the taxes and fees) for 60 months at 1.9% which would be pretty reasonable on $53k/year. Subarus hold their value pretty well. If current depreciation holds on it, I should be able to sell it for around $15k in two years when I’m ready for another new car, that I expect to have a sticker of around $35k.

TL;DR - most people I know over age 30 looking at new cars have a decent trade-in and aren’t financing anywhere near the price of the car even if they are making a statistically average income.

iaintafraidofnoghost > FTTOHG Has Moved to https://opposite-lock.com
05/04/2016 at 22:13

Completely fair write up. I just wrote this to get a gauge what others felt was a fair monthly output for a car. I was also curious what people though the necessary monthly income should be to get a luxury car (mid range audi/bmw/benz). Definitely appreciate your perspective though.

FTTOHG Has Moved to https://opposite-lock.com > iaintafraidofnoghost
05/04/2016 at 22:26

Yeah I went a little off topic sorry. I would say about 1/10 of your monthly take-home for payments. My two cars combine for more like 1/8 of mine and it is tight right now. I really think I should have kept my paid off beater a little longer to save more of a down payment on car #2 to get closer to that 1/10 number. That translates roughly to new car price 1/3 of your salary. So assuming you have a trade/cash of the typical 20% down, I wouldn’t be comfotable buying a new 3-series until I was making $110k per year or so.

I think that is a big part of the reason so many are leases... people think oh I’m making $70k now that’s good money I'll go look at Bimmers... Then they crunch the numbers and see the monthly payment is almost as much as their mortgage and the lease looks pretty enticing.

iaintafraidofnoghost > FTTOHG Has Moved to https://opposite-lock.com
05/04/2016 at 23:47

Fair enough. I can’t wrap my head around leases. You just toss out 3-4k and still have a monthly payment and no car at the end. I drive too much so a lease will never make sense. I get them if you’re going to buy a new car ever 2-3 years, but other than that.. not so sure.

I feel you on keeping the commuter car. That has been my dilemma lately. We have a new SUV with not a large loan on it, but it is there. My car has been paid off for years. I’m not so sure I want to have two loans. Also if I can wait for the 2017 Volvo wagon, the SUV will be paid off and I could have a slick wagon. But then the next question is can I justify a 40-50k+ car. Probably not. I can barely justify a $25-35k. I like vacationing too much

RiceRocketeer Extraordinaire > iaintafraidofnoghost
05/05/2016 at 00:00

I also struggle to make sense of this — that is a lot of money to be pissing away.

As much as I hate my Camry, it is dirt cheap to run/fix/maintain and will probably keep running until there’s no more gas in the world left to consume.

FTTOHG Has Moved to https://opposite-lock.com > iaintafraidofnoghost
05/05/2016 at 08:20

Your last point is the classic enthusiast’s dilemma - how many things am I willing to give up so that I can afford my dream car?

I say hang in there until you get a few more raises and can really afford it. In the meantime, you can still get a pretty awesome wagon for under $35k if you’re willing to compromise on the Swedish part... it’s not as stylish, but it is still a nice place to be.

Kinja'd!!!

Luc - The Acadian Oppo > iaintafraidofnoghost
05/05/2016 at 10:54

Copied from a previous post very similar to this. This is my story.

Whatever you do don’t get in over your head. I’ve been there and it is fucking terrible. when I was 25 I bought a brand fucking new Challenger SRT8 and rolled in some negative equity into the loan in order to get it. The car ended up being $63 grand.

I was making at the time $2700/month after taxes and the payment was $823/month about 30% of my income. but then there was insurance of $200/month plus copious amounts of gas ~$500/month. By the time you factor in all that stuff I was paying well over $1500/month just on a car. 55% of my income dedicated to a fucking car.

Every time I got behind the wheel all I could think of was how much it was costing me so I was never able to actually enjoy it.

Now 5 years later I drive a Ford Fusion 1.6L ecoboost that is $440/month insurance is $94/month and at the very most I spend about $120/month for gas. so all in It’s costing me about $650/month to drive.

So it’s costing me about a 3rd of what it did before and now 5 years later my income went up about 35% so it makes it MUCH MUCH more affordable.

I’d say spend no more than 20% of your take home income on a car and this is including ALL expenses (EX: insurance,repairs,fuel,ect)

As jalop as I am there are more important things than cars. You might want to buy a house one day you don’t want your car to interfere with that.

Now I have a nice house with a 3 car garage and the fusion and some disposable income that I can play around with old cars on my spare time.

iaintafraidofnoghost > FTTOHG Has Moved to https://opposite-lock.com
05/05/2016 at 18:40

What raise amount would be most appropriate? $200k

iaintafraidofnoghost > Luc - The Acadian Oppo
05/05/2016 at 18:58

This is a great experience to share. I think factoring in all the outside figures as well is often overlooked by many. I’m really glad you brought it up. Thanks for sharing your insight.

I should have specified this article was more to give a general sense to people. Personally, I already have a house.

Luc - The Acadian Oppo > iaintafraidofnoghost
05/06/2016 at 10:41

Like I said this was strictly a copy and paste from a previous reply. There was a young jalop here in his early 20's that was ready to spend much more than he could technically afford and this was my reply to him.