×

Save your first

— or NEXT

$100,000!

Get our free weekly newsletter and MoneySchool: Our FREE 7-day course that will help you make immediate progress on the money goals you’re working toward right now.

No, thanks
Subscribe now

How Much Should You Spend On A Car?

How much car can you afford? Find out how much you should spend on a car in your twenties and why—unless cars are your absolute passion—it’s probably way less than you think.

How much should you spend on a new car?

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.

Related: Car Affordability Calculator

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 ‘one-size-fits-all’ rule: 35% of income

Personal finance is personal, but everyone wants a rule to follow. So, when pressed, I would say spend up to 35 percent of your annual income on a car.

This covers most bases. If you only earn $20,000 a year, it gives you a budget of $7,000. That’s not a lot, but it’s definitely enough to buy an older, yet still reliable, used car.

On the other end of the spectrum, someone earning $150,000 a year might spend $52,500 for a new car. That will buy a wide range of brand-new cars, including luxury models. Still, that person earning $150K might be annoyed to be told they shouldn’t buy a a well-equipped Tesla Model S for $100K.

Which is why I think it makes more sense to break the rule into tiers. Only you can decide which tier is right for you based upon your financial situation, whether you’ll pay cash or finance, and how important your car is to you compared to other expenses.

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.

Again, don’t spend more than you can afford. But if you need to finance your purchase, you can get no-obligation auto loan quotes from Even online in about five minutes:


And, if you really love cars

To all you personal finance blog regulars out there, this probably sounds good so far. If this is your first time here (and assuming you’ve read this far), you might be thinking, “These people are so cheap! That’s crazy. There’s no way I can get a car I want for that money!”

To you, I would say: Ask yourself why you’re saying that. Is it because you’re a “car guy (or girl)” and you value your car most out of all your possessions? Or is it because you’ve simply been conditioned by our culture, advertising, and car salespeople to think that you should buy a brand new car and that there’s nothing wrong with spending a year’s worth of paychecks on a car?

If it’s the former—that you love cars—cool. There’s nothing wrong with intentional spending on the things you value most. By “intentional spending,” I mean spending money—maybe more than other people would think is sensible—on things that interest you.

So if you value your car, I don’t see anything wrong with spending more than we recommend for most people, perhaps up to 50 percent of your income on a car. Chances are—as a car person—you’ll care for the car more, enjoy it more, and get more money for it when you sell it than the average car owner. Again, you just have to remember that because the car will be a large expense, you’ll have to be extra vigilant about other expenses.

Summary

If you’re not a car person, the takeaway is to think about why you think you should spend so much on a car. It’s easy to think that way, I know—I worked at a car dealership once.

If someone walked in and didn’t specify a budget, we’d sell them any car they wanted and only after the fact worry about whether they could afford it. And by “afford,” of course, I mean that they could get financing approved. In some cases I’m sure they sold cars that cost more than the customer earned in a year.

We didn’t care about the car buyer’s actual income or budget; it wasn’t the dealer’s business. If a customer can’t afford a car, the bank sends a repo man and gets its car back. The system looks out for everyone else but you. Start looking out for yourself by figuring out how much you should pay for a new car and then stick to your guns.

Happy driving.

Read more:

Need more help finding the right car for your budget? Use our resources to find all the information you need:

Save or share! Email this page »

Know Before You Go to the Dealership

Find Car Incentives & Rebates at Edmunds.com Get Free Dealer Price Quotes in 5 Minutes
Let the dealers fight for your business; pick your car and find the best price before you leave home.
Get Financing Online Before You Shop
Easy 3-minute pre-approval. No obligation. Past credit problems OK.
About David Weliver

David Weliver is the founding editor of Money Under 36. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

We invite readers to respond with questions or comments. Comments may be held for moderation and will be published according to our comment policy. Comments are the opinions of their authors; they do not represent the views or opinions of Money Under 36.

  1. Kelan Bomar says:

    Hi, hoping you might be able to way in on my situation. I am a college student going into my last year of a chemical engineering bachelors degree. I can expect to earn around 65k starting as a starting salary after graduation. I plan on making around 5000 dollars over the summer and to put down about $3000 of that toward a car. Man, I want don’t want a junker car though. Would putting down $2000 and financing another $5000 to buy a $7000 dollar car be unwise? I will be unemployed yet able to pay for the car using subsidized loans throughout the year.

    • Chris Macmurdo says:

      I’d like to advise against doing this because you are taking out a loan and then using a loan to pay for another loan. It’s just interest on top of interest. Buy a car for 2-3k like an old accord and then once you get a job set up a budget and see what you can afford. Driving an old reliable car (like an accord with 160k miles) for a year is the smart move.

    • Korang says:

      Avoid debt. I think its better you save up and buy a used car with cash. Later after a year or two you can buy a much better car

  2. Crystal says:

    I buy my cars new but used off the lot. In other words, I buy the demos with anywhere from 1-4 thousand miles on it and let the dealer take a hit on some of the depreciation. In addition, I drive my cars until they die. My car right now has 112,000 miles on it and its a 1995. I figure we have at least 3 more years. Because I have been frugal, I figure this next car will be the last car I buy, my house is paid for. I would really like a luxury model but not sure if that is the right thing to do. If I could take it out under a home equity line of credit would I be better off? What are your thoughts?

  3. JJ says:

    So I’ve read a few comment that confused me. So its “smart” for me to buy a $12k car on a $120k salary but I should preferably move closer to work to avoid having a car payment altogether? How? That’s right, by renting closer to the office. What is the point of discussing investing in a depreciable asset without prioritizing the importance of home ownership?

    Anyone with a salary above $50k I assume has a pretty important job role. So I’d also safely assume it would not go without consequence arriving late to work, a meeting, etc. because of car trouble in a 10-year old vehicle. Buy what you can comfortably afford.

  4. DOUGLAS CHRISTENSEN says:

    The 20/4/10 rule

    – Make a down payment of at least 20%.
    – Finance a car for no more than four years.
    – And not let your total monthly vehicle expense, including principal, interest and insurance, exceed 10% of your gross income.

    If you make $4,000 per month ($48,000 p/ yr) gross your vehicle expenses should not exceed $400. Assuming $100 for insurance that leaves $300 for a payment. Over the max four years (48 mos) the total amount financed needs to be $14,400. Now you put 20% down ($3,600) so that is a grand total of $18,000. But how much would the purchase price be? Depends on your credit.

    • Meghan says:

      Love this, totally saving it for my next car purchase.

      • Donnie says:

        Except you’re rule is flawed and so are your numbers. You are forgetting, taxes, title, tags, and processing fees at a dealership not to mention interest on the loan. With an $18000 vehicle you are looking at $747 in sales tax for my state (VA at %4.15). $18,000 – $3,600 down payment = $14,400. add the $747 in sales tax you are at $15,147 plus an additional $10 for title transfer. $15,157. I forget how much tags cost, I think it depends on the design you get and if they have custom lettering. For the purpose of this demonstration we will forget about it. Now we add the $300 processing fee to that amount needing to be financed putting you at $15,457. Financing that amount over a four year period with an interest rate of 6% which is what someone with average credit should expect, you have a payment of $363.01/mo. A 7 year loan has you at a payment of $225.80/mo. Luckily since auto loans don’t have a pre-payment penalty you can still pay it off in 4 years if you pay $363.01/mo while having a 7 year loan. It also looks better on your credit history when you pay off something early.

  5. K88 says:

    I’m trying to stay frugal, but want to justify to myself that I can get a newer, more reliable vehicle. So I was thinking 10% monthly paycheck after taxes for car payment/insurance would be fair. I don’t see the point to consider pretax money as a measure. If you bring home $4000 after taxes ($65-75k gross) you could try to get a car with $300 payments and $100 insurance. Over 60 months and 3%, this could get you a $17k car. This is assuming at least 3 months emergency fund is already saved, no credit card debt, and 401k is at least 5% pre match. And you’ve already made a Downpayment on a house… Is that justifiable by the frugal spender experts? One day, years in the future, I’d like to buy a nice truck for $40k and hate to think these vehicles are only for people making $400k a year, but maybe that is the case.

  6. Chris says:

    Out of curiosity, is the article referencing gross annual income or after-tax annual income? Thanks.

  7. RJ says:

    How about save 25% of your income and anything over that, you can spend the rest however you want!

  8. Joe says:

    I am at the <10% club

    I make $110K a year. But after tax, that's only about $6k/mo. I bought a used car from craigslist for $5k (great, reliable one). Including tax, replaced battery, etc, that's about $6k. I save $4k/mo (spending $2k/mo for a single dude living in a low cost of living area is actually very comfortable). That means I bought a car with 1.5 months of saving

    Obviously, I'm not a car enthusiast.

    • Clay says:

      I like the way u operate

    • Jeremy says:

      You do not gross 110k a year and only take in 6k/mo. I live in california and I bring home 6k and I gross 75k. Why inflate your numbers so much?

      • K88 says:

        That means you only get taxed $250 a month.

      • Vistinum says:

        I don’t know how you are getting your own numbers, but Joe is not inflating his numbers. Let’s say you earn 110k a year, live in California, file tax as single, and have 1 personal allowance.

        Effective Tax Rates
        Federal: 18.77%
        FICA: 7.65%
        State: 9.30%

        Total income tax: $36.395
        Income after taxes: $73,605

        $73,605/12 = $6134
        This means that he gets $6134 each month after tax, which is indeed “about $6k” as he said.

        • Joe says:

          This is the original poster.

          For NC, it’s between $6.2k and $6.3k per month after tax. Technically, I only get that amount the last month since I max out the 401k and spread it out over the first 11 months. That’s why I said “about $6k”.

          Although I’m not a car enthusiast, I treat my car very well and enjoy DIY car maintenance. I mostly do the basics like changing oil, rotating tires, cleaning, etc. I have it checked by a professional once a year, the same time I have to do the state emission/safety thing.

          I have done some rough calculations, and the total cost of owning a car like mine is around $2k per year, including depreciation and about 10k miles annually. That’s about 1/3 month of my after tax income

      • Brandon Wood says:

        Actually he’s about right depending on tax filing status / other deductions.

  9. Zane says:

    It’s fine to spend $40,000-$70,000 on a car if you meet the following criteria:
    1. Take excellent care of the vehicle, keeping it washed and waxed, keeping the oil changed, tires rotated, making sure all scheduled maintenance is done at recommended intervals, and not abusing the vehicle by doing doughnuts, racing, drifting, etc.
    2. Keep the car for a very long time (at least 12-15 years), and keep mileage below 12K-15K per year.
    3. Live within your means, don’t buy a huge mansion you can’t afford, don’t party like a rock star or take frequent lavish vacations and max out your credit cards.
    4. Keep your insurance low by driving carefully and not racking up speeding tickets and accident claims.
    5. Park in a garage as much as possible.

    If this all sounds like too much of a hassle, or if you are a person who gets bored with a car every couple years – then never buy a new car unless you are wealthy enough to spend a fortune on depreciation and financing.

  10. AmericanFool says:

    I agree with the comment that it’s about priorities, but also about strategy. The guidelines are fine and appropriate (total price vs 1 year salary) if you don’t have backup plans and you aren’t good at car repair, or know a good cheap mechanic. My wife and I married at age 26 and 28, and in the space of two years bought two new vehicles for about $44K total, mostly financed, on combined income of about $110K. Great decision, though it’s outside the parameters of these recommendations. One of those cars went 18 years and 265k miles, the other I’m still driving, almost 20 years and over 297K miles. Both cars had great reputations for reliability & lived up to them. We recently had to get another car for the one that died at 265K, so we went and spent more than I would have on my own (about 25% of our current ttl income), but it’s both a very reliable and very capable vehicle, as we now live in the snow belt. However, I’ll be replacing the other before long, so between the two cars we’ll be up at 40-45% of our income, again mostly financed. This works because we finance at low rates, but the cash goes to savings where it earns multiples of that. The cost of this car represents 3% of our net worth, and the next one will be another 2%, so it’s definitely a hit (I don’t count the value of cars or furniture in my NW), but one that will reliably support years of further earnings and savings. I’ll freely admit we could be more frugal (at a cost of time to repair or have the cars repaired more frequently), but our overall TCO is still well below anything you ever see published as an estimated “average”.

  11. Nick says:

    This question has already been asked by others, but I don’t see an answer: Is it 20% of your yearly income is what the total purchase price of the car should be (100k salary = 20k purchase price) or 20% of your income is what you should spend every year (100k salary = 60k purchase price over 3 years is 20% each of the 3 years)? That is a large variance. I hope it’s not the first option, because if the person in my example (100k yearly income) buys a 20k car, over the course of 10 years, that car is only 2% of each of those 10 years. I only factored in purchase price for simplicity.

  12. David Arellano says:

    When you say 10 percent does that mean 10 percent on a yearly basis. So a $30,000 salary would be able to afford a car that cost $3000 a year i would say that would be better right?

    • Mike says:

      Be sure to include the cost of insurance, parking, gas, and maintenance into the total cost.

      In reality, if you make less than $30k a year you should not own a car because you simply can’t afford one. Take the bus or ride a bike. You’ll end up spending less money each year by moving to an apartment within walking or biking distance of work than you would on a car, gas, insurance, and maintenance.

      • Erick says:

        I don’t know how you guys do it in the states but at least where I live you can’t just take public transport (it is incredibly inefficient and traffic is big so you could wait 10-50 minutes or even more for a bus to arrive) or a bike (doing 30 miles of bike trips is not fun or even healthy I think plus you are going to get sweaty for work/college/chores/etc and takes way more time to arrive than using a car).

        Unfortunately a $1,000 car where I live will need $2k-$3k in repairs for it to be reliable (insurance is dirt cheap so forget that) and I do about 37 miles round trip a day to work yet don’t make $17k a year (finishing college soon). I had to buy a reliable car I could finance cheap and found a 2010 kia for $8k. If we go by most financial experts they would kill me wasting so much on a car but not every place is the same or every persons needs/requirements. (Had it for about 2.5 years now and can afford it)

  13. Under what conditions would it be a good decision to buy a Tesla Model 3? – Loans Online says:

    […] read online that a good rule of thumb is have a car that is roughly 20% of your annual income.. This seems like a very small quantity, because that would mean you need a $175,000 annual salary […]

  14. Sah says:

    10% of my income won’t buy me much car at all. I bought a car 4 years ago that was 20% of my income and I’ve spent more than the car costs on repairs. I’m saving to buy something reliable, especially because I have a long commute. I consider myself frugal in general, but I think 1/3 of ones annual income is a good guideline for a car purchase.

    • Mike says:

      Consider what it would cost to move closer to your job so you could bike or walk. Would you pay $200-500 month more for rent? Then figure you’d spend $300 a month on a car payment, plus insurance (and if you finance you will have to carry full-coverage), gas, maintenance, and possibly parking. What’s the difference? That should answer your question.

  15. Brandon P says:

    I’m sorry, I only read about halfway through because I couldn’t wrap my head around the premise of this article. I don’t get how you equate how much car you should buy with you’re annual income. Shouldn’t the amount you spend on a car have more to do with your priorities? I mean, say I’m a frugal person who makes about 28k a year but wants something that’s not going to break down all the time. Those priorities lead me to roughly $5000 for a car that’s about 10 years old (these are really rough estimates just for argument’s sake). Okay but now say you have person B who makes 100K a year but it ALSO frugal, and wants a reliable car. He has the same priorities as someone with less income. I don’t see how much car you need is a function of how much you make. Why does a rich frugal person need or want more car than a poor frugal person?

    Update: I read the rest of it and I’m still lost.. I think how much you spend on a car is a function of your priorities and that type of car has a specific price range. How much you earn in a year of work doesn’t play into that other than how long you’ll have to save up for the car.

  16. Nitesh says:

    Are these percentages for the total cost of a car, or how much you spend on it each year? Ie, would the recommended 25% of a 60k salary mean a 15,000 dollar car, or 15,000 per year total to spend on paying for it, say if it was split over three years?

  17. Eva says:

    I bought a used car that was around 20% of my income. The great thing about a used car is that if you get a ‘ding’ in the grocery store parking lot; you care, but not as much. One other thing for folks to consider is maintenance costs. I bought a GM with relatively cheap parts and oil changes. Some of my friends own cars and their brakes and oil changes are more than my monthly car note.

  18. Mike says:

    I am a passionate car enthusiast, however, “new” cars are just a waste of money. I am satisfied going used or certified used with something that has low miles and is 1-3 years old. Sure, you get the extra security of knowing the car’s initial history, but that’s why certified-used vehicles are the way to go. You don’t get hit with depreciation and you still get something that is like new. The reality is that a car is no longer “new” the moment you’ve signed (or payed) your life away, the car becomes “used.” Usually financing is higher with used vehicles than with new, however mine has the same 1.9% as the last 2 new vehicles my partner purchased. I do have to disclose that we have family in high places at a dealership, so we were able to maximize our trades, but we still have to pay. We got one vehicle a couple years ago that I advised my partner not to get….but he wanted it very badly after wanting one for years before they ever came to the US. Luckily it wasn’t expensive and only involved financing about $7,000 due to the trade. Two weeks ago enough was enough and we traded it for something I was suggesting in the first place and we are absolutely happy. Between both our cars, we are financing about $17,000…which is about 18% of our income annual income, so nothing too crazy. My previous vehicle was a lousy 7% as I was still in grad school at the time….but my credit has improved vastly since then. No late payments, no defaults, etc. With 1.9% financing on both vehicles, you’d think we would be older, but we are still in our late twenties! We have many friends who have large aspirations with their vehicles, but all I’m looking for is something that is a little sporty so it accelerates well, something that I can fit other people and things, and something that is reliable. With my own personal vehicles, I was lucky enough that my first 2 were paid for by my parents…the first was a very old hand me down, the 2nd was 5 years old from the used lot and lasted me 5 years until engine issues through no fault of my own as I am a stickler for maintenance. The 3rd was out of necessity (and had a 5 speed!) and my current was amazing deal for a basically new vehicle….and is the newest I’ve had, not counting my partner’s vehicles.

    • Mike says:

      My solution – saved up some money and bought a cool project car that’s appreciating over time. Get my driving and wrenching jollies on a car that true enthusiasts gawk over, while using a turd car to sit in endless gridlock every morning and evening. Total cost – gas, insurance and maintenance for the turd, hobby funds for the project. Easy! You can get an NA Maia for less than $4,000 and have more fun driving that thing than a guy worried about a bird crapping on his new McLaren 650S. Just saying.

  19. newton says:

    I’m an absolute car guy and I can still manage to spend no more than 20-30% of my income on cars.

    Consider this: I bought a 2001 BMW in 2009 for $9k. Over the course of five years I’ve spent around $4-5k in maintenance and repairs. For about $13-14k total, my car still cost less than a new Kia, looks very new and is a joy to drive. Not to mention, I bought it in cash so never had to deal with a car note.

    Understandably, those who don’t care much about cars and are looking for a practical solution would still buy a new Kia for around $16k or so and finance. But my point is that if you have around $15k to spend on a car, you have many options depending on how much you’d like to commit in keeping a car of your choice going. Additionally, you’d be taking a bigger hit dollar for dollar on a new Kia than you would on something older and ages well.

  20. Sara says:

    Oh, man, this is great. I make ~$50,000 (and my household income is about ~$80,000) and last year we got a 2 year old Hyundai for about $14,500. We did have to finance it, and got a loan at about 3%. As the biggest purchase of my life to date, it felt pretty extravagant. We also have an old beater pickup that was my high school gift from my parents and while it’s great to have when it works, I don’t know how many gray hairs that thing has given me by breaking down at the worst possible moment. I couldn’t live with another beater, even if it meant getting a loan. So it felt right to get a car that is safe, reliable, gets great gas mileage and hasn’t needed a single mechanic visit other than oil changes and inspection — despite the financial advice to NEVER EVER take out money for a depreciating asset. Hearing that we actually landed in the frugal-to-reasonable zone makes me feel better about shelling out to pay that loan every month.

  21. guest says:

    I’m in the frugal 10% category—so is that range comprehensive of the purchase price, or per year cost (maintenance/repairs?)

  22. Mark Ross says:

    Great post! I think that spending 10-15% of your annual income can get you a nice car, so if you have a very low annual income, then it’s time to increase it for you to get a more reliable car.

  23. Leave a Reply

    Your email address will not be published. Required fields are marked *