Cost of car compared to Gross Income

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sunnyday
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Cost of car compared to Gross Income

Post by sunnyday »

I just read this by blogger Financial Samurai
A car is the #1 personal finance killer given it is an unnecessary luxury that rapidly depreciates over time. I suggest spending no more than 1/10th of your gross income on the purchase price of a car. If you make $50,000 a year, then buy a nice second-hand Honda Civic for $5,000. If you make $500,000 a year, that new 4 series BMW coupe is quite alright. And if you only make $20,000 a year, then consider taking public transportation or biking. The last thing the median earning household should do with their $51,000 income is buy the median priced $30,000 car after taxes.

I'm planning to buy a car that will be 13% of our gross income. I don't think it's that much since we live below our means and keep our cars for a while.

How much was your last car compared to your gross income?
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in_reality
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Re: Cost of car compared to Gross Income

Post by in_reality »

0% - age 45 and never owned one. Sold BMWs to help pay for college back in the day though...
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cheese_breath
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Re: Cost of car compared to Gross Income

Post by cheese_breath »

I never considered gross income. In my younger days before I could pay cash my criteria was whether I could afford the monthly payments or not.
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Polymorphic
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Re: Cost of car compared to Gross Income

Post by Polymorphic »

How much was your last car compared to your gross income?
About 43% on a new Honda. In hindsight that was way too much. I'm paying it off in a couple of weeks. I don't plan to take out another car loan ever again. I blame Bogleheads. :D
sscritic
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Re: Cost of car compared to Gross Income

Post by sscritic »

30% of last year's AGI. But then this is the first car in 16 years, so make that less than 2% of AGI per year. Actually, my AGI was higher before I retired, so even less than less than 2% per year.
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prudent
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Re: Cost of car compared to Gross Income

Post by prudent »

cheese_breath wrote:I never considered gross income. In my younger days before I could pay cash my criteria was whether I could afford the monthly payments or not.
We all did that, I'm sure. It was a lot less significant when car loans maxed out at 36 months. Now you can get 84 month car loans to keep the payment down, and I wonder how many people who take those loans realize how long they are upside down and the need for gap insurance.
JoeJohnson
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Re: Cost of car compared to Gross Income

Post by JoeJohnson »

A blanket statement number like this does not work. Current and future income stream and its reliability, future marriages/offspring/etc, commute distance. There are a lot of variables at play here.

It's a good rule if you want to protect people from overspending, but as far as me driving a $5,000 car to work everyday? No thanks! The safety features alone would make it worthwhile to get something a little nicer.
flyingbison
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Re: Cost of car compared to Gross Income

Post by flyingbison »

sunnyday wrote:I just read this by blogger Financial Samurai
A car is the #1 personal finance killer given it is an unnecessary luxury that rapidly depreciates over time. I suggest spending no more than 1/10th of your gross income on the purchase price of a car. If you make $50,000 a year, then buy a nice second-hand Honda Civic for $5,000. If you make $500,000 a year, that new 4 series BMW coupe is quite alright. And if you only make $20,000 a year, then consider taking public transportation or biking. The last thing the median earning household should do with their $51,000 income is buy the median priced $30,000 car after taxes.
That's very unrealistic advice, in my opinion. You have to be very lucky to find a decent, reliable car for $5K these days. A quick search online tells me there are currently 11 Honda Civics for $5K or less within 100 miles of my city, and all of them are 10+ years old. If I spend 5k on a 10+ year old car, I'll probably be replacing it every couple of years, so what have I really saved.

The last car I bought was 50% of my annual salary, and 20% of my annual household income.
Rob Bertram
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Re: Cost of car compared to Gross Income

Post by Rob Bertram »

A lot of people confuse wealth and income. Financial Samurai seems to be doing that. For people that do not save for large expenses, his advice might be relevant. There is a strong argument for avoiding consumer debt, especially car loans that sometimes go up to 7-9% for those with poor credit. For Bogleheads who do save, the answer is often "buy what you need and can afford".
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cheese_breath
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Re: Cost of car compared to Gross Income

Post by cheese_breath »

prudent wrote:
cheese_breath wrote:I never considered gross income. In my younger days before I could pay cash my criteria was whether I could afford the monthly payments or not.
We all did that, I'm sure. It was a lot less significant when car loans maxed out at 36 months. Now you can get 84 month car loans to keep the payment down, and I wonder how many people who take those loans realize how long they are upside down and the need for gap insurance.
Good point. But back when car loans were 36 months that's about how long a car lasted. (Well maybe a year or two more). Now most properly maintained cars easily last 84 months or more. I guess either way they have it set up by the time you get the loan paid off you may need another vehicle. Glad I reached the point where I can pay cash and don't have to worry about that..... Another thought too, interest was deductible back in the 36 month loan days. Now it's not, making the 84 month loan even more painful.
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tadamsmar
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Re: Cost of car compared to Gross Income

Post by tadamsmar »

It's better to think in terms of yearly total cost to own (TCO)

The only thing that Financial Samurai mentioned is depreciation. For a 2013 Civic, depreciation drops to $1000 after 5 years:

http://www.edmunds.com/honda/civic/2013/tco.html

And, estimated repair and maintenance costs are going up, eating into the savings on depreciation. Insurance tends to be relatively higher on older cars because they are less safe and less crashworthy. There is a lemon factor when buying a used car that is not reflected in TCO starting with a new car. Since older cars tend to be less safe, there is a cost in terms of risk to you and your loved ones that is not priced in.

You can mitigate the safety and insurance cost issue by making sure you get a used car with ESC:

http://epicurusgarden.blogspot.com/2011 ... h-esc.html
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Re: Cost of car compared to Gross Income

Post by placeholder »

sunnyday wrote:How much was your last car compared to your gross income?
I don't know because I don't remember what my gross income was in 1999.
uncertainty
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Re: Cost of car compared to Gross Income

Post by uncertainty »

cheese_breath wrote:
prudent wrote:
cheese_breath wrote:I never considered gross income. In my younger days before I could pay cash my criteria was whether I could afford the monthly payments or not.
We all did that, I'm sure. It was a lot less significant when car loans maxed out at 36 months. Now you can get 84 month car loans to keep the payment down, and I wonder how many people who take those loans realize how long they are upside down and the need for gap insurance.
Good point. But back when car loans were 36 months that's about how long a car lasted. (Well maybe a year or two more). Now most properly maintained cars easily last 84 months or more. I guess either way they have it set up by the time you get the loan paid off you may need another vehicle. Glad I reached the point where I can pay cash and don't have to worry about that..... Another thought too, interest was deductible back in the 36 month loan days. Now it's not, making the 84 month loan even more painful.
84 months? I sold my previous car (94 Camry) private sale a few years ago after about 204 months of daily use. Last time I checked it's still on the road!
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cheese_breath
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Re: Cost of car compared to Gross Income

Post by cheese_breath »

uncertainty wrote:
cheese_breath wrote:
prudent wrote:
cheese_breath wrote:I never considered gross income. In my younger days before I could pay cash my criteria was whether I could afford the monthly payments or not.
We all did that, I'm sure. It was a lot less significant when car loans maxed out at 36 months. Now you can get 84 month car loans to keep the payment down, and I wonder how many people who take those loans realize how long they are upside down and the need for gap insurance.
Good point. But back when car loans were 36 months that's about how long a car lasted. (Well maybe a year or two more). Now most properly maintained cars easily last 84 months or more. I guess either way they have it set up by the time you get the loan paid off you may need another vehicle. Glad I reached the point where I can pay cash and don't have to worry about that..... Another thought too, interest was deductible back in the 36 month loan days. Now it's not, making the 84 month loan even more painful.
84 months? I sold my previous car (94 Camry) private sale a few years ago after about 204 months of daily use. Last time I checked it's still on the road!
My previous '93 Olds Cutlass Ciera is still on the road too. Best car I ever had. Hated to part with it in 2009 but just didn't feel comfortable depending on a 16 year old car for cross country travel.
The surest way to know the future is when it becomes the past.
uncertainty
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Re: Cost of car compared to Gross Income

Post by uncertainty »

cheese_breath wrote:
uncertainty wrote:
cheese_breath wrote:
prudent wrote:
cheese_breath wrote:I never considered gross income. In my younger days before I could pay cash my criteria was whether I could afford the monthly payments or not.
We all did that, I'm sure. It was a lot less significant when car loans maxed out at 36 months. Now you can get 84 month car loans to keep the payment down, and I wonder how many people who take those loans realize how long they are upside down and the need for gap insurance.
Good point. But back when car loans were 36 months that's about how long a car lasted. (Well maybe a year or two more). Now most properly maintained cars easily last 84 months or more. I guess either way they have it set up by the time you get the loan paid off you may need another vehicle. Glad I reached the point where I can pay cash and don't have to worry about that..... Another thought too, interest was deductible back in the 36 month loan days. Now it's not, making the 84 month loan even more painful.
84 months? I sold my previous car (94 Camry) private sale a few years ago after about 204 months of daily use. Last time I checked it's still on the road!
My previous '93 Olds Cutlass Ciera is still on the road too. Best car I ever had. Hated to part with it in 2009 but just didn't feel comfortable depending on a 16 year old car for cross country travel.
Maintenance does become an issue after a while, but if you have a good mechanic (or some know-how, which I do not) I'm sure most modern cars can make it 20 solid years.

I just purchased a car a few months ago and went through this exercise myself. I ended up spending 27.5% of my gross income, far more than most online guides would suggest. I'm planning on holding onto it long enough to make up for this instance of questionable frugality, but I feel like there's something to be said for spending money on a reliable car you enjoy driving.
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Re: Cost of car compared to Gross Income

Post by livesoft »

We have typically paid between 10% and 15% of our gross wages for our cars over the years. We have now bought 5 cars since college days 35 years ago and still drive 3 of them.
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Bacchus01
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Re: Cost of car compared to Gross Income

Post by Bacchus01 »

The average new car has to be around $30K now. So does that mean the average gross income is $300K? I don't think so.

Unfortunately cars are expensive.
JoeJohnson
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Re: Cost of car compared to Gross Income

Post by JoeJohnson »

Bacchus01 wrote:The average new car has to be around $30K now. So does that mean the average gross income is $300K? I don't think so.

Unfortunately cars are expensive.
No, it means that people spend on average 30k. Has nothing to do with their income!
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leonidas
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Re: Cost of car compared to Gross Income

Post by leonidas »

The last new car I bought was a 2007 Hyundai Sonata for about 18K which was about 10% of my salary back then. It was paid off in 2012 and I still own it.
In February of 2014 I bought my wife a 2012 Honda Pilot for about 27.5k which is about 12-13% of current gross. We are doing a 5 yr loan for that one. No more new cars for us since the new car prices seem excessive. I plan to purchase 1-2 year old low mileage cars/SUV from now on.
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Re: Cost of car compared to Gross Income

Post by fareastwarriors »

Bacchus01 wrote:The average new car has to be around $30K now. So does that mean the average gross income is $300K? I don't think so.

Unfortunately cars are expensive.

I actually think cars are relatively inexpensive.
reisner
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Re: Cost of car compared to Gross Income

Post by reisner »

25% for a 2014 Subaru Forester that we will keep for ten or fifteen years. We could have paid cash but the credit union was offering 1.9%, so why take money out of Vanguard?
cbr shadow
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Re: Cost of car compared to Gross Income

Post by cbr shadow »

I feel like a lot of people here are living in a bit of a dreamland based on some of the comments above..
$30k for the average car? That might be true in some places in the US, but definitely not typical. I guess it depends on how you take that statistic though.
I recently spent $9,000 on my 2007 Honda Civic with low miles (42k). There were cheaper cars on craigslist, but this one had some options that I liked (Sunroof, premium sound, steering wheel stereo controls) and was about 5% of our gross household income. This car looks great and is very reliable. I expect to get many years out of it.

What are some of the safety features that you think are worth spending the extra money on? The US has strict safety requirements, so I think we're splitting hairs with some of the extras like "Blind spot detection" and the new Mercedes that brakes for you if you come up on someone too fast on the highway. At what point are there diminishing returns? I guess it depends on where you draw the line.. if those features only came in cars that were $70k would you still argue that "The safety of my family is worth it"?



Here's an article I liked.
http://www.mrmoneymustache.com/2011/10/ ... commuting/
sambb
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Re: Cost of car compared to Gross Income

Post by sambb »

my car is <10% of my gross yearly income
acegolfer
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Re: Cost of car compared to Gross Income

Post by acegolfer »

about 10%

It's probably the lowest ratio that I spend on a car. But this car is my favorite.
Quickfoot
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Re: Cost of car compared to Gross Income

Post by Quickfoot »

It doesn't make sense to do the cost calculation this way, the purchase is not paid for all in one year it's typically paid over 3-6 years. We lease instead of buy and got a new Jetta TDI last year and a new Ford Edge this year, we'll keep both for 39 months. A far better calculation is cost of the vehicle per year divided by your income in that year.

If you do the calculation with a single year's income (like the OP requested) the TDI is 8% of one year's income and the Edge is 9% of one year's income but spread over the 39 month period of time we will be using / paying for the vehicles the Jetta is only 2.46% of our income and the Edge is 3% of our income. So combined we are paying about 5.46% of our gross income per month for our vehicles. Our rent is 11% of our gross income so we spent less than half our hosing costs on our cars, a number I'm comfortable with.
Last edited by Quickfoot on Fri Jun 20, 2014 10:47 am, edited 2 times in total.
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LAlearning
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Re: Cost of car compared to Gross Income

Post by LAlearning »

24%. Paid cash.

Had previous car for 12 years (car was 16yo total).
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schwarm
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Re: Cost of car compared to Gross Income

Post by schwarm »

cbr shadow wrote:I feel like a lot of people here are living in a bit of a dreamland based on some of the comments above..
$30k for the average car? That might be true in some places in the US, but definitely not typical. I guess it depends on how you take that statistic though.

Report: Average price of new car hits record in August ($31,252)

http://www.usatoday.com/story/money/car ... t/2761341/
nordlead
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Re: Cost of car compared to Gross Income

Post by nordlead »

Quickfoot wrote:It doesn't make sense to do the cost calculation this way, the purchase is not for all in one year it's typically paid over 3-6 years if the owner finances. We lease instead of buy and got a new Jetta TDI last year and a new Ford Edge this year, we'll keep both for 39 months. A far better calculation is cost of the vehicle per year divided by your income in a year.

If you do the calculation with a single year's income the TDI is 8% of one year's income and the Edge is 9% of one year's income but spread over the 39 month period of time we will be using / paying for the vehicles the Jetta is only 2.46% of our income and the Edge is 3% of our income. So combined we are paying about 5.46% of our gross income per month for our vehicles.
If I count it that way, the first car I bought (which I had for 7 years) was only 0.7% of my income. It was a 96 Accord, and I owned it from 10 years old to 17 years old.

For me, I try to keep the cost well under 10%, but not because I do a gross income calculation, but more because I start balking when the price of a car gets over $5k, but that is because I buy 10 year old cars.
Khanmots
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Re: Cost of car compared to Gross Income

Post by Khanmots »

When I came out of school I needed a replacement car (was driving parents old junker that needed lots of repairs)

When I got a job, I spent a while (months) hunting and negotiating and got a car I really loved for around 46% of my gross income.

Between raises and simple living I had it paid off in under 3 years and a 20% down-payment on a house in under 5. If I were to spend the same amount on a car purchase today it'd be around 25% of my gross income (today's).

The key isn't to buy a cheap car. The key is to live below your means. If cars aren't important to you then buy a cheap car. If they are... then skimp elsewhere. My house is full of secondhand furniture, I don't have cable, I do my lawn and most house repairs myself... but... I look forward to my commute because it's an excuse to drive my car.

Funnel your resources to what's important to you not what's important to society and live below your means. You'll be happy *and* able to retire :)
mikep
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Re: Cost of car compared to Gross Income

Post by mikep »

My last car purchase was over 100% of my income but I was in college working part-time. I would not say I overspent since 14 years later I still have the car and today's value is about 3% income. This is not a good metric to use.
Quickfoot
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Re: Cost of car compared to Gross Income

Post by Quickfoot »

If I count it that way, the first car I bought (which I had for 7 years) was only 0.7% of my income. It was a 96 Accord, and I owned it from 10 years old to 17 years old.
Remember you have to calculate it as expense / income over the period of time you are making payments, not the period of time you kept the car. Say a person makes 35K a year and they buy a 20K car with zero down for 72 months at 4% interest which means their monthly payment is $303 per month. The purchase price of the car is 57% of a single year's income but it's only 9.5% (10.4% counting interest) of their income over 72 months.

Keeping the car 10 years doesn't decrease the percentage of income spent on the car while payments are being made so keeping it longer doesn't make it more affordable while payments are being made so length of ownership should not factor into how much car you can afford. Keeping a car after you have paid it off does change things (mostly for lower income people) but that only becomes a factor once the car is paid off.
I'm planning to buy a car that will be 13% of our gross income. I don't think it's that much since we live below our means and keep our cars for a while.
Rather than worrying about what someone says that has no idea what your situation is take a hard look at your specific situation and make a decision for yourself. Someone that has credit card debt, bought too much house and has a stay at home mom is in a completely different situation than a two income earning house with no debt other than house and cars.

Banks generally cap your debt to income ratio at a max of 43% of your gross income (including mortgage payment). Add up all your monthly bills including rent, daycare, internet, etc and include the proposed monthly car payment, if you are over 43% you can't afford the car. If you are under 43% you probably can afford the car. If you want to be conservative limit yourself to 33 to 38% of your gross income instead of 43%.

If you finance the car for 48 months even that 13% car purchase only adds 3.25% to your yearly expenditures over those 48 months.
Jodi
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Re: Cost of car compared to Gross Income

Post by Jodi »

Ours was 7% paid in cash for a 4 year old Silverado for my husband. Couldn't talk him out of the pickup.

My last car cost 100% of my yearly med school stipend. Bought a new Hyundai Sante Fe. Great buy as I'm still driving it 11 years later with very minimal money ever spent on maintenance. Now my husband is begging me to get a new car since the hyundai doesn't have any traction control or ABS and I'm driving our baby around. Will be really hard to let go since it's been such a reliable and cheap car.

Jodi
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Re: Cost of car compared to Gross Income

Post by Spirit Rider »

As has been alluded to in some of the responses, the metric (purchase price vs. gross income) in the OP is wrong because the purchase price is not the only variable factor. While the purchase price is important, the length of time you will keep the vehicle is equally important.

I have always set about 20% of my gross as my limit, but I have always come in well below that. The relevant point is that I have always kept the cars 8-10 years.

So I might suggest a reasonable metric might be 1%-2% of gross income * the number of years you plan to keep the vehicle. So someone buying every 4 years can spend about 8% of their gross and someone buying every ten years can spend 20%.

You can quibble with the percentages, but the relevance of how long you keep the vehicle is highly relevant. Note: This should be based on net purchase price (purchase price minus trade-in or private sale) or net lease (monthly payments + due at signing.
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Re: Cost of car compared to Gross Income

Post by NorCalDad »

mikep wrote:My last car purchase was over 100% of my income but I was in college working part-time. I would not say I overspent since 14 years later I still have the car and today's value is about 3% income. This is not a good metric to use.
Similarly, my last car purchase was just two years after college graduation, and it represented 35% of my gross income. 13 years later, I am still driving that car because I still enjoy it, and its current value < 1% of household income.

If I'd had my current mindset, I probably wouldn't have bought a brand new car at the time. But looking back, I can't say it was the wrong decision because the car has served me well through many years and life changes.
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Re: Cost of car compared to Gross Income

Post by acegolfer »

Spirit Rider wrote:As has been alluded to in some of the responses, the metric (purchase price vs. gross income) in the OP is wrong because the purchase price is not the only variable factor. While the purchase price is important, the length of time you will keep the vehicle is equally important.

I have always set about 20% of my gross as my limit, but I have always come in well below that. The relevant point is that I have always kept the cars 8-10 years.

So I might suggest a reasonable metric might be 1%-2% of gross income * the number of years you plan to keep the vehicle. So someone buying every 4 years can spend about 8% of their gross and someone buying every ten years can spend 20%.

You can quibble with the percentages, but the relevance of how long you keep the vehicle is highly relevant. Note: This should be based on net purchase price (purchase price minus trade-in or private sale) or net lease (monthly payments + due at signing.
I understand what you are saying. But the metric (purchase price/gross income) that OP is asking (and also mentioned in the blog he quoted) is not meaningless and it may matter to him.
Crow Hunter
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Re: Cost of car compared to Gross Income

Post by Crow Hunter »

I bought my first vehicle in 1998 for $25,000 or so (1999 Black Z71 Silverado Step side I special ordered) and my yearly salary was roughly $43,000 (IIRC) but I was living at home with my parents at the time and working my first engineering job. I paid for 1/2 of it cash and I paid it off in 5 months because I hated paying interest.

I just sold that truck 3 weeks ago for $4,900 and it was still running fine.

I think if someone "needs" a "new" vehicle every 2-3 years then keeping it low cost is a good idea. However, if you are going to keep the vehicle for a long time and you buy decent quality that rule of thumb isn't as applicable.
bhramar
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Re: Cost of car compared to Gross Income

Post by bhramar »

We have one car that we bought in 2011 (2008 Nissan Sentra), paid $9900 in cash, around 6% of our gross income for 2011.
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Re: Cost of car compared to Gross Income

Post by tetractys »

My car, which is also the first new car I've ever bought, was a kind of investment. An exemption to the OP rule. It has allowed me to get to work at any hour on the moment, and without reliability and maintenance worries. In the beginning the payments were a killer though. -- Tet
Minot
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Re: Cost of car compared to Gross Income

Post by Minot »

My last vehicle purchase was a 2002 Sportsmobile Camper Van for $45627 plus tax, licence. My gross income for that year was $25372, so I paid 180% of GI, and I have no regrets.

The income was SS, a small pension, and dividends from my investments. The camper van was actually purchased with about 3/5's of an unplanned for inheritance. It's been worth every penny I paid for it.
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munemaker
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Re: Cost of car compared to Gross Income

Post by munemaker »

sunnyday wrote:I just read this by blogger Financial Samurai
A car is the #1 personal finance killer given it is an unnecessary luxury that rapidly depreciates over time. I suggest spending no more than 1/10th of your gross income on the purchase price of a car. If you make $50,000 a year, then buy a nice second-hand Honda Civic for $5,000. If you make $500,000 a year, that new 4 series BMW coupe is quite alright. And if you only make $20,000 a year, then consider taking public transportation or biking. The last thing the median earning household should do with their $51,000 income is buy the median priced $30,000 car after taxes.

I'm planning to buy a car that will be 13% of our gross income. I don't think it's that much since we live below our means and keep our cars for a while.

How much was your last car compared to your gross income?
The quoted advice is overly simplistic. Wealth, disposable income, insurance, car tax (in some states), how long you keep the car are all factors. Also, there is consideration of household income and how many cars the family owns. Maybe you have a car or cars for your kids who have little or no income; I remember having 5 cars when my kids both lived at home. Changing cars frequently also has extra costs due to high early-year depreciation, sales commissions and sales tax. You pay the commissions and taxes, but they provide no value to you; 100% waste.

I buy new or late model used and keep them until they only have salvage value (10+ years), so depreciation and resale value are not considerations for me.
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ClevrChico
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Re: Cost of car compared to Gross Income

Post by ClevrChico »

It's an interesting consideration. 16%, five years ago. I plan to own it fifteen more years. TCO of the car + maintenance/repairs should be well under 1%/gross income when I donate it to charity.

I'm sure there's a lot of people out there with that number closer to 40%. :shock:
ralph124cf
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Re: Cost of car compared to Gross Income

Post by ralph124cf »

Quickfoot wrote:
If I count it that way, the first car I bought (which I had for 7 years) was only 0.7% of my income. It was a 96 Accord, and I owned it from 10 years old to 17 years old.
Remember you have to calculate it as expense / income over the period of time you are making payments, not the period of time you kept the car. Say a person makes 35K a year and they buy a 20K car with zero down for 72 months at 4% interest which means their monthly payment is $303 per month. The purchase price of the car is 57% of a single year's income but it's only 9.5% (10.4% counting interest) of their income over 72 months.

Keeping the car 10 years doesn't decrease the percentage of income spent on the car while payments are being made so keeping it longer doesn't make it more affordable while payments are being made so length of ownership should not factor into how much car you can afford. Keeping a car after you have paid it off does change things (mostly for lower income people) but that only becomes a factor once the car is paid off.
I'm planning to buy a car that will be 13% of our gross income. I don't think it's that much since we live below our means and keep our cars for a while.
Rather than worrying about what someone says that has no idea what your situation is take a hard look at your specific situation and make a decision for yourself. Someone that has credit card debt, bought too much house and has a stay at home mom is in a completely different situation than a two income earning house with no debt other than house and cars.

Banks generally cap your debt to income ratio at a max of 43% of your gross income (including mortgage payment). Add up all your monthly bills including rent, daycare, internet, etc and include the proposed monthly car payment, if you are over 43% you can't afford the car. If you are under 43% you probably can afford the car. If you want to be conservative limit yourself to 33 to 38% of your gross income instead of 43%.

If you finance the car for 48 months even that 13% car purchase only adds 3.25% to your yearly expenditures over those 48 months.
I am going to have to disagree with some of your reasoning.

I would bet that a very significant percentage (30% - 50%) of the people on this forum no longer borrow to purchase vehicles. Taking the purchase price from a low yielding bank account forgoes a trivial amount of income.

It does not make sense to consider this as only an expense for that year, provided that you can be confident that you will not run short of cash.

It is difficult to figure out in advance the true yearly cost of ownership, but it is worthwhile to try. There are online calculators that can help with this. The biggest unknown is the years of ownership. Some might buy expecting to keep a car ten or fifteen years, but plans and circumstances change and they might sell after one or two years.

While I would never consider a vehicle an investment, neither would I consider the entire purchase cost as consumption in the year purchased. Properly, the yearly actual depreciation (based on age or miles) should be considered as consumption for inclusion in a budget, but this is hard to determine. To simplify, I use five year straight line depreciation to help me keep track of my financial status.

Ralph
acegolfer
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Re: Cost of car compared to Gross Income

Post by acegolfer »

ralph124cf wrote: While I would never consider a vehicle an investment, neither would I consider the entire purchase cost as consumption in the year purchased. Properly, the yearly actual depreciation (based on age or miles) should be considered as consumption for inclusion in a budget, but this is hard to determine. To simplify, I use five year straight line depreciation to help me keep track of my financial status.

Ralph
5 years is a good choice and IRS agrees with you.

automobile: 5 yrs MACRS depreciation
http://www.irs.gov/publications/p946/ch04.html

MACRS table
http://www.irs.gov/publications/p946/ar02.html

I'm not suggesting everyone should use MACRS to calculate the expense. We are not companies.
bobbun
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Re: Cost of car compared to Gross Income

Post by bobbun »

Gross income has relatively little to do with how much you should spend on a car. If someone makes a million a year, then spending 100k on a car is only 10% of income, and should be "affordable", but nonetheless most of that expense clearly falls under discretionary spending. On the other hand, someone making 20k a year might need to spend a substantial portion of their annual income in order to obtain a vehicle that will reliably get them to work every day.
Atgard
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Re: Cost of car compared to Gross Income

Post by Atgard »

Total cost of car ownership per year / income per year seems like a much more relevant number.

If TCO is too much to calculate, I guess you can just use purchase price / number of years you own it to get reasonably close.

There's a huge difference between someone leasing or buying a new car every 3 years, and someone keeping a car for 10-15 years. The latter can spend 5x as much on a car and end up in about the same place.

And, cars aren't a straight-line thing: someone commuting to work every day may need a nicer/more reliable/safer car than 10% of his $30,000 salary can afford. But the CEO probably doesn't really need to spend $10M a year on new cars.

In either event, it's the monthly or yearly cost people have to calculate in their budget and see what they can afford (and still have enough left over for savings, of course). Otherwise it ignores arguably the most important financial aspect of car ownership: how long do you keep it? I've paid less per month for my Corvette than most have for their Hondas because I've had it for 13 years and haven't made a payment in over a decade.
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telemark
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Re: Cost of car compared to Gross Income

Post by telemark »

I'd guess around 23% (don't remember my income in 2006) but I had a check from the other driver's insurance company to cover about half of that. My first car was a ten year old VW my parents gave me, and I drove that another seven years until the brake lines rusted out. I've never taken out a car loan.
ratesguy
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Re: Cost of car compared to Gross Income

Post by ratesguy »

I'm not sure cost to income or wealth is the right way to think about it. It's a value proposition.

I've never bought a new car even though for quite nice ones it would be a pretty small percentage. My income has gone up by many multiples over the years but what I like to pay for a car hasn't.

I never saw the value in a new car. I'm actually thinking about going from a two car family to a one car family. It's become a hassle just keeping up with the maintenance schedules, registrations, inspections, insurance in addition to those costs.

I can take a cab to the commuter train and come out ahead. Or better yet ride my bike.

I have extended family that have limited incomes but always nice new cars and hence they are not getting anywhere with saving.

Don't get me started about razor blades, no matter how much I make they are way too expensive. But I think my iPad Air was dirt cheap for what it does. To each his own I guess.
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Kenkat
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Re: Cost of car compared to Gross Income

Post by Kenkat »

it is an unnecessary luxury
Maybe if you live in Manhattan. Most places. a car is a necessity.

We spent around 25% of our income on a new vehicle this year. It replaced a 12 year old vehicle. We buy new and keep them for awhile.
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cheese_breath
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Re: Cost of car compared to Gross Income

Post by cheese_breath »

Atgard wrote:... And, cars aren't a straight-line thing: someone commuting to work every day may need a nicer/more reliable/safer car than 10% of his $30,000 salary can afford. But the CEO probably doesn't really need to spend $10M a year on new cars....
The CEO most likely gets a company car, maybe even chauffeured. But the CEO's spouse may find a way to spend $10M.

(Notice I made this gender neutral) :D
The surest way to know the future is when it becomes the past.
Quickfoot
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Re: Cost of car compared to Gross Income

Post by Quickfoot »

There's a huge difference between someone leasing or buying a new car every 3 years, and someone keeping a car for 10-15 years. The latter can spend 5x as much on a car and end up in about the same place.
No they can't, a person can afford a certain amount of car payment, buying or leasing doesn't impact the amount of car payment they can afford. In fact they can afford far less car buying because their payments will be much higher. AFTER the car is paid off they will start saving money but that has no impact whatsoever on how much car and what payment amount they can afford.

A person can afford a fixed amount per year, the more you make and the less debt you have the higher that amount is, keeping the car after it is paid off doesn't affect that number and doesn't increase the amount they can spend. A person that leases tends to pay only about 50-70% of what it would cost to buy the same vehicle over the same amount of time, they can either get a more expensive vehicle for the same monthly payment or they can have a lower monthly payment for the same vehicle.

For example our Edge with zero down costs us $400 a month to lease for 39 months, cost of ownership is $15,600 for the whole term which includes all maintenance. Financing the same vehicle for 39 months at 2% would be car payments of $983 per month, more than twice as much, even a 72 month loan at 2% is $547 per month. The person that finances for 39 months will pay $35,388 or $19,788 more than the person that leases for the same term.

Someone that buys a car and pays it off in 39 months has to keep it 48 more months (a total of 7 years) just to break even with the guy that's leasing. At that point the guy that's leasing has leased and returned another car, the leaser has paid less and is on new car number three while the buyer is stuck with a 7 year old car.

Also the guy doing a 39 month lease usually doesn't have to pay for maintenance, doesn't pay for tires (mileage is low enough they don't need to be replaced most the time), and doesn't have to worry about mechanical failure. You also only pay sales tax on the portion you lease instead of the entire vehicle which can be a good amount of savings.
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