What % of Gross Income Should You Spend on a New Car?

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YngInvstr
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What % of Gross Income Should You Spend on a New Car?

Post by YngInvstr » Tue Jun 11, 2013 8:28 am

Let's say gross household income is $85k, does 30% seem reasonable for a maximum price of a new car? That would put the car around $25.5k.

Let's put retirement funding, E-funds, and any other savings out of this equation and assume those are all on track. Also, let's exclude the argument of paying for the whole thing upfront vs financing.

Just curious what % of 1 year income do the members believe is reasonable for a car purchase. :D

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Re: What % of Gross Income Should You Spend on a New Car?

Post by jebmke » Tue Jun 11, 2013 8:32 am

At that level of income I'd be inclined to look for a lightly used small car in the range of $10-15K.
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Re: What % of Gross Income Should You Spend on a New Car?

Post by enderland » Tue Jun 11, 2013 8:34 am

This completely depends on how much the purchaser values the car.

I don't, at this point, really care what car I drive, so my percentage is about 5x lower than my brothers who both enjoy having a nice vehicle. My percentage is much more reasonable to me than their percentages are.

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Re: What % of Gross Income Should You Spend on a New Car?

Post by bungalow10 » Tue Jun 11, 2013 8:34 am

Is this a two-car household on that income? If so, then I think 30% is reasonable for TWO cars (each 15%, or one 20% and one 10%, etc).

I would not have 50k in cars when my income is only 85k/year. We make about double that and have never bought a car that was over $20k.
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Re: What % of Gross Income Should You Spend on a New Car?

Post by henry » Tue Jun 11, 2013 8:51 am

Here is a boglehead thread from last year that might be helpful.

Car to Gross income ratio - under 35.
http://www.bogleheads.org/forum/viewtop ... 11&t=95967

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Re: What % of Gross Income Should You Spend on a New Car?

Post by NorCalDad » Tue Jun 11, 2013 8:54 am

YngInvstr wrote:Let's put retirement funding, E-funds, and any other savings out of this equation and assume those are all on track. Also, let's exclude the argument of paying for the whole thing upfront vs financing.
In my opinion, if you earn $85,000 gross for a dual-earner household, buying a $25,500 car would throw your retirement funding off track. If it's $85,000 gross for a single-earner, it may be a different story.

To answer the question, I think 30% seems too high, but I also don't think a formula like this works well. I think it depends on each individual's unique financial demands. Your rent could be $2,000/month in a high COL area or $400/month if you live with roommates. You could live frugally everywhere else in your life but want to drive a nice car. You could have $100,000 in student loans or you could be debt-free.

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Re: What % of Gross Income Should You Spend on a New Car?

Post by Ged » Tue Jun 11, 2013 8:59 am

YngInvstr wrote: Let's put retirement funding, E-funds, and any other savings out of this equation and assume those are all on track. Also, let's exclude the argument of paying for the whole thing upfront vs financing.

Just curious what % of 1 year income do the members believe is reasonable for a car purchase. :D
I don't think percentage of income by itself is an appropriate measurement. Other factors are important too.

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Re: What % of Gross Income Should You Spend on a New Car?

Post by TomatoTomahto » Tue Jun 11, 2013 9:02 am

My wife really likes cars. She paid 10% of her gross for a car a while ago; I wouldn't have, but it's her income, and everything else is completely on track (house paid for a decade ago, tax-deferred maxed, 529s full to the brim, taxable in double comma territory).

A $25.5 car on $85 income? One of my kids might someday ask me that question. As a loving and indulgent parent, I would still have to respond: "are you kidding?"
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Re: What % of Gross Income Should You Spend on a New Car?

Post by scrabbler1 » Tue Jun 11, 2013 9:13 am

Ged wrote:
YngInvstr wrote: Let's put retirement funding, E-funds, and any other savings out of this equation and assume those are all on track. Also, let's exclude the argument of paying for the whole thing upfront vs financing.

Just curious what % of 1 year income do the members believe is reasonable for a car purchase. :D
I don't think percentage of income by itself is an appropriate measurement. Other factors are important too.
I agree, Ged. When I bought my last car (new) in 2007, I did not earn a lot of money from working so as a percent of gross income the car cost me about 30%. But my investment income that year was more than the cost of the car. Also, the car cost me about 5% of my total non-retirement portolio so it was little more than a blip on my financial radar screen. With market gains I had recovered the cost in 2 months.

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Re: What % of Gross Income Should You Spend on a New Car?

Post by TomatoTomahto » Tue Jun 11, 2013 9:15 am

scrabbler1 wrote:
Ged wrote:
YngInvstr wrote: Let's put retirement funding, E-funds, and any other savings out of this equation and assume those are all on track. Also, let's exclude the argument of paying for the whole thing upfront vs financing.

Just curious what % of 1 year income do the members believe is reasonable for a car purchase. :D
I don't think percentage of income by itself is an appropriate measurement. Other factors are important too.
I agree, Ged. When I bought my last car (new) in 2007, I did not earn a lot of money from working so as a percent of gross income the car cost me about 30%. But my investment income that year was more than the cost of the car. Also, the car cost me about 5% of my total non-retirement portolio so it was little more than a blip on my financial radar screen. With market gains I had recovered the cost in 2 months.
Why would you not count investment income as part of your gross income? OP didn't specify earned income only.
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Re: What % of Gross Income Should You Spend on a New Car?

Post by KyleAAA » Tue Jun 11, 2013 9:20 am

I would find it more useful to look at it from a cash flow perspective. Presumably, if you were making $85k you would have to take out a loan on a $25k vehicle unless you had a ton of money saved up. I would therefore say you probably shouldn't spend more than 10% of your take-home pay on a car payment and then drive it into the ground once it was paid off. If you have the net worth to pay cash, then you don't even need to ask this question.
Last edited by KyleAAA on Tue Jun 11, 2013 9:23 am, edited 1 time in total.

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Re: What % of Gross Income Should You Spend on a New Car?

Post by scrabbler1 » Tue Jun 11, 2013 9:22 am

TomatoTomahto wrote:
scrabbler1 wrote:
Ged wrote:
YngInvstr wrote: Let's put retirement funding, E-funds, and any other savings out of this equation and assume those are all on track. Also, let's exclude the argument of paying for the whole thing upfront vs financing.

Just curious what % of 1 year income do the members believe is reasonable for a car purchase. :D
I don't think percentage of income by itself is an appropriate measurement. Other factors are important too.
I agree, Ged. When I bought my last car (new) in 2007, I did not earn a lot of money from working so as a percent of gross income the car cost me about 30%. But my investment income that year was more than the cost of the car. Also, the car cost me about 5% of my total non-retirement portolio so it was little more than a blip on my financial radar screen. With market gains I had recovered the cost in 2 months.
Why would you not count investment income as part of your gross income? OP didn't specify earned income only.
The OP did specify to exclude savings so excluding income from savings (i.e. investment income) did not seem to be much of a stretch. But you could be right. Why don't we let the OP (ynginvstr) tell us? :happy

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Re: What % of Gross Income Should You Spend on a New Car?

Post by deanbrew » Tue Jun 11, 2013 9:29 am

The responses so far are FAR out of line with most people. The median household income in the country is about $53,000. The average new car price, according to NADA, is now $31,300, or 59 percent of MHI. I think it makes more sense to compare the car price to average income for one worker, as most households have one car per working adult. The average wage for full-time workers is about $48,000, so the average new car price is 65 percent of that figure.

Frankly, I think a person making $85k can afford far more than a $10k, $15k or $20k car, though a household making $85k likely has to budget for two cars. As others said, it's a matter of priorities and other living expenses.

FWIW, almost all of my cars have cost me between 25 and 30 percent of one year's gross income. But I've kept most of them for five to seven years, reducing the annual depreciation (which is the most important aspect of buying and selling cars) to a very manageable $1,300 to $2,000 per year. You're not going to do that if you trade cars every three years.
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Re: What % of Gross Income Should You Spend on a New Car?

Post by deanbrew » Tue Jun 11, 2013 9:33 am

TomatoTomahto wrote:My wife really likes cars. She paid 10% of her gross for a car a while ago; I wouldn't have, but it's her income, and everything else is completely on track (house paid for a decade ago, tax-deferred maxed, 529s full to the brim, taxable in double comma territory).
I do not want to drive a car that costs only 10 percent of my income. No way. If your investments are in line, I think that's crazy. Just my opinion, of course. And like I said, it really depends more on how long you keep your car and how much value it loses than the initial purchase price - though that counts, too, of course.
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Re: What % of Gross Income Should You Spend on a New Car?

Post by TomatoTomahto » Tue Jun 11, 2013 9:33 am

scrabbler1 wrote:The OP did specify to exclude savings so excluding income from savings (i.e. investment income) did not seem to be much of a stretch. But you could be right. Why don't we let the OP (ynginvstr) tell us? :happy
I took OP to mean that he didn't want to be lectured to about a Roth, EF, etc., but your interpretation might be right. :sharebeer
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Re: What % of Gross Income Should You Spend on a New Car?

Post by TomatoTomahto » Tue Jun 11, 2013 9:36 am

deanbrew wrote:The responses so far are FAR out of line with most people. The median household income in the country is about $53,000. The average new car price, according to NADA, is now $31,300, or 59 percent of MHI. I think it makes more sense to compare the car price to average income for one worker, as most households have one car per working adult. The average wage for full-time workers is about $48,000, so the average new car price is 65 percent of that
averages shmaverages. The average family in this country is broke. This forum hopes for a better outcome for its members.
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Re: What % of Gross Income Should You Spend on a New Car?

Post by TomatoTomahto » Tue Jun 11, 2013 9:38 am

deanbrew wrote:
TomatoTomahto wrote:My wife really likes cars. She paid 10% of her gross for a car a while ago; I wouldn't have, but it's her income, and everything else is completely on track (house paid for a decade ago, tax-deferred maxed, 529s full to the brim, taxable in double comma territory).
I do not want to drive a car that costs only 10 percent of my income. No way. If your investments are in line, I think that's crazy. Just my opinion, of course. And like I said, it really depends more on how long you keep your car and how much value it loses than the initial purchase price - though that counts, too, of course.
To paraphrase Groucho Marx's line: it's fine if you have enough of them. My wife's car is quite nice.
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Re: What % of Gross Income Should You Spend on a New Car?

Post by bungalow10 » Tue Jun 11, 2013 9:49 am

deanbrew wrote:The responses so far are FAR out of line with most people. The median household income in the country is about $53,000. The average new car price, according to NADA, is now $31,300, or 59 percent of MHI. I think it makes more sense to compare the car price to average income for one worker, as most households have one car per working adult. The average wage for full-time workers is about $48,000, so the average new car price is 65 percent of that figure.
Are you assuming that the average family only buys new cars?

What is the average price of ALL cars sold (new and used) in the US each year, that would be a more accurate comparison.
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Re: What % of Gross Income Should You Spend on a New Car?

Post by Valuethinker » Tue Jun 11, 2013 9:56 am

YngInvstr wrote:Let's say gross household income is $85k, does 30% seem reasonable for a maximum price of a new car? That would put the car around $25.5k.

Let's put retirement funding, E-funds, and any other savings out of this equation and assume those are all on track. Also, let's exclude the argument of paying for the whole thing upfront vs financing.

Just curious what % of 1 year income do the members believe is reasonable for a car purchase. :D
There really is no rule of thumb against *annual* salary. You might be thinking of mortgage, where 30% of gross income is a commonly used maximum--- but that is comparing a flow to a flow. Another rule of thumb is that a mortgage is max 3-4x annual income- that's certainly what British banks will lend you at a maximum.

Find the car you want, that you can reasonably afford.

Then look at it relative to your household savings and other financial need. If you do this on a lease or car loan you could put that into your monthly budget.

It varies so much. For a young couple with children, might need 2 cars, then the cost of auto transport is going to be a big household item. For an older couple it won't be-- you have to think of it in terms of holidays foregone.

Another way to look at it is the expected number of years you will own the car, and amortize the cost over those years (assume a limited residual value if any).

So a $40k car owned for 8 years costs you $5k pa. Then compare *that* to your annual income (using after tax dollars!). Probably 10% for all car costs (including gas and insurance) is what you want to aim for, with 15% a maximum. I think the average US household spends c. 5% of its budget on gas (but if you are in the market for say a $35k car, you should be spending less).

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Re: What % of Gross Income Should You Spend on a New Car?

Post by deanbrew » Tue Jun 11, 2013 10:16 am

bungalow10 wrote:
Are you assuming that the average family only buys new cars?

What is the average price of ALL cars sold (new and used) in the US each year, that would be a more accurate comparison.
Good point. The average used car sold for about $9k to $11k last year (figures are harder to come by than for new cars), based on what I could quickly find. I'll let someone else find the average price of all new and used transactions. I'm guessing it's in the $17-$20k range.
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Re: What % of Gross Income Should You Spend on a New Car?

Post by MnD » Tue Jun 11, 2013 10:25 am

We spend around 12% of gross household for each new car (maintain two at a time) plus ~3% each for two used cars for the kids. The used ones will be sold to the kids at trade-in when they graduate from college if they want them, otherwise sold at private party. I'd guess I'll get about 1.5% back for the used cars.

My brother was CFO of a huge credit union that served genuinely middle class customers (30K-70K type households) and virtually all of their car loan business was in financing used cars. I would not say it is appropriate to compare average incomes to typical new car prices to justify a high percentage of income new car purchase. people with average incomes don't generally buy new cars.

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Re: What % of Gross Income Should You Spend on a New Car?

Post by Grt2bOutdoors » Tue Jun 11, 2013 10:34 am

First new car I purchased was 50% of gross, I paid cash for it after having saved for it over the course of 4 years. My income then jumped over time. I still have that car, knock on wood. If you expect your income to grow and you save for it over a period of time, fine, but to borrow that much - absolutely not.
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Re: What % of Gross Income Should You Spend on a New Car?

Post by MathWizard » Tue Jun 11, 2013 11:24 am

There is new vs. used and financed vs. buy outright vs. leasing

I don't think that you can separate these issues.

I look at Total Cost of Ownership (insurance, reg., maintenance, cost of fuel, interest, and purchaseprice/years car is kept)
cost per year for the length of ownership.

I try to stay at 15% total for two cars. Cars are second only to houses in costs over your lifetime.

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Re: What % of Gross Income Should You Spend on a New Car?

Post by deanbrew » Tue Jun 11, 2013 11:25 am

MnD wrote:My brother was CFO of a huge credit union that served genuinely middle class customers (30K-70K type households) and virtually all of their car loan business was in financing used cars. I would not say it is appropriate to compare average incomes to typical new car prices to justify a high percentage of income new car purchase. people with average incomes don't generally buy new cars.
They don't? There will be over 15 million new cars sold this year, following a year when 12 million were sold. According to Edmunds, 27% of new cars are bought by buyers (not households) earning less than $50k. Another 40% are bought by buyers with incomes between $50-100k, with the remaining 33% bought by buyers earning over $100k.

Now, I'm not saying all, or even many, of these purchases are fiscally prudent. But expecting people to spend only 10 to 15% of annual income on a car is unrealistic - today or anytime since cars were invented. If one believes those percentages are realistic, where do I find new cars costing $5,000 to $10,000 (yes, I know there are used cars in that price range - no thanks). Even a $15,000 new car is pretty rare.

Again, to each his own. Prioritize as you wish. I do not want to drive a car costing 10% (or 12.5%) of my income. I'd rather buy a more expensive, nicer car, and keep it longer. Thankfully, cars are more dependable and reliable and last longer than ever before.

I think the more important aspects are financing and loan term. Stretching out a loan to four or five (or, gulp, six) years so you can afford a car means you don't have a big enough down payment and/or you need to buy a cheaper vehicle. But used and save money until you can afford to buy a more expensive car.

Your mileage may vary. :wink:
Last edited by deanbrew on Tue Jun 11, 2013 11:33 am, edited 1 time in total.
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Re: What % of Gross Income Should You Spend on a New Car?

Post by tyrion » Tue Jun 11, 2013 11:31 am

I agree with the general sentiment that your criteria is to simplistic and other factors can/may have strong weighting.

I bought my first (used) car at age 18 for 120% of my gross income. Obviously I had saved up for a few years.

We bought my wife a nice sensible new car when she was pregnant with our first child. Probably 35% of household gross at the time.

If you make a lot of money, you could easily buy a car for 5% of your gross income that most people could only dream of having.
If you make very little money you could buy a car for 50% of your gross income and consider it a wise choice (given other factors like keeping it 10 years, saving up, etc).


I have household income similar to yours. I consider a $25k car to be about right. But I would plan on it lasting 10+ years at that price tag. And it would need to be an economical car in terms of gas, maintenance, insurance, etc.

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Re: What % of Gross Income Should You Spend on a New Car?

Post by YngInvstr » Tue Jun 11, 2013 11:38 am

scrabbler1 wrote:
TomatoTomahto wrote:
scrabbler1 wrote:
Ged wrote:
YngInvstr wrote: Let's put retirement funding, E-funds, and any other savings out of this equation and assume those are all on track. Also, let's exclude the argument of paying for the whole thing upfront vs financing.

Just curious what % of 1 year income do the members believe is reasonable for a car purchase. :D
I don't think percentage of income by itself is an appropriate measurement. Other factors are important too.
I agree, Ged. When I bought my last car (new) in 2007, I did not earn a lot of money from working so as a percent of gross income the car cost me about 30%. But my investment income that year was more than the cost of the car. Also, the car cost me about 5% of my total non-retirement portolio so it was little more than a blip on my financial radar screen. With market gains I had recovered the cost in 2 months.
Why would you not count investment income as part of your gross income? OP didn't specify earned income only.
The OP did specify to exclude savings so excluding income from savings (i.e. investment income) did not seem to be much of a stretch. But you could be right. Why don't we let the OP (ynginvstr) tell us? :happy
Thanks for all the responses!

Let me clarify a little, the income amount I provided is not out current income (it is significantly higher), however, when my wife leaves her job to stay at home (next month) the income will be close to that. I am excluding all side income that I earn and any income from investments. I'd rather not count on those for this calculation.

I also fully intend on my income to rise over the next several years as I am just now starting to move up the ladder.

We do have another car (I purchased new in 2009) and it is fully paid for and very reliable.

We have e-fund savings and have been specifically setting $ aside for another car, so we could pay cash if we needed to, however with rates at almost 0, I'd rather finance.

I guess I'm just trying to get an idea of "am I going to be spending too much for a new car" or not. We do plan on keeping the car for a long time, especially if we purchase new. The other option is to buy used and spend about 16k- downside is we won't be able to get all of the cool new features that we can get with a new car- bluetooth, backup camera, etc...

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Re: What % of Gross Income Should You Spend on a New Car?

Post by YngInvstr » Tue Jun 11, 2013 11:41 am

MathWizard wrote:There is new vs. used and financed vs. buy outright vs. leasing

I don't think that you can separate these issues.

I look at Total Cost of Ownership (insurance, reg., maintenance, cost of fuel, interest, and purchaseprice/years car is kept)
cost per year for the length of ownership.

I try to stay at 15% total for two cars. Cars are second only to houses in costs over your lifetime.
Just to clarify, 15% of gross income per year on your total auto expenses?

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Re: What % of Gross Income Should You Spend on a New Car?

Post by damjam » Tue Jun 11, 2013 12:24 pm

For another data point, I'll give you my experience.

When in our 20s, we as a couple spent 18% of our gross on a new car (including tax, destination, etc.). We put 20% down and financed the rest with a 3 year loan. We paid the loan off early (not sure just how early) and kept the car for 12 years.
In our 30s when are income was much much higher (about 5x) we spent about 10% on a car and paid cash. We still have that car and it's 12 years old now.

I personally think 30% is too much. Way back then I though 18% was more than I wanted to spend but I wanted a decent car since I was commuting almost 100 miles a day at the time. The car was a Toyota Corolla.

I do think there is such thing as a minimally acceptable car for such things as safety, etc. I think a Corolla or Civic would fit the bill. But there I'm showing my age, since the Japanese cars were the best overall value when I was younger. I need to do some research as to what is the sweet spot now.

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Re: What % of Gross Income Should You Spend on a New Car?

Post by Clearly_Irrational » Tue Jun 11, 2013 12:34 pm

Buy the cheapest car you can get that meets your requirements:

1) Gets you from A to B
2) Sufficiently reliable
3) Reasonable gas milage
4) Doesn't cause social or work problems
5) You don't mind driving it

For most of my life that was used vehicles, however my last purchase was a new (at the time) 2008 Honda Civic Coupe. The used models held their value so well it only cost me about $1500 to move up to a new one so it seemed worth it.

I don't think the price can really be expressed as a function of gross wages very well. It's certainly not a simple linear percentage.

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Re: What % of Gross Income Should You Spend on a New Car?

Post by Hector » Tue Jun 11, 2013 1:39 pm

When I got the car that I am driving right now, I was starting out I did not have money and I bought the car around $6k with the help of my parents. That car has 200k miles on it now and we dont have any major issue with it. Wife did not have much money when she got her car that she is driving now. She paid around $5k-$6k for the car. That car has over 100k on it right now. We were not married at that time. We both paid cash for the car and did not want to get car loans. Both of these cars are still reliable and we would do the same thing when time would come to buy another car regardless our current income. Car is just a reliable transportation for us and we do not see the point in spending money on cars.

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Re: What % of Gross Income Should You Spend on a New Car?

Post by Rodc » Tue Jun 11, 2013 2:22 pm

Spend what you need to spend, not necessarily what you can afford to spend.

By your calculation I can buy a very nice German luxury car. I bought a base model Subaru Forester which I will keep for at least 10 yeas. It does everything I need and does it reasonably well. The difference between the two is 5 very nice 2-week vacations to Europe, or two plus years of State U for a child, or retiring 6 months early. Factor in a few cars over time and it grows in proportion.

Even when money was tighter I can't imagine why I would spend 30% of my income on a disposable item like a car. But if you do, for sure do not be someone who buys a new car every few years. That is a great path to a lifelong lack of money for more important items.

FWIW: I agree with others that percentage of gross income in and of itself is not a very good measure. 30% and buying new every 2 years is very different from 30% and keeping 15 years. How much in emergency savings? Retirement savings? College funds? All and more should be taken into account.
Last edited by Rodc on Tue Jun 11, 2013 2:33 pm, edited 1 time in total.
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Re: What % of Gross Income Should You Spend on a New Car?

Post by MnD » Tue Jun 11, 2013 2:29 pm

deanbrew wrote: Now, I'm not saying all, or even many, of these purchases are fiscally prudent. But expecting people to spend only 10 to 15% of annual income on a car is unrealistic - today or anytime since cars were invented. If one believes those percentages are realistic, where do I find new cars costing $5,000 to $10,000 (yes, I know there are used cars in that price range - no thanks). Even a $15,000 new car is pretty rare.

Again, to each his own. Prioritize as you wish. I do not want to drive a car costing 10% (or 12.5%) of my income. I'd rather buy a more expensive, nicer car, and keep it longer. Thankfully, cars are more dependable and reliable and last longer than ever before.
We buy (what I think at least) are new nice reliable cars and trucks for 10-15% of household income and keep them for 10-15 years. No BMW's or other luxury nameplates, but we have a lot of vehicle flexibility - middle-age mid-size 4WD pickup, older AWD wagon and near-new hybrid sedan currently. Nice also to have paid off our last auto loan in 1992. :happy
New vehicle buying is quite exciting on this rotation - cars change a lot when your rotation period is around 12 years! :mrgreen:

Rodc
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Re: What % of Gross Income Should You Spend on a New Car?

Post by Rodc » Tue Jun 11, 2013 2:35 pm

New vehicle buying is quite exciting on this rotation - cars change a lot when your rotation period is around 12 years!
Yep, even buying a base or near base level car is a nice bump up. :)
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

MnD
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Re: What % of Gross Income Should You Spend on a New Car?

Post by MnD » Tue Jun 11, 2013 2:53 pm

Rodc wrote:By your calculation I can buy a very nice German luxury car. I bought a base model Subaru Forester which I will keep for at least 10 yeas. It does everything I need and does it reasonably well. The difference between the two is 5 very nice 2-week vacations to Europe, or two plus years of State U for a child, or retiring 6 months early. Factor in a few cars over time and it grows in proportion.
Bingo!

MathWizard
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Re: What % of Gross Income Should You Spend on a New Car?

Post by MathWizard » Tue Jun 11, 2013 3:25 pm

YngInvstr wrote:
MathWizard wrote:There is new vs. used and financed vs. buy outright vs. leasing

I don't think that you can separate these issues.

I look at Total Cost of Ownership (insurance, reg., maintenance, cost of fuel, interest, and purchaseprice/years car is kept)
cost per year for the length of ownership.

I try to stay at 15% total for two cars. Cars are second only to houses in costs over your lifetime.
Just to clarify, 15% of gross income per year on your total auto expenses?

Yes, except I should have used "below" not "at".

This is for 2 cars (bought used) and using household income.

The purchase price of the two cars is only 3% of gross income when averaged over 8 years, which
is the minimum that I keep cars. We average under 10K miles per year per car.

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roymeo
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Re: What % of Gross Income Should You Spend on a New Car?

Post by roymeo » Tue Jun 11, 2013 3:29 pm

First: define the required criteria for your vehicle.
Second: see what options are available.
Third: narrow down and buy.
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John3754
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Re: What % of Gross Income Should You Spend on a New Car?

Post by John3754 » Tue Jun 11, 2013 4:04 pm

This is very subjective, and dependent on how much you value cars. Personally I view a car as a tool
to get me from point A to point B, not as a luxury item or status symbol or anything of that sort. Personally I wouldn't spend more than about $15,000 for a car, and my gross income is significantly more than $85k, but to each their own.

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Re: What % of Gross Income Should You Spend on a New Car?

Post by roymeo » Tue Jun 11, 2013 4:14 pm

John3754 wrote:This is very subjective, and dependent on how much you value cars. Personally I view a car as a tool
to get me from point A to point B, not as a luxury item or status symbol or anything of that sort. Personally I wouldn't spend more than about $15,000 for a car, and my gross income is significantly more than $85k, but to each their own.
I couldn't restrict someone (or myself) to a price range without first understanding the requirements.

Easy to park in San Francisco. Must fit in narrow garage. Must be able to tow at least 3500 pounds. Must have space for myself and briefcase. Must have space for 3 adults and 2 child seats. Must be hybrid so I can use the HOV lane as I'm too lazy to find someone to commute with. Must have AWD. Never leaves a 20 mile radius. Should cause people to flip me off when I pass. Should cause people to wave a pinky finger at me when I pass. Convertible. 1-ton hauling. etc.
The sewer system is a form of welfare state. | -- "Libra", Don DeLillo

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deanbrew
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Re: What % of Gross Income Should You Spend on a New Car?

Post by deanbrew » Tue Jun 11, 2013 9:48 pm

Such different answers one would see on an Edmunds or Car & Driver forum. They regularly make fun of people who view cars as just tools or appliances. Again, just different priorities and interests, IMO.
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Re: What % of Gross Income Should You Spend on a New Car?

Post by leonard » Wed Jun 12, 2013 7:19 pm

What percent of income should be spent on a hammer?

Determine the car you need, based on your usage. Then, determine how much you can afford to spend. Then, take the lower of those 2 numbers. There is simply no reason to buy more car - just cause you have a target percent of income. Kind of like paying $200 for a hammer - at a certain point - it doesn't drive nails any better.

Oh, and purchase a low mile, excellent shape vehicle from a private party and save even more.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.

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wander
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Re: What % of Gross Income Should You Spend on a New Car?

Post by wander » Wed Jun 12, 2013 7:33 pm

I don't use my income to determine how much I should spend on a new car. My rule of thumb is under $30k. Saying that, I haven't bought any car last 16 years since my car is still doing it job of taking me from places to places.

TRC
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Re: What % of Gross Income Should You Spend on a New Car?

Post by TRC » Wed Jun 12, 2013 7:55 pm

This is sort of a silly question, as it doesn't take into account debt and other expenses.

Pay cash, buy something within your means, and keep it for a long time.

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Frengo
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Re: What % of Gross Income Should You Spend on a New Car?

Post by Frengo » Wed Jun 12, 2013 8:05 pm

Choose any car that you fancy and then buy it used. [Snarky comment removed by admin LadyGeek]

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Re: What % of Gross Income Should You Spend on a New Car?

Post by investingdad » Thu Jun 13, 2013 7:05 am

The most expensive car we bought so far was my wife's CX-7 two years ago. The price was about 12.5% of our gross income.

I've only ever driven inexpensive vehicles as my daily drivers...Civic, Sentra, Sonata. The Sonata was a recent upgrade in size since we have two carseats in the back, but it only set me back about 15K new. I'm coming up on 40 this summer and made the decision to upgrade for my next vehicle. The hard part is going to be going to an automatic. All my cars have been stick shift. But I'd like my wife to be able to drive my car so that means an automatic.

I looked at a few different options and think I'll probably opt for a full loaded, V6 Nissan Altima. That's a pretty big step up for me. It's going to come in around 30K or so which may give me convulsions. But I can get just as much engine and more features than a base model 'luxury' brand for less money. So I guess that's about 15% of our gross. If you do the math, you can obviously figure out easily about what we make.

I decided I can probably afford something other than econoboxes for a change.

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Re: What % of Gross Income Should You Spend on a New Car?

Post by englishgirl » Thu Jun 13, 2013 7:48 am

I don't think car purchases should be decided upon as a percentage of income. I think you should figure out what impact to your cash flow buying that car will have, and then make sure you can afford that.

For example, if you buy a $10,000 car but want to replace your car every 3 years, you're spending as much per year as a $30,000 car that you choose to replace every 9 years.

As soon as I bought my last car, I started saving for my next one. I make a $200 "car payment" to myself every month into a separate savings account (this amount will probably float up a bit to keep pace with inflation). I kept the last car for about 8.5 years/100,000 miles. I'm going to try to keep this one for longer, probably at least 10 years - I'm aiming for 150,000 miles, but it's going to depend upon reliability at the end. And I like to buy new. Therefore I think it's reasonable to spend $25k. But my finances would be totally different if I was trying to finance the same car within 3-4 years, as my monthly payment would be a much higher percentage of my cash flow.
Sarah

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scubadiver
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Re: What % of Gross Income Should You Spend on a New Car?

Post by scubadiver » Thu Jun 13, 2013 7:41 pm

I spent a total of $41K on my and my wife's cars. We'll own them each for at least 10 years, barring unexpected circumstances. Let's say we pay $4K per year towards the purchase of a new vehicle. I'm the sole breadwinner and make ~$125K / year, so that's 3.2% of our annual income.

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mike143
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Re: What % of Gross Income Should You Spend on a New Car?

Post by mike143 » Thu Jun 13, 2013 7:55 pm

Buy a vehicle that will provide the lowest cost of ownership for your needs, anything beyond that is a splurge. I will be installing brakes on the rear of my 2004 Honda Accord LX with 168k this weekend. I would love to move into a new car but I don't need it and it doesn't make sense. If I ever splurge it will probably keep my current car, whatever it might be and buy a $10k Spec Miata to keep me entertained on the weekends. We bought a new 2012 Civic for my wife, which will eventually be passed down to me, when we need something larger for the future children. Next vehicle for her will most likely be a Mazda5 unless there is a better alternative at the time of need.

I have driven a Ferrari F430, Lamborghini Gallardo and Porsche 911 Carrera 4S, while all entertaining they are unnecessary.
Nothing is free, someone pays...You can't spend your way to financial freedom.

downshiftme
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Re: What % of Gross Income Should You Spend on a New Car?

Post by downshiftme » Thu Jun 13, 2013 8:04 pm

I think there are other factors to consider. I drive my cars for 15-20 years, so when it's time to get a new one (rarely) I'm willing to pay a bit more for it, as I intend to amortize that cost over a long useful life.

furwut
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Re: What % of Gross Income Should You Spend on a New Car?

Post by furwut » Thu Jun 13, 2013 8:09 pm

I'd pay as little as reasonable not as much as I could afford.

PS - I haven't owned a car in nearly 10 years.

BerkeleyChris
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Re: What % of Gross Income Should You Spend on a New Car?

Post by BerkeleyChris » Thu Jun 13, 2013 8:19 pm

instead of asking the question this way, how about "what is the annual percentage of household income i/we should be spending on auto transportation"

for me it looks like this:

Code: Select all

Category	%[
Gas & Fuel	1.63%
Auto Insurance	0.76%
Service & Parts	0.49%
Car Wash	0.15%
Other   0.1%
Parking	0.01%
Depreciation	1.61%
Total	4.75%

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