% of income to pay for a car

[disneysteve]

In another thread, someone mentioned that Dave Ramsey says your car shouldn't cost more than 50% of your income. I was surprised as I think that is too much. The median income in this country is 46K and I don't think someone earning 46K should spend anywhere near 23K on a car. So I'm curious how much others have spent relative to their incomes.

I'd have to estimate our numbers as it's been a while. I got my car in 1998 and probably spent 14% of income. We got my wife's van in 2002 and that was about 19% of our income at the time. I realize it's been a few years, but both of those cars cost less than 23K and we earn well above median income.

[vsjhoc]

Agree, 50% seems absurd.

Re the median income figure of 46k: is that for an individual or total household??

[MarianneJ]

Yes, this doesn't sound right to me either. Maybe they misheard him and Ramsey really said 15%, not 50%. ???

[disneysteve]

Any DR fans who can help with this one? I'm glad to hear it isn't just me who thought that number was too high.

[disneysteve]

Originally Posted by vsjhoc

Re the median income figure of 46k: is that for an individual or total household??

That is the household figure as of 2005. I believe that is US Census Bureau data.

[Gruntina]

I am not sure about 50% but I can easily see at least 30% if you include the gas, auto insurance, license and oil changes/repairs fee. For some that can easily get up to 50% of their take home pay if they are not too careful.

[fairy74]

50% seems outrageous, but then I think any car that costs over 10K is a ripoff so I'm probably not the best judge in this arena, LOL!

[Gruntina]

Is it possible that Dave Ramsey us that figure for the entirety cost of owning and maintaining the car?

Forgot to add that earlier!

[autoxer]

I did that in 2003. I financed a car that cost half of my yearly income. Financed over 5 years @ 3.9% interest, the monthly loan payment consumed 10% of my income. It wasn't a stretch at all, but as I started dreaming about buying a house, my opinion has changed. I just sold that car in december '06.

Right now I own two cars free & clear, but their combined cost was less than 10% of my yearly income.

[disneysteve]

Originally Posted by Gruntina

Is it possible that Dave Ramsey us that figure for the entirety cost of owning and maintaining the car?

I guess that's possible, but even that sounds awfully high.

[poundwise]

For the record, Dave Ramsey says that the TOTAL value of your vehicles should not exceed 50% of your annual income amount.

I too, however, think this can become excessive when plugging in the numbers for many people, especially if you're counting two incomes and two cars.

However, to be fair, it should also be noted that Ramsey is including recreation vehicles, a third vehicle, a boat, etc. as well and that the 50% is the maximum, not the recommended.

Also, I would point out that Ramsey is also not talking about how much you PAY for a car (i.e. - financing or buying new and losing value immediately) -- that is -- this is not his guideline for buying a vehicle per se, especially in the case of financing as he would call on you to not buy a vehicle with a loan.

All in all, I am not really in favor of setting these artificial numbers. Several writers/gurus do it regarding savings, retirement, home buying, etc. They can serve as good guidelines but I find, in most cases, it is fairly easy to demonstrate how they do not always fit across the board.

[Ima saver]

Yes poundwise has it right, it was 50% value of your total income. I felt bad when I heard that because at the time our vehicles value was about 100% of our total income. However 2 of our vehicles go up in value every year.

[Squantum]

Originally Posted by poundwise

For the record, Dave Ramsey says that the TOTAL value of your vehicles should not exceed 50% of your annual income amount.

I too, however, think this can become excessive when plugging in the numbers for many people, especially if you're counting two incomes and two cars.

However, to be fair, it should also be noted that Ramsey is including recreation vehicles, a third vehicle, a boat, etc. as well and that the 50% is the maximum, not the recommended.

Also, I would point out that Ramsey is also not talking about how much you PAY for a car (i.e. - financing or buying new and losing value immediately) -- that is -- this is not his guideline for buying a vehicle per se, especially in the case of financing as he would call on you to not buy a vehicle with a loan.

All in all, I am not really in favor of setting these artificial numbers. Several writers/gurus do it regarding savings, retirement, home buying, etc. They can serve as good guidelines but I find, in most cases, it is fairly easy to demonstrate how they do not always fit across the board.

This still seems really high to me. I don't think people should have boats, RVs and third vehicles worth 50% of their annual household income.

I remember being astonished a few months ago to realize that the average new car these days costs probably $22,000 (maybe someone knows -- I have never bought a new car) and now to find out the average household income is in the $40s? Well I guess (some) people are following this rule after all (unconsciously most likely)? For me it would just be so unthinkable to spend 1/2 my income on a car! I really don't care about cars, though.

[poundwise]

After suggesting that guidelines are not always so good...


Here is a nice article on the subject along with some guidelines


http://www.sun-sentinel.com/business/yourmoneystory

[vsjhoc]

You mean I have to include the value of both my yachts in the 50% also?

[Ima saver]

all you have is two yachts? [Automated by GetSmile]

[tinapbeana]

303 payment
+75 insurance
+25 gas
+20 property taxes
-----------------------
423 per month (15.7% of my net, 9.9% of the household net)

does this mean i am above average for spending wisely or below average for spending small?

[Daylily]

I guess I'm not following the outrage over spending $25,000 on a new car if your income is $50,000. If you financed it over 4 years and ended up spending a total of $30,000 then you would also consider that the income over that 4 years would be $200,000. Over that period of time, you are far below 50%.

[disneysteve]

Originally Posted by Daylily

I guess I'm not following the outrage over spending $25,000 on a new car if your income is $50,000.

I wouldn't say I'm outraged. I just think it sounds like a lot. Although I think spending $25,000 on a car is quite a bit regardless. My rule of thumb up until now has been nothing over 20K and I've got a 6-figure income. No way would I ever buy a car that was anywhere close to 50% of my income, even though I have plenty of colleagues who do.

[fairy74]

I agree with Steve, it's really up to the individual, but it seems like a lot of money...everyone has their priorities...