Car % Rule

[LivingAlmostLarge]

I can't recall but on some car thread someone mentioned not buying a car more than 10 or 20% of your income. Is that for one car or two car combined? Is that the value of the car new or what you paid for if used?

Did anyone follow this rule? If the rule is 20% and the average income is $50k would that be $10k in cars? What can you afford for 2 cars? $5k each? Or $100k so you can afford $20k for 2 cars?

[greenskeeper]

pay cash

[dczech09]

Conventional wisdom is no more than 50% of your income.

So at a $50k income, that would be a $25k car. You never want more than half of your income being in cars. Otherwise you have too much money tied up.

Rule #1: Pay cash

Rule #2: If I cannot talk you out of a loan, then...

Assuming a $25k loan balance for 5 years at 6% APR, the payment would be about $483.32, which is about 11.60% of said person's monthly income.

So I would say that payments SHOULD be under 10% of income, but definitely should not be more than 12%.

IMO, it would be as follows:
0% (no payment)- excellent! This is where you want to be!
9.99% or less- the car payment is tolerable
10% to 11.99%- bordering tolerable and intolerable (depends on what other payments you got)
12% or more- SELL THE CAR!

[kork13]

If you must borrow, the rule of thumb is to take a loan for no more than 3 years with a monthly payment of no more than 10% of your monthly take home pay.

Here's what Steve normally puts out there as a general rule. And I would say that you can normally take that for each car you need...within reason. As long as you are comfortable with it and actually know how 2 payments will fit into your budget, I'd say you'll be fine.

My personal rule, I will never buy a car without at least a 50% down payment... preferably just pay in full upfront.

[disneysteve]

Here's what Steve normally puts out there as a general rule.

This is great. I don't even have to post anymore. Other people do it for me.

[dczech09]

This is great. I don't even have to post anymore. Other people do it for me.

Just like Dave Ramsey. He does not have to post on this forum- others do it for him lol

[disneysteve]

Just like Dave Ramsey. He does not have to post on this forum- others do it for him lol

Now if only I had Dave's money.

[LivingAlmostLarge]

Do most people follow it if they do borrow? The 10% rule? It feels so low. Not saying I want to, but how the heck do people even buy used $15-20k cars if they jointly make $100k? So at least $30k in payments? Assume it's a used car no less.

[kork13]

This is great. I don't even have to post anymore. Other people do it for me.

LOL sorry to steal your thunder Steve, I knew that you had the one ROT that you always offer, but didn't remember it, so I had to look it up myself, and I figured I'd save somebody else the trouble of searching as well. hahahahaha

Do most people follow it if they do borrow? The 10% rule? It feels so low. Not saying I want to, but how the heck do people even buy used $15-20k cars if they jointly make $100k? So at least $30k in payments? Assume it's a used car no less.

It's really not all that low... with a $50k/yr income, that's ~$4100/mo gross. So that allows you to have a $410/mo payment. Estimate a 6% loan rate, and even with $0 down, that will get you a $13k-$14k car. Add in a decent (20%-50%) downpayment, and you get to a $20k+ car no problem.

[LivingAlmostLarge]

Seeing a $400 payment makes me almost die and cringe.

[disneysteve]

Do most people follow it if they do borrow? The 10% rule?

Does It really matter what most people do? Most people are broke. Most people are living paycheck to paycheck. Most people are buried in debt and buying too much car is often a big part of that. You don't want to be like most people. I'm willing to bet that most people do not follow this rule. Ask around. See how many people you know have 3 year loans as opposed to 5 year loans or longer. I bet you won't find many.

[YLTL_Dan]

I can't recall but on some car thread someone mentioned not buying a car more than 10 or 20% of your income. Is that for one car or two car combined? Is that the value of the car new or what you paid for if used?

Did anyone follow this rule? If the rule is 20% and the average income is $50k would that be $10k in cars? What can you afford for 2 cars? $5k each? Or $100k so you can afford $20k for 2 cars?

I push the 20% rule on my blog, but I'm sure it's been around before me.

This is what I say in the article:

Take 20% of your gross annual income (before taxes, social security, etc) and that's what you can spend. Preferably, you should purchase with cash as well.

If you are in a relationship and you combine salaries, you should add up both incomes and divide by two. If you want, you can split the amount up differently (60/40, 70/30, etc), but make sure you don't surpass the 20%.

I learn a ton from this community so I'd like to hear what everyone else thinks about it... but I say if you're buying your cars with cash, you can use the 20% rule every year if you'd like. It's mostly just to give people an idea of what they should spend so they don't end up like I did when I bought at $28k while making $45k a year!

[disneysteve]

Dan, calculating off of gross can be troublesome because you can't spend your gross. You can only spend your net.

That said, it works out to be about the same most likely. I pulled my year-end numbers. 20% of gross would be $22,288. 10% of monthly net for 36 months would be $23,909. And that difference would include interest on the loan, so the results are nearly identical.

[kv968]

Now if only I had Dave's money.

Maybe you would Steve if you would just cut up those "evil" CC's

[YLTL_Dan]

Dan, calculating off of gross can be troublesome because you can't spend your gross. You can only spend your net.

That said, it works out to be about the same most likely. I pulled my year-end numbers. 20% of gross would be $22,288. 10% of monthly net for 36 months would be $23,909. And that difference would include interest on the loan, so the results are nearly identical.

Wow, that's interesting! Maybe I'll give myself too much credit and say great minds think a lot