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How much car can you really afford?

Not to put a damper on your dream of having a flashy sports car, but there are a number of factors that will limit your choice.

By MSN Money Partner Mar 15, 2012 9:14AM

This post comes from Rob Berger at partner blog The Dough Roller.


The Dough Roller on MSN MoneyI've been talking to my children about finances a lot lately. As they near high school graduation -- one senior, one junior -- I grow more and more concerned about their ability to handle money. And last week the talk centered on how much you should spend on a car.


Why am I worried? Well, my daughter wants to buy a black Cadillac Escalade and my son talks a lot about a Lamborghini. Now, this could well be just teenage talk, much of which makes absolutely no sense anyway, but I'm still worried. And this got me to thinking about the cost of buying and owning a car.


Buying a car should be a calculated decision. It's a major purchase and for many it's the next biggest purchase to buying a home. There's much more to consider than just the cost of the vehicle and the monthly payment. Other considerations should include the cost of car insurance, gas, and regular maintenance. When you update your vehicle, whether it's brand new or just new to you, it's going to mean higher insurance rates. If you're buying used, you can probably expect there will be maintenance costs sooner rather than later.


But that still leaves unanswered the critical question: How much car can (or should) you afford? (Post continues below.)

Rules of thumb

The general rule of thumb is that you should not spend more than 20% of your monthly take-home pay on cars, according to So if your after-tax monthly income is $4,000, your total cost of car ownership for ALL of the cars you own should not exceed $800 under this rule. I don't want to put a damper on your dream of having a flashy sports car, but to be clear, this percentage includes the cost of all those other things mentioned above -- insurance, gas, maintenance.


Dave Ramsey takes a balance-sheet approach. Rather than looking at monthly transportation costs, Dave recommends buying cars that cost no more than 50% of your annual income. So if you make $50,000 a year, you should not spend more than $25,000 for a car(s).


The Dough Roller approach

Here's my rule of thumb: Pay cash. Now, I can hear what you're saying. You just graduated from college and have a great job making $60,000 a year. But if you pay cash, you'll be lucky to drive to work in a car that costs $2,000. Everybody else will be driving new cars that cost "just" 60 "easy" payments of $500. So you want me to drive a sled (as they used to say in my day)? Yep.


DR, is that what you did when you got out of school? Nope. And I regret it. Do everything in your power to pay cash for your car. And if that means driving around in a car that doesn't compare well with the cars your co-workers and friends are driving, so be it. That's the advice I'll give my children. And that's the advice I wish I had followed.


Recognizing that you may not follow my advice, here are some online car calculators to help you decide how much car you can afford. You plug in a few pieces of information and the calculator tells you what you can afford.

Tips for staying within your budget

Now that we’ve faced the cold, hard truth that buying a car is more about what you can afford and less about what you wish you could have, here are some tips to stay within your budget:


Arrange financing in advance (assuming your ignore my advice). You don't have to rely on the dealership to get you financing. You can compare rates of banks, credit unions and loan organizations before you even head to the dealership. Find out ahead of time what you can get approved for and that way you can keep the financing out of the negotiation process. Dealerships often offer very attractive financing rates, but not everybody qualifies for those rates. If you don't qualify, you might end up getting locked into a loan with a higher rate if you rely on the dealership for financing.


Also, once you have a car loan, your goal should be to get it paid off as quickly as possible. One thing to consider is whether you can save money by refinancing your auto loan.


Avoid paying for extras. Don't go for the extra fees and services offered by car salespeople. Often you will be offered things like rustproofing, fabric protection, paint protectant, etc. Try to determine ahead of time if these are things you really need so that when under pressure you don't make a rash decision.


Don't pay sticker price. There is always room to negotiate, so don't assume the sticker price is what you have to pay for the vehicle. This is why you should do some research before taking your test drive. You want to find out what the dealer paid for the vehicle and start your negotiations from there. A reasonable price to start negotiations is 1% to 5% over what the dealer paid, depending on the demand for the vehicle.


Negotiate, negotiate, and negotiate more. Once you have your heart set on a vehicle (that's within your budget) be sure to negotiate each point separately. Salespeople like to wrap it all into one big negotiation: the financing, trade-in value, monthly payment, etc. Break down each of those pieces of the deal and negotiate them each as individual factors.


As a final tip, I'd suggest you begin the negotiation long before you enter the showroom. Get prices via fax, phone, or email. It makes comparing offers very easy, and you avoid hours in the showroom while the salesperson runs back and forth between you and the "manager," a process specifically designed to put you at a big disadvantage in the negotiation process.


More on The Dough Roller and MSN Money:

Jan 25, 2014 11:50PM
I have to disagree about buying it upfront with cash.  Today, you can buy vehicles with 0.9% APR.  That's free money that you can invest for 5 years and earn on the average of 7-10%(conservative) in my opinion.  
Sep 25, 2013 6:58AM
I was always told no more than 25% of you annual income.  50% is way too high.
Jun 26, 2014 1:43PM
Just to make a counterpoint to the author's point about driving a "sled" to work while your coworkers drive new cars to the office. Sometimes this can be perceived as you being "less successful" or poor, and this could affect potential for advancements in the office. It's just a fact of American society that you are judged, in part, by the car you drive.
Feb 27, 2014 11:53AM
Feb 27, 2014 11:52AM
To reply to the other, I don't think 50% is too high, but I do think that the lower you can make it, the better. At the end of the day, I'd rather pay less than more! I found this interesting article on the subject:
Mar 16, 2012 2:43AM

If you are convicted of moving traffic violations or of causing an accident, your auto insurance premiums will likely go up, no matter what your age. Drivers with clean records no tickets, no accidents pay the lowest rates at "Clearance Auto" website

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