Oh, cars. How we love to both love and hate you.
It’s easy to get caught up in the manufactured romance of the automobile. The new-car smell. The comforting feel of cool leather cocooning you as you grip the wheel and accelerate into a curve. The prowling glow of halogen headlights and distant thumps of bass as you approach a hot spot’s valet stand. The allure of cruising a busy strip on a warm summer evening.
That’s what car manufacturers want, of course.
For most of us, the reality goes something like this;
- You get your license towards the end of high school.
- If you’re lucky, your parents let you borrow their minivan every now and then. If you’re really lucky, your parents give you their old minivan or some equivalent beater that’s safe, slow and guaranteed to break down twice a month.
- At some point you either work your tail off to save cash for a used car of your own – or perhaps you get a job and just as quickly march into a car dealer to finance a brand new car, no money down.
Either way, you end up disillusioned with cars tout de suite.
If you buy your own $3,000, it still breaks down twice a month.
If you finance a new car, you live the dream for a few months before realizing that you’ll be making this crazy car payment for the next three and a half years and that you can’t afford anything else. (Oh yes, and by the way: That new car still needs oil changes, tires, and other maintenance).
What’s the answer? Is it possible to own a car that’s both reliable and affordable, if not even – dare we say it – sexy? (At least just a little bit?)
Like everything I write, it depends on your situation. Personal finance is personal.
But like many financial decisions, the key is to adjust your car-buying budget to your income. Remember that boring, tried and true advice: spend less than you earn? A car is a big expense. So it’s important that you get this decision right if you want to have any hope of living within your means and investing the difference.
Now here’s the thing: The most frugal people I know go out of their way to spend as little as possible on their car. It’s not just smart money; it’s a point of pride. They buy a used car, probably with cash. They drive their cars to 200,000 miles or beyond. They own one car for a family instead of two or three. And some really frugal ones don’t own a car at all.
So the real answer to the question: “How much should I spend on a car in my twenties?” – or anytime – is “As little as you can get away with.”
The frugal answer: 10 percent of your income
For many people I think that will be between 10 – 15 percent of your income. So if you earn $25K a year, that’s going to be a high-mileage used car for $2,500 – $3,000. If you earn $80K that’s a used car for around $10K or $12K. (Yes, this is the harsh reality of being good with money).
So here’s the thing: I’m not that frugal. I know that’s weird coming from a personal finance blogger, but I’ve always been honest about the fact that I’m more of a natural born spender than saver. I’ve checked myself in a lot of ways and become better at making frugal decisions, but I don’t have that driving passion for spending as little as I can at every turn (though I’m often jealous of those who do).
The compromise: 20 percent of your income
For me, if I’m going to buy a new car I want something that’s as safe and reliable as possible for my needs. Especially with a young family and two busy working parents, reliability is key – sending the car to the shop all the time would be a hassle. When the small pickup truck I was driving would no longer fit the car seats of my growing family, I found a three-year used Toyota Highlander with only 18,000 miles. It was a pretty great find because I got a like-new car for a used car price.
What I’m saying is: How much car you can afford is a different question than how much you should spend on a new car.
A loan officer will look at your income and credit report and say: “you can afford $400 a month”. Well, you could finance a new Porsche for $400 a month if they stretch the loan long enough, but you certainly shouldn’t spend that much on car.
If you take pride in your frugality, 10-15 percent for your income sounds about right. If you value the reliability a newer, more expensive car brings, then 20-25 percent is a good benchmark. This gets you $5,000 to $7,500 on a $25K salary. Still not a lot, but you’ll have more options. At a salary of $50K you can spend $10–15K which should be plenty for a basic used sedan under 100,000 miles.
Finally, if you really really love cars…
To all you personal finance blog regulars out there, this probably sounds good so far. If this is your first time here (and assuming you’ve read this far), you might be thinking, “These people are so cheap! That’s crazy. There’s no way I can get a car I want for that money!”
To you I would say: Ask yourself why you’re saying that. Is it because you’re a “car guy (or girl)” and you value your car most out of all your possessions? Or is it because you’ve simply been conditioned by our culture, advertising, and car salespeople to think that you should buy a brand new car or that there’s nothing wrong with spending a year’s worth of paychecks on a car?
If it’s the former – that you love cars – cool. There’s nothing wrong with intentional spending when you’re conscious of it and make sacrifices in other areas. By intentional spending I mean spending money – maybe more than other people would think is sensible – on things that interest you.
So if you value your car, I don’t see anything wrong with spending more than we recommend for most people, perhaps up to 50 percent of your income on a car. Chances are – as a car person – you’ll care for the car better, enjoy it more, and get more money for it when you sell it than the average car owner. Again, you just have to remember that because the car will be a large expense, you’ll have to be extra vigilant about other expenses.
If you’re not a car person, the takeaway is to think about why you think you need to spend so much on a car. It’s easy to think that way, I know – I worked at a car dealership once.
If someone walked and didn’t specify a budget, we’d sell them any car they wanted and only after the fact worry about whether they could afford it. And by “afford”, of course, I mean that they could get financing approved. In some cases I’m sure they sold cars that cost more than the customer earned in a year.
We didn’t care about the car buyer’s actual income or budget; it wasn’t the dealer’s business. If a customer can’t afford a car, the bank send a repo man and gets its car back. The system looks out for everyone else but you. You can start by looking out for yourself by figuring out how much you should pay for a new car and sticking to your guns.