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How Much Should You Spend on a Car in Your 20s?

How much car can you afford? Find out how much you should spend on a car in your twenties and why — unless cars are your absolute passion — it’s probably way less than you think.

How much car can you afford? The better question: How much should you spend on a car?
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.

Happy driving.

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. Great post! I think that spending 10-15% of your annual income can get you a nice car, so if you have a very low annual income, then it’s time to increase it for you to get a more reliable car.

  2. I’m in the frugal 10% category—so is that range comprehensive of the purchase price, or per year cost (maintenance/repairs?)

  3. Oh, man, this is great. I make ~$50,000 (and my household income is about ~$80,000) and last year we got a 2 year old Hyundai for about $14,500. We did have to finance it, and got a loan at about 3%. As the biggest purchase of my life to date, it felt pretty extravagant. We also have an old beater pickup that was my high school gift from my parents and while it’s great to have when it works, I don’t know how many gray hairs that thing has given me by breaking down at the worst possible moment. I couldn’t live with another beater, even if it meant getting a loan. So it felt right to get a car that is safe, reliable, gets great gas mileage and hasn’t needed a single mechanic visit other than oil changes and inspection — despite the financial advice to NEVER EVER take out money for a depreciating asset. Hearing that we actually landed in the frugal-to-reasonable zone makes me feel better about shelling out to pay that loan every month.

  4. I’m an absolute car guy and I can still manage to spend no more than 20-30% of my income on cars.

    Consider this: I bought a 2001 BMW in 2009 for $9k. Over the course of five years I’ve spent around $4-5k in maintenance and repairs. For about $13-14k total, my car still cost less than a new Kia, looks very new and is a joy to drive. Not to mention, I bought it in cash so never had to deal with a car note.

    Understandably, those who don’t care much about cars and are looking for a practical solution would still buy a new Kia for around $16k or so and finance. But my point is that if you have around $15k to spend on a car, you have many options depending on how much you’d like to commit in keeping a car of your choice going. Additionally, you’d be taking a bigger hit dollar for dollar on a new Kia than you would on something older and ages well.

  5. I am a passionate car enthusiast, however, “new” cars are just a waste of money. I am satisfied going used or certified used with something that has low miles and is 1-3 years old. Sure, you get the extra security of knowing the car’s initial history, but that’s why certified-used vehicles are the way to go. You don’t get hit with depreciation and you still get something that is like new. The reality is that a car is no longer “new” the moment you’ve signed (or payed) your life away, the car becomes “used.” Usually financing is higher with used vehicles than with new, however mine has the same 1.9% as the last 2 new vehicles my partner purchased. I do have to disclose that we have family in high places at a dealership, so we were able to maximize our trades, but we still have to pay. We got one vehicle a couple years ago that I advised my partner not to get….but he wanted it very badly after wanting one for years before they ever came to the US. Luckily it wasn’t expensive and only involved financing about $7,000 due to the trade. Two weeks ago enough was enough and we traded it for something I was suggesting in the first place and we are absolutely happy. Between both our cars, we are financing about $17,000…which is about 18% of our income annual income, so nothing too crazy. My previous vehicle was a lousy 7% as I was still in grad school at the time….but my credit has improved vastly since then. No late payments, no defaults, etc. With 1.9% financing on both vehicles, you’d think we would be older, but we are still in our late twenties! We have many friends who have large aspirations with their vehicles, but all I’m looking for is something that is a little sporty so it accelerates well, something that I can fit other people and things, and something that is reliable. With my own personal vehicles, I was lucky enough that my first 2 were paid for by my parents…the first was a very old hand me down, the 2nd was 5 years old from the used lot and lasted me 5 years until engine issues through no fault of my own as I am a stickler for maintenance. The 3rd was out of necessity (and had a 5 speed!) and my current was amazing deal for a basically new vehicle….and is the newest I’ve had, not counting my partner’s vehicles.

  6. I bought a used car that was around 20% of my income. The great thing about a used car is that if you get a ‘ding’ in the grocery store parking lot; you care, but not as much. One other thing for folks to consider is maintenance costs. I bought a GM with relatively cheap parts and oil changes. Some of my friends own cars and their brakes and oil changes are more than my monthly car note.