Trying to answer the question: “How much should I spend on my car?” may be challenging. You may be inclined to ride something in style, which is possibly going to come with a huge budget. Or, when whispering to yourself about “fiscal responsibility,” you might be trying to find the most economical alternative. Fortunately, you can reach a fair balance. All that is left is knowing how to do it.
Before you proceed to the dealership, you must integrate the distance between realistic and unrealistic. When it comes to financing, there are lots of factors, issues and risks to study before doing anything. On platforms like ReviewsBird.com, you will find a number of takes and information on financing options which could come in handy.
Now, let’s take a look at the rules to consider when buying a car.
Rule 1: The 36{ae849c16258a7742524f263eacbbce70573cb403aeee30c8822680f72593932e} rule
The 36{ae849c16258a7742524f263eacbbce70573cb403aeee30c8822680f72593932e} rule dictates that you should not spend more than 36{ae849c16258a7742524f263eacbbce70573cb403aeee30c8822680f72593932e} of your total income on all your loans together, prior to taxation. That is, all your monthly liabilities combined (house, car, credit cards, student loans, etc.) must not be more than 36{ae849c16258a7742524f263eacbbce70573cb403aeee30c8822680f72593932e} of your pre-tax income.
If for instance, your monthly pre-tax income is $5,000 and your total loans amount to $1,200. 36{ae849c16258a7742524f263eacbbce70573cb403aeee30c8822680f72593932e} of $5000 (your monthly income) is $1,800. Therefore, you can spend up to $600 on car rentals or payment.
Rule 2: The 15{ae849c16258a7742524f263eacbbce70573cb403aeee30c8822680f72593932e} rule
This rule is a better one for car shoppers who are thrifty and wish to make a significant contribution to savings. It follows the same basis as the 35{ae849c16258a7742524f263eacbbce70573cb403aeee30c8822680f72593932e} rule, but with the percentage difference.
Using the same example of $5,000 monthly income, 15{ae849c16258a7742524f263eacbbce70573cb403aeee30c8822680f72593932e} of it is equivalent to $750. When you calculate the sum of all your debts, you subtract that number from $750. This gives you the amount you can spend on a car per month.
Rule 3: The 20{ae849c16258a7742524f263eacbbce70573cb403aeee30c8822680f72593932e} rule
Here, 20{ae849c16258a7742524f263eacbbce70573cb403aeee30c8822680f72593932e} of $5,000 is $1,000. So, after subtracting your debts and liabilities from $1,000, what you are left with is the permissible amount to spend on a car.
Rule 5: Half your annual salary
It is advised by some financial experts to set your car purchase budget at half your annual income. Using the previous example of earning $5,000 a month, that’s going to translate to a $60,000 annual income. You can spend up to $30,000 on your car purchase, according to this rule. This is the most preferred rule if you wish to buy a car and not rent one. However, your existing mortgage obligations, financing expenses or what you have saved for a down payment are not taken into consideration.
Getting a car: buying vs leasing
With the four rules aforementioned, depending on your income and savings, it is up to you to decide if you want to buy a car or rent it. If you are following any of the first 3 rules, renting might seem the better option. However, you can save up each monthly permissible amount until it is enough to purchase a car if no interrupting responsibilities occur. Leasing is generally less expensive, but you can build an asset with your own car.
In conclusion, how much you should spend on a car is dependent on your income and the car-buying rule of your choice.