TyroneBiggums

What are your general guidelines on how much money to spend on a car? Do you tend to find the car you want, and make it work with your budget? Or do you prefer to figure out how much to spend, and then look for cars at that point?

These are some of the various spending guidelines I've heard:

- no more than 10% of your monthly net income should go towards a car loan

- if you can't pay for it in cash, you can't afford it

- total value of your cars should be no more than 50% of your annual household gross salary

Just curious what others here think.

doopstr

This is hard for a young person to grasp if they don't understand money. I was in this boat once. I am all for this policy now though. Although when you are 21 I think the ladies are more impressed with BMW than Honda. They usually don't care about how much debt you are carrying.

Ah, now let's take a look at this. Dedicate half a years gross salary to a car? After taxes, what's left for you?

Mr Marco

If I followed those rules I'd be driving this POS:



House=$1950mo
Car=$700mo

probmxstyle

I followed this rule. With my new car purchase, my monthly payment is 8% of my monthly net take home. I waited until I had enough money to put down to make my payment less than 10%.

nspec_ya4

iTrader: (38)

Following common rules just makes you an average Joe. Don't be an average Joe.
Sit down and write down your expenses and figure out the numbers yourself.

I usually figure out the car I want exactly and then look for a good deal on one.
my philosophy is very complicated when it comes to cars.

Don't know why people call em investments, they're an expense.
Its like trying to figure out if u wanna stay at a shit hole hotel or luxury one when u go out of town. Either ways, ur gonna spend the money on it

SuperTrooper169

iTrader: (2)

I completely agree with your first statement, cars are definitely not investments unless of course you're buying a collector car and putting it away somewhere. I disagree with your second statement though. Deciding on a hotel to stay in, whether it be for a day or a week, is a little different than a 3, 4 or 5 year commitment.

I personally narrow down my budget to a certain amount depending on what I feel comfortable paying a month while allowing me to live the life I like to live (entertainment, eating out, toys, etc) as well as providing for my family (mortgage, daycare, food, etc) and saving for the future (savings, 401k, etc), then I look around online to see what I can get in that price range. Typically for me I end up actually spending less than I originally intend, but that's just me, most people go above their original budget IMO.

achenator

Daily cars I try to pay cash for (my FX4), or finance with a huge amount down for a very short term-1 year (my wifes QX56). My GT-R I financed for a good rate with a good amount down to never be anywhere near upside down. It doesn't make good financial sense to pay interest on a toy but I don't really care. I figure if life takes a downturn the toys can go first. Cars are more than just a transportation expense for me. Totally emotional. Many of my partners at work have $1mm homes, hunting camps, huge RV's, 38ft sportfishers etc. I don't like any of that stuff but I love my rides.

pits200

Everyone has vices and particular weaknesses when it comes to certain things in life.

Cars are my weak spot. Of course I could be saving the extra money for a side business or to retire 1 year earlier, etc..

But if you can afford to have a roof over your head, save money, provide all other necessities, I don't see why it's a problem to splurge on certain things.

Also, putting down a large chunk of cash on a car isn't always the best thing. If you are diligent enough to save 10-20k for a car cash, that means you probably have an 800 credit score and that means you probably can get a 2.5% auto loan. Once you can get a loan at 3% and under, I'd rather keep that 10-20k down payment and use it for a financial investment.

Setting guidelines isn't something you have to draw a hard line with, I use them as starting points and go from there.

fuzzy02CLS

iTrader: (2)

Or close to it. I will take out a small loan that I can pay down in a year. Like my srt8. Will be paid for by December.

pits200

$20k in cash

1.) Put towards mortgage, unless you have it paid off, depending if you haven't refied and have a 5% loan.

2.) Put into blue chip investment, regardless of the market, you know Apple is going to get you at least 5-7% per year.

3.) Create Roth IRA account if you don't have one already, even though you can't put 10k in, at least 5K should go towards this per year.

4.) Have at least 8 months of living expenses in liquid assets because you never know.

5.) Put large down payment on a car/pay down car payment.

I will take out the longest term car loan I can get if the % is not a slap to the face and is low enough and the bank is desperate enough. Then when times are good in your life, make extra payments and if you lose a job or have hardships, you can still fall back to the cheaper/longer term car payments till times get better.

Paying down low interest debt is not always the best idea.

nspec_ya4

iTrader: (38)

Agreed about no down payment. I'd rather save that money and use it for something else.
eventually ur gonna end up paying it, but it's more of a personal and the right choice. I know a shit ton of finance managers and every single one of them agrees with that statement.
You should put that money away for a bad time.

(Given you have good credit and get a good rate)

juniorbean

iTrader: (5)

This.

We typically take out a small loan to keep the credit score high... but it's usually very small and very little interest is paid. But yeah, if we couldn't just write a check for it... we don't buy it.

fuzzy02CLS

iTrader: (2)

I just can't agree with that. Any debt in today's economy is bad.

Although if it collapses, debts will get wiped out anyway.

pits200

Low interest is the key word here.

I have outstanding student loans that are at 1.5%, I hear all these stories online about people who paid off their student loan debts in 32 days or some B.S. It's hilarious when the praise these people as financial gurus for doing this. To be honest, its pretty dumb to sink precious saved cash into these loans unless you have everything else in life perfectly situated financially.

The point here is, how can you make your money work for you. If you get any loan under 2%, it is ridiculous to pay this off early. You should be using that excess cash for so many other things in life. Obviously this is dependent on your age and financial situation.

But for a middle class family in their 30s who need to fund a 401k, roth ira, 529 plan, save for an emergency and just a ton of other needs before sinking every dime into paying off low interest debt.

Now lets say Best Buy offers you 0% for 24 months on a tv, do you consider this debt? So would you choose to wait 24 months and save $100 per month then buy the tv or buy the tv then pay $100 for 24 months.

I gotta admit, the American mentality is kind of scaring me, you guys probably also think it's a great thing to get a huge tax refund, lol.

nspec_ya4

iTrader: (38)

Dont know whats the catch on tax refund part but agree on everything else, for the most part. your idea is on a very long term, structured plan so in theory it works perfectly fine.

phee

iTrader: (5)

Cash.

fuzzy02CLS

iTrader: (2)

I wouldn't buy a TV on a CC. It's the idea of I have to pay something & what happens if I loose my job or get into some mess that I can't work or some other unknown then I still have this debt to pay off. I rather have the piece of mind in saving the $ up & paying cash rather then the have it now pay it later mentality.

I agree with the tax refunds. I work it out so I pay about $200 each year. Sometimes I break even.

Mr Marco

Sooo easy to cut out the extra expenses when you are single. However, I've found that when you are married the little things add up.

Paper towels and toilet paper for example. If your single all you need is the paper sack that your groceries (beer & ice-cream) came in. But, nooooo, when your married you need to budget for things "salon/chop-shop time." (WTF is that?)
Did you know they make special shampoo just for colored hair? And don't forget about the furniture...Apparently we need a new "bedroom set." Do you know how expensive a bedroom set is? Because I don't, I've never shopped for a "bedroom set." I brought a really nice maple framed bed I bought in 1997 for $600 into the marriage, but that doesn't match either of our dressers...

Pete2010

Yup - exactly - Got a loan on my TL for the credit score, made larger payments than expected to pay it off in 1.5 years instead of 5. Now the money I was spending on monthly car payments goes right into the bank.

pits200

I guess the way I'm looking at it is if you use the cheap/ no interest, you're keeping that money in your pocket if you do lose your job.

So lets say worst case scenario that you lose your job, what are your necessities?

1.) House
2.) Family/Food
3535.) Paying off BB tv.

If you have the cash available that you didn't spend on the cheap/no a few months.

Now the reason people feel this method never works is because they lack the self control to keep that chunk of cash for a rainy day.(Not saying that is your case, just explaining)

If you saved that cash, you can pay the important bills and let the tv loan/car loan default for at least a few months and still have a roof over your head. This is obviously extreme circumstances, I know no one wants to default.

pits200

But you're right in that you took out a 5 year loan and left the payments up to you. If something happened 6 months into making those big payments, you could fall back onto the smaller 5 year payments till things got better.

This is the method I agree with.

fuzzy02CLS

iTrader: (2)

Exactly.....From someone who wrecked their credit at 20( the $ amount was less then $7K, but across 6 accounts & on your record for 7 years) & didn't get a decent credit score again till I was 30. No way I would let that debt ruing me again.

oo7spy

OP, I would do a budget. Take a look at all of your expenses and income over at least a 6 month period, leave enough buffer to save at least 10%, and you should come up with a good idea of what you can afford.


To the rest of the replys, LOL at "pay for it with cash". Two things wrong here, and I see that everyone saying that except Phee is over 30 years old. 1) The cost of living today proportional to the average wage is not the same now as it was in 1990. 2) The interest rates today are no where near what they were in 1990. That ship sailed a while ago, and it took the 3k mile oil change with it.

As a result of #1, a college student cannot save enough to support themselves and pay for a car in full that will not cost them more in maintenance and repairs than a car payment would. I worked full time as a student with a paid off car and no tuition, and I could not save over $1000. Shit, the cost of gas alone is 4x what it was in 1999.

As a result of #2, the cost of interest toady (assuming the completely realistic ~2% rates) is near negligible when the influence of inflation is taken into account. Like pits said, take your savings and invest it somewhere. A car is not an investment.

pits200

I completely respect that, better to learn the lesson early on than too late.

I also ran up some debt in college, boy does it suck getting those collection calls knowing that working 15 hours a week at Best Buy isn't going to cut it.

Oh well, you live and learn.

MeehowsBRZ

If I can't write a check for it then I can't afford it. Sure, I COULD be driving a BMW or brand new Camaro SS but even if I happen to lose my job in this economy no one is going to come take my car away because I defaulted on payments.

pits200

But they can come take your house away because you don't have that 10k in the bank anymore because you spent it on your car.

NwTSXmt

on topic: OP only you can determine what you can afford.

off topic:

CC is like free money...just zero out your balance monthly...heck my cc sends me a check once a quarter...I havent paid interest on a CC in about 8 years..

phee

iTrader: (5)

I finance things I can pay cash for. just to help my credit as I rebuild it. but I must have the cash to buy it

Pete2010

Most definitely - I've paid off my cc every month for the last 10 years or so - have sooo many CC miles/points that i've used to buy all kinds of stuff.

vas25tl

I use my CC for business travel and everything my wife and I purchase, pay it off every month and enjoy a great check every once in a while

As far as the car goes - For years, I was fine with anything under $300/month no matter what my salary has been. Now that I make more money, I like to pay cash and drive paid off cars. Something about that monthly payment...

justnspace

iTrader: (1)

for 801 credit score!

/boasting.

huy33

Dang, I've been wanting to get to the 800 mark. Between the 3 bureaus, I'm between 786 and 795.

SuperTrooper169

iTrader: (2)

Wow, I guess I'm the only smuch on AcuraZine that makes a monthly payment and doesn't pay my car off early.

speedemon90

I have yet to have a car payment, but just from reading this, I wanna say i agree with pits for a couple reasons and this is something i can see me doing in the future.

Most of you guys are saying if you dont have the cash dont buy it, and you take out a 1 year loan to build credit.

But like pits is saying, if you can get a very low apr on a car, why would you not take out the full term. Sure go and pay it off quicker if you have extra money to do so, but you can also take that extra money and put it into actual investments so that money is compounded. Although this has many variables as paying for a 20k car and a 50k car you will have more interest.

I think for each car and apr you get, see how much extra you would be paying if you took the full 5 years to pay it. If it isnt that much then do it, and lets say you feel its a lot, still do it and just pay it off quicker, so you have that safety gap if other financial things come up and you need to spend emergency money for something.

No point in paying cash cause ALL that money is gone right away. What if you get into an accident and have huge medical bills? You just lost a lot of money saved up. Instead if you just put a down and went for the five year route you will have money to pay those bills and you may still be able to manage the car bills as well.

Its good that you dont consider a car if you cant pay it in full, but I'd still take out a long loan, under the assumption you get a low %, if you dont then consider shorter term or bigger down.

pits200

Good man, A+ in Advanced Econ.

Main reason this idea fails is when people spend that excess money in other places instead of using it wisely when taking extended terms. But if you have discipline this method is tried and true for middle to upper middle class lifestyle.

speedemon90

Only took 2 econ classes in college engineer here, but i love finances. I read up on my own

fuzzy02CLS

iTrader: (2)

I would hope one would not just have $ saved for a car & they would have an emergency fund if they needed it.

murph145

Just spend whatever you feel comfortable with. To me my caris more than just transportation it's my hobby so I didn't mind spending more than typical to have my car since its fun to mod. Obviously write down your income minus your bills and see what you have left .... Cars are never a good investment but u can limit the amount u spend by being smart

Aman

Never had a car payment, but I would rather pay cash than take a loan. I think it's a nice feeling knowing your car is 100% yours, with no asterisks.

Carraway

It depends on the situation and circumstances. I'm in a good financial position now and can pay cash for about any car, but that wasn't always the case, especially when I learned how expensive it is to need a surgery and not be covered (I was a "contractor").

I think people just need to be smart about it. Like many people here, I like cars and driving, so I'll look for something more than a commuter. The trick is not to overextend or to see a car as a gateway to some completely different life rather than an element of the current one. If someone sees a car as becoming a catalyst for much higher income, s/he'll likely be disappointed. (There are exceptions, sure, but in general, no).

So, my formula (as I write this at 5AM and subject to change) is:

- Have a certain amount of cash quickly available. What that amount is depends on the person, but having a sizable emergency fund cuts down the chances of life throwing something at you for which you're financially unprepared.

- Make sure debts, necessities, responsibilities, etc. will be handled with enough saved to build investments and the like.

- Is there enough left for something more than basic transportation? If so, how much more? Then balance that between other interests, hobbies and pursuits. A car should never be a financial burden.

- Find it, drive it, take care of it, enjoy it.

As a final note, I discovered that taking care of a paid off car while controlling other expenses really helps rebuild financially (in my case after turning over a life savings to, well, stay alive).