How much car can I afford?

A calculator for finding out how much car I can afford

There are dozens of different articles on the internet all trying to help people figure out how much of a car payment they can afford. Suggestions range from 1/10th of gross income for a car purchase, to 50%. All of these suggestions share a common problem, however. They assume that everyone is the same! WTF!

The truth is that we are all a little different. We live in different areas that have different costs of living. Someone who is spending 40% of their income on housing in San Francisco or New York probably shouldn’t spend as much on their car as someone who is living in Detroit and only spending 20% of their income on housing.

It turns out that people also have different philosophies about finances. Some people are frugal, wanting to pinch every single penny possible to increase their savings and investments. Other people are like me, focusing on increasing income for savings and not worrying as much about cutting expenses. Neither philosophy is wrong… they are simply ways of looking at the world.

All of this means that there isn’t a single number or percentage that everyone should follow when they are buying a car. It depends! That means that we need a flexible calculator to be able to find a number for different people in different situations. Type in your information into the car payment affordability calculator below to see an estimate for the highest car payment or car purchase that would make sense in different situations. I would always recommend LESS than this number, by the way. It’s simply the highest number that could make sense.

I am using a “middle of the road” value of 30% of annual gross income as a baseline for car purchases, and 10% of monthly take home pay for loans and leases (including insurance and taxes). The inputs you select below will move those percentages up and down.

Other tips to keep in mind when you are buying a car

Besides the top line number, there are a few things that you will want to keep in mind when you are buying a car so that it doesn’t end up becoming something you regret.

• Try not to lease: I have leased cars before so I won’t judge anyone who does, but leasing is not the most efficient use of your finances. You are simply renting the car and receive no value from the vehicle at the end of the term (despite having spent a good deal of money on it).

• Try not to buy new: New cars depreciate by 20% the moment they drive off of the lot. That is an awful investment by any metric, so why buy new when you could buy a 1 year old car that is basically the same for significantly less?

• Try to buy something reliable: The initial cost is just ONE component of a car payment. You also have to keep it on the road, so try to buy something that is reliable, with low maintenance costs if something goes wrong. Here’s a list of the most reliable cars in case you are looking for one.

Don’t make a purchase until you know you can afford it

Your car should be just a small component of your overall spending, and it’s important to keep track of that spending as closely as possible. The estimates I use above are simply rough rules of thumb, and the real question should be whether you can afford your new car in the context of your monthly spending or available cash.

Of course, that means that you have to know what your monthly spending and available cash are. I think Personal Capital is the easiest way to monitor all of my accounts as well as my cash flow from month to month. From here I can see everything including:

• Mortgage and home

• Car payment

• Gym memberships

• Food subscription services

• TV/entertainment

• Spending money

This isn't my report but it gives you an idea of what the cash flow report looks like in Personal Capital (which is free, BTW). 

How much car can you afford?

It’s really up to you. How much cash flow do you have available each month? What are your spending and savings goals? What are the other commitments you have coming up that you could use the money for? The more you look at it, the more it becomes clear that the less you spend on your car, the better off you will be. But, the calculator above should give you an idea of the maximum you will want to spend on a car.