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How much car can I afford?

5K views 24 replies 10 participants last post by  brkf 
#1 · (Edited)
The general rule of thumb is that payments for all cars must be less than 20% of your post-tax monthly income. (I assume this is for those taking a loan.)
http://www.bankrate.com/finance/money-guides/how-much-car-can-you-afford.aspx

I wish they were more specific though...what length of loan, should maintenance costs and insurance be included in that, etc.

One way to compute this for cash buyers would be to figure out the total cost of ownership for 5 years or 7 years (using calculators for insurance and maintenance costs) and then do (purchase price + maintenance and insurance) / 5 or 7 as the case may be.

Another viewpoint:
Buy a car whose cost is no more than 50% of your annual income.
http://www.foxbusiness.com/personal-finance/2010/09/29/car-afford/

Again, I wish it were clearer about where this is post tax or pre-tax annual income.

If we use the second one, and assume it is post-tax, then one would need to make close to 200K to afford a new F30.

Anyone else have any thoughts on this?
 
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#2 · (Edited)
It varies from people to people really.

Some people like to spend more on cars, some people not so much.

It's up to your own to decide how much to spend on your car.

*Also General rule of thumb is don't look at how much you can afford a month. But look at the final cost. Say the new M5. Sure a lot of people can afford $1500 a month lease payment. But at the end of month 36, you are down $54000 dollars. Plus another $20000 in gas,insurance,etc. All add up to a big number. :)
 
#3 ·
Those rules of thumb are meaningless without knowing how much debt, expenses and savings you have.

I like to think of cars as if I were going to walk in and pay cash for it. If I start itching for a new car, and thinking about writing a $50,000 check for one, I lose interest quickly.
 
#4 · (Edited)
Those rules of thumb are meaningless without knowing how much debt, expenses and savings you have.

I like to think of cars as if I were going to walk in and pay cash for it. If I start itching for a new car, and thinking about writing a $50,000 check for one, I lose interest quickly.
I think they are still useful guides to make sure one is not overreaching. Sometimes one can have a lot of savings because of past earnings and then one can jump into a car that ends up unexpectedly being a money hog.

For a base F30 (37K MSRP), Edmunds estimates it will cost 50K+ over 5 years, driving 15000 mi/yr to own the car (including insurance, maintenance, etc.).
http://www.edmunds.com/bmw/3-series/2012/tco.html?style=101386360
They assume leasing, but even without that it is $50K+.

So even if one were paying cash for it, it makes sense to think what percentage of after tax income is being spent on the car.
 
#7 ·
I don't quite follow your reasoning about cash flows and life styles. If you are taking a loan to fund your lifestyle without savings in the bank, you are living dangerously close to a financial ruin. What would happen if you or somebody in your family fell sick, or got laid off? You'd still had to pay the lender, if not they would repo your car/boat etc and you'd loose all your equity.

I always buy rather than lease as I put so many miles, so my rule only apply to purchases. My point is that if you always buy your cars with cash, it does the following things:
- Forces you to save for your next purchase
- Rather than paying interest to the bank, you get to keep the interest
- Makes you a more cost conscious buyer, i.e. you can't just stroll into a dealership, fall in love with a car and next thing you're already signing papers if you don't have accumulated the funds. In effect forces you to delay the gratification of buying a new vehicle

Everybody looks at their finances differently, this is what has worked very very well for me. No reason it would not work for others.
 
#16 ·
Im with ya there (almost) Dave Ramsey.....:) Isnt the recommendation is to buy a CPO or newer used car? If you want to debate the point, can anyone afford the 50% hit on a 50k car in 3 years? Let someone else take the hit.

Most people here on the 'Fest know that a car is an emotional decision and a lot of the logic is thrown out the window...
 
#8 ·
Again, what I was saying is that just because one can buy a car for cash does not mean one can afford it. (I agree with you 100% that if you can't pay cash, then you can't afford it. If you can pay cash but choose not to for other reasons, that is OK.)

For instance, if I make $60K a year but I have been frugal the last 20 and lucky with investments and now have $100K in the bank, can I really afford a $50K car? My analysis based on the links above would say "no". If I did buy one, in a few years it would become a huge drain on finances (aside from depreciation).
 
#10 · (Edited)
For instance, if I make $60K a year but I have been frugal the last 20 and lucky with investments and now have $100K in the bank, can I really afford a $50K car? My analysis based on the links above would say "no". If I did buy one, in a few years it would become a huge drain on finances (aside from depreciation).
Actually, you can afford a $50k car if you've got $100k in the bank, and don't plan on buying another comparable car in the next ten or more years. Considering that you've been able to save $5k a year, while still purchasing and maintaining other cars, maintaining a $50k shouldn't tax you fiscally. This is all based on the assumption that the $100k isn't your retirement money.

Of course, this is based on having no kids, because if you've been working for more than 20 years, you're probably looking at the cost of college right now and won't be able to get a new car for another 10+ years.
 
#9 ·
OK, now I got it. Yes, choosing to take a loan rather than depleting your cash reserves can be a smart move as you always need to have your emergency fund.

And yes, after accumulating $100k after 20 years of saving, does NOT mean you can afford a $50k car. You're absolutely right about that.
 
#24 · (Edited)
Affordability needs to be addressed on a case-by-case basis. There are a ton of different factors. Here are just some:

  • How much do you make?
  • How stable is your employment?
  • How much do you have saved?
  • Are you single or married?
  • Do you have kids?
  • Do you have kids with special needs?
  • What about college for your kids?
  • How much is your rent or mortgage payment?
  • Is your house paid for?
  • How much credit card debt do you have?
  • Do you like to go on expensive vacations?

But generally speaking, I always follow the 10% rule. Monthly payment should be < 10% of your monthly take home pay.

If you have $100k in the bank, and you plan on spending half that ($50k) on a car, then that doesn't sound like a good idea at all to me. You really should be looking at a cheaper car, and you should finance some of it. For example, target a $35k car, pay $20k in cash and finance $15k. It's always good to have money in the bank; even if you have a stable job and guranteed income.

Paying cash for a car is nice, but we're talking about a depreciating asset. So even though finance charges add to the cost, cash is still king, and having money in the bank is even better...That's why when paying cash, it isn't really a bad idea to finance about 35% to 40% of it...You just never know when you'll have to tap into your bank account. Now if you have millions and millions, that's totally different, and then paying cash makes sense.
 
#25 · (Edited)
krash - yeah with some places (Pentagon Federal) offering 1.49% for 60 months it definitely makes sense to keep the cash somewhere liquid. I say if he's got 50k he's itching to drop, buy the car on credit and then drop that 50k into a mix of roths, money market, stocks, property.

Locally, 50k on a 240k house in San Diego would mean...1200 payment, rent for 1600. That's 19k in, 14.4k in payments, 7500 in depreciation, 6k in interest, 2500 in property tax, 600 insurance. Can't get a 5-6% ROI much more easily. Rentals not for all people. So in that case, market, etc.
 
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