This leaves you with these two car affordability options, the last being a high spending maximum: – Conservative: Car value is 25% or less of annual gross income– Moderate: Car value is 35% of your annual gross income– High: Car value is 45% of your annual gross incomeSo where do you start when it comes to car buying?
Your salary should determine what car you can afford!
What car buying typical resembles is something similar to the example below:
1. A customer looks online for a car or goes to a dealership
2. The potential car buyer selects a car based on their wants, then fits financing around the purchase price
3. Fitting the “Finances” typically leads to longer-term lengths to have an “Affordable” car payment without factoring in other car expenses like fuel and insurance.
However, within five years (60 months) a car loses on average 60% of the initial purchase value. So a $20,000 car at purchase would be worth $8,000 or less in five years – with still eight more months of payments to go!
Ideally, the best rule to follow when buying a car is the 25% gross salary rule, since it is 100% based on what you make each year. However, that doesn’t necessarily help you when it comes to your monthly car payment.
In hypothetical Jenny’s case, her $65,000 annual gross salary equates to $5,416 per month (gross). The 10% rule for Jenny would mean she has $541 per month to pay towards ALL of her car expenses each month.
1. Don’t purchase a car valued at more than 25% of your annual gross income
2. Make sure your monthly car expenses and payments are less than 10% of your monthly gross income.