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.
For that, it’s best to use the “10%” number from the 20-4-10 car buying rule (We will cover the entire rule here in a few). The 10% number refers to making sure that no more than 10% of your gross monthly income goes towards your automobile costs.
So at this point, you understand the two most essential rules when it comes to buying cars. 1. Don’t purchase a car valued at more than 25% of your annual gross income2. Make sure your monthly car expenses and payments are less than 10% of your monthly gross income.
– 20% down on your car purchase– Don’t finance longer than four years or 48 months– Make sure your monthly car expenses (Insurance, payment, gas, maintenance) do not exceed 10% of your monthly gross income.
The 20-4-10 car buying rule essentially guarantees you will be able to afford your car payment. Here is how it works: