If you’re finally getting serious about fixing your finances, you might be wondering how much money you should be spending on cars for your family.
Cars are usually the second largest expense any family will have behind housing costs.
But does it have to be that way?
Should you be spending more on cars than everything else in your budget?
While you can, and some people may choose to, you don’t have to have cars be the second largest expense in your budget.
Don’t Listen To Banks Or Car Salespeople
If you’re trying to figure out how much to spend on a car, you’ve probably consulted with banks and car salespeople to see how much car you can buy. Unfortunately, that’s the wrong question and the wrong people to ask.
Banks are in the business of lending money so they can earn interest on the money they loan out. It is in the bank’s best interest to loan you as much money as they think you can repay, even if it will wreck your personal budget.
Car salespeople are in the same boat as bankers. Car salespeople don’t care anything about your monthly budget or what you can really afford. All they care about is making a sale.
Yes, car salespeople need to make sure you’ll get approved for a loan for the car you’re going to buy, but they don’t care one bit how that impacts your finances and your family.
The first thing you need to do when figuring out how much car you can afford is answer the following question.
How Important Are Cars To My Family?
Cars are important in the sense that they get us from place A to place B quickly and safely. Other than that, cars don’t provide much value in my mind. Of course, that isn’t the reality in America today.
Today, cars are often seen as status symbols.
Big trucks, luxury sedans and giant SUVs have taken over the car marketplace. These cars are expensive and don’t provide much more, if any more, value than cheaper Japanese sedans and other “less desirable” cars.
If you want to become wealthy, you need to get over the mindset of having a car as a status symbol. Instead, you need to do a deep dive and find your personal answer to how important cars are to your family.
Are fancy cars worth not saving for the future? Are fancy cars worth stressing out about how to manage your credit cards and other consumer debt? For my family, they aren’t.
A Reasonable Car Buying Rule of Thumb
One of the more reasonable car buying rules of thumb I’ve seen is called the 20/4/10 rule.
The rule states you should put at least 20 percent down when purchasing your car, finance the car for no more than 4 years and your auto costs shouldn’t exceed 10 percent of your gross income.
While this rule may work for some people, for others the results are insane. Instead, use this rule as a starting point. Then, adjust the results to your family’s financial situation and desires.
Just remember, you need to make sure you spend less than you earn, are working toward paying off your debt and you need to save for your future while paying for your car.
Personally, I believe people should either pay cash for cars or finance them for no longer than three years. I also believe people should keep cars for a long time, usually at least 10 years if you buy a car new.
These two ideas have saved us tens of thousands of dollars.
How to Keep Car Costs Down
Keeping car costs down isn’t hard in reality. The first thing you should do is sell your current, expensive car and buy a cheaper car that fulfills the same purpose.
If you already have a reasonable car or you flat out refuse to sell your fancy car, you should keep your car as long as possible.
Ideally, you’ll keep your car for years beyond when the loan is paid off. This will give you many years without car payments that allow you to either save that money for your next car or for other purposes, such as paying down other debt.
The next time you buy a car, hopefully you can pay for it in cash. The easiest way to buy cash cars it to buy older cars that are still in good shape.
Many cars last well beyond 100,000 miles despite the common fear that cars with 100,000 miles are about to die. Heck, many cars even last beyond 200,000 miles if they’re maintained correctly.
Even if you have to take out a loan, these older cars will give you the best shot at finding an affordable car that will still get you from point A to point B safely.
If you aren’t knowledgeable about cars, get the car inspected by an independent mechanic before you make the purchase.
Of course, the cost of the car isn’t the only factor to consider when you’re figuring out if you can afford a car or not. Other costs, including insurance, fuel costs and property taxes can make a big dent in your budget.
Check Insurance Rates
After I’ve narrowed my ideal car choices down to a few models, I usually start getting car insurance quotes. When I’m doing my initial investigation, I usually get quotes from Geico as they’re usually the best priced insurance in our area.
Insurance rates can vary wildly depending on the car you pick, so make sure you have an estimate before you purchase a new vehicle.
Getting a quote with Geico is easy. Even if you aren’t considering getting a new car, get a quote from them to make sure you’re not overpaying for your insurance.
Get started on your Geico quote right now.
Estimate Any Property Taxes
While not all states and localities make you pay property taxes on your car’s value, some do. If you live in a state that has an ad valorem tax, make sure you calculate what the cost will be for your new ride.
Newer cars are worth more, so you’ll pay more taxes on them. You’ll have a lower up front price cost for a used car which means you’ll pay less in ad valorem taxes as well.
Consider Fuel Economy
Depending on how much you drive, fuel economy can be a huge deal.
If you just drive a couple miles to work each day, you won’t notice much difference between a car that gets 15 miles per gallon versus a car that gets 20 miles per gallon. However, if you drive 25 miles each way to work, you definitely will.
While official EPA estimates aren’t exactly what you’ll get from your car, they’re at least a standard you can use to compare different car models. Simply Google the year, make and model of the car you’re considering to find EPA MPG estimates.
Calculate Total Cost Per Month
After you’ve figured out all of the information above, calculate the total cost for your car, or your potential new car, each month. This total number will help you figure out if your car fits within the 10 percent of gross income the 20/4/10 rule suggests.
Consider Becoming A One Car Family
If you want to take saving money on cars to the next level, consider becoming a one car family. Many married couples and families have at least two cars, sometimes three or more. Many couples could technically get by with having one less vehicle.
If you can pull this off, you could save a huge amount of money. Just imagine how your financial life would be with less money spent on car payments, insurance payments, property taxes and maybe even gas purchases.
Yes, you may occasionally need another vehicle. In that case, you can rent a car if you know of the need in advance or use a ridesharing service like Uber or Lyft to pick you up for unexpected but necessary trips when your car isn’t available.
My Personal Car Buying Rule Of Thumb
Cars simply aren’t that important to my family. For that reason, it is our goal to spend as little as possible on cars over the long term while keeping our family safe and comfortable.
Whenever one of our cars becomes unreliable or no longer meets our family’s needs, we evaluate all of our options and choose the car that will best fit our family and our finances.
Making the decision to use cars for transportation instead of a status symbol will easily save my family hundreds of thousands of dollars over the next few decades.
Instead, we used that money to pay off $80,000 of student loan debt, build an emergency fund and invest for our future.
You can do the same exact thing. Your future self will thank you if you do.
How much do you spend on cars and car related costs each month? What percentage of your gross income is that?