How Much Car Can You Afford? It Is Probably Much Less Than You Are Thinking.


Nowadays most people looking to buy a car only ask the car salesperson “How much down and how much per month?” They want to have it now and pay for it later. Plus interest. (I hate paying interest.)

These people hardly ever think about how much it really costs them. It is only the monthly payments that matter for them. This is the wrong way to go about buying a new car.

If this sounds like you then whatever you are buying, it is probably too expensive, here’s why.

Personal finance experts say that 20% of your take home pay is the maximum affordable amount that you can spend on a monthly vehicle payment.

I think that is too much.

But some people don’t even listen to that rule.

From the most recent data that I found, the average new car payment is about $500 for 68 months! That’s $34,000! By the time that car is paid off, it’s worth maybe $8,000.

Since a $500 a month payment is just 20% of $30,000 annually, most people feel fine with this chain around their legs all their lives.

But turning $34k into $8k is a great way to stay broke. People wonder why they have nothing saved.

You can double that if you are married and making payments for two vehicles.

Not to mention the increased insurance to cover a more expensive car. If you have an inexpensive car, you won’t need to have full coverage on it.

Now if your newer, more expensive car is something that truly brings happiness into your life, then it is a worthwhile expense. As for myself, I have chosen to purchase cheaper, but reliable, vehicles.

When I decided to become financially free, I came up with my own personal rule when it comes to buying my car. I will only buy a car that costs a maximum of 10% of my gross yearly income, and I will not finance it.

Last year I made just a little under $65,000 – so any car that I buy will cost $6,500 or less. This keeps me on track to invest and grow my wealth. When you buy an expensive car, you lose a much larger chunk of your net worth every month. If the car has already been greatly depreciated your loss is much less, and sometimes even neutral or positive.

People seem to think that buying a car in that price range means I will have to drive a junker.

Far from it.

I just know from Robert Kiyosaki’s book Rich Dad Poor Dad that a car is a liability, and you shouldn’t purchase liabilities with credit.

Plus, I am a bargain hunter. If I can find the diamonds out there I know other people can too.

My brother-in-law is a car gearhead. He seems to have a new car every time we go to visit. He buys cars that are special, these are not your normal day-to-day type vehicles. I can’t even remember the models since he is in Europe, but from what he tells me is that the cars have a small but fanatical following. He says that his car expenses are low since the cars hold value. He might sell one car for just a few hundred less than he paid a year earlier, or even get to drive it for months and turn a profit on the sale.

When I rented a room in Hawaii, my landlord didn’t have a job. Instead, he collected the rent from all the other bedrooms and spent his time flipping cars off of Craigslist. Sometimes they needed a bit of mechanical work, other times cosmetic attention, but most of the time he just cleaned them really well and took great photos.

That’s all he did and he lives in Hawaii – one of the more expensive, but gorgeous, places to live. People will sell their car for less than the actual value.

If they do it, so can you.

When I purchased a car for my wife, it was already 11 years old with around 150k miles. Three years later the car has dropped in value by $1200 (about $33 a month). I could have done better but I couldn’t even bargain hunt for this one as she HAD to have a specific model and color. We were also in somewhat of a time crunch. Ugh…

The only things I have had to do in the entire time I owned it was to change the battery and replace the tires. Oil changes? I make money off of oil changes by performing secret shop jobs that reimburse the cost of the service and pay me an additional $40 for my report.

Sure, because I have some mechanical expertise I might I have some advantage in spotting potential problems when I am looking a vehicle over, but it doesn’t take much skill to identify leaks or if the vehicle makes a strange sound when you drive it. Worst case is that you pay for an auto mechanic to look it over. Why worry about a one-time $100 for a thorough inspection when you normally pay a recurring $500 a month?

For most households, the highest monthly expense is housing, followed by transportation.

Buying more than you can afford in these two categories can bankrupt you, so don’t do it! Being free from financial stress is worth having a smaller house or an older car, believe me.

If you need any more convincing, let’s plug in the numbers and see what $500 a month invested at just 7% a year for 30 years turns into. Because once you pay off a car its time for another one, right? Car payments are just a way of life.



Dave Ramsey says he gets a 12% average yearly return on his money. Let’s see what that looks like.




Do you think driving older cars is worth it now?

I do.

In fact, I just purchased a new vehicle last week. A 2007 Honda Odyssey for $4,600. It was in good shape mechanically, but really dirty. A little scrubbing took care of that, but it was something I used to bargain down from his asking price.

I don’t mind a little dirt to save hundreds of dollars because the excitement and smell of a new car will wear off, the knowledge that you are securing your future does not.

I changed from being a consumer to a saver and investor. This one simple change could send you well on your way to becoming a millionaire!

Stop spending so much on cars and start buying your freedom instead.

Stop making the car dealerships and bankers rich off your hard work, and instead work hard towards your freedom.

Once you have enough money invested it will work harder for you than you could imagine.

Pictures: Pixabay / Bankrate.com calculator / Images by bplanet at FreeDigitalPhotos.net


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  1. Mrs. Picky Pincher

    Nowadays my rule of thumb for cars is to buy the cheapest, most reliable vehicle possible. We do still have a car payment, but moving forward we’re paying only cash for our cars.
    Mrs. Picky Pincher recently posted…Moving Tips On A BudgetMy Profile

    1. MrDD

      Well, you will have plenty of choices if reliability is your only criteria. You can search edmunds for hundreds of reviews for almost any car/year. Japanese brands usually are the best for reliability (Toyota mainly). Have you ever thought of going full electric?

  2. Mustard Seed Money

    I am a huge fan of buying gently used cars. Normally I like original owner cars, that have never been in an accident with less than 12k miles per year. I’ve had really good luck with these types of cars and I definitely like the ability to invest the difference in things I care about. Like retiring early 🙂 Thanks for sharing!!!
    Mustard Seed Money recently posted…The Journey Out WestMy Profile

    1. MrDD

      Those one owner cars are a good idea. I would have liked that but my Odyssey was about $2,000 dollars less than what it could have got in the local craigslist market if they cleaned it up a bit and asked for more. Odyssey’s and Toyota Sienna’s seem to disappear fast if they have a clean title and are around the market value (which is way higher than Edmunds or KBB values).

      I hear you about the mileage too. This one was just slightly over that 12k per year, but not by too much. Some of the cars were closer to 20k/year! I can’t even imagine that much driving in a family vehicle. My wife drives about 9k/year and I do about 3k max.

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