How Much of Your Monthly Income Should Car Payment Represent?
The amount of your monthly car payment in relation to your gross income can vary significantly depending on the cost of living in your area. In states with a high cost of living like New Jersey, California, or New York, you should aim to allocate no more than 15% of your monthly income to car payments. Conversely, in more affordable states, you might find it reasonable to spend up to 25%.
However, many financial experts advise against having any car payment at all. Suggestions include never buying a new car, always paying cash for a vehicle, never borrowing money to buy any depreciating asset like a car, boat, or RV. According to Never buy a new car! ALWAYS pay cash for a car, borrowing money only results in paying interest on an item that loses value with each payment. This strategy promotes financial wisdom and prudence.
Never Borrow for Depreciation
One popular opinion is that you should pay cash for your car. Buying a car in cash can help you avoid an interest burden that only grows as money is repaid. Moreover, advises include buying a car that is at least 2-3 years old to avoid the significant depreciation costs associated with new cars. An older car is less expensive to insure as well.
Car Payment Alternatives
The amount you allocate to car expenses is ultimately a personal decision. Depending on your financial situation, it could be as low as 15-20% of your monthly income, including any payments you might make to a reserve fund rather than a traditional car payment. For those deeply passionate about cars, a 30% figure might be reasonable, but only if all other aspects of your finances are in good order and you are not drowning in debt.
Alternatively, consider the scenario where you can find a functional car for as little as a third of your average monthly pay. Such a car might be old and might have some issues but will serve its purpose of getting you around. You can then save the money you would have spent on a new car and use it to upgrade to a better vehicle later.
Personal Opinion: Pay Cash, Not Interest
Paying cash for a car is not just about saving on interest. It's about taking control of your finances and avoiding the financial trap of getting locked into car payments for the rest of your life. It’s always better to have a car that is reliable and functional, even if it's an older model, as long as it serves its intended purpose of transportation.
Key Takeaways
1. High-cost living areas typically limit car payments to 15% of gross income, whereas more affordable regions might allow 25%.
2. Opt for cash payments over financing to avoid interest and depreciation expenses.
3. Consider older, more affordable cars to save money and build a reserve fund.
4. Personalize your car expenses based on your financial situation and priorities.