Content of the material
- What is a reasonable car payment?
- How much should I spend on a car if I make $60000?
- Is Dave Ramsey right about car loans?
- Should I pay off my car before investing?
- Customizing your car budget
- The Financial Samurai Approach
- The Average Income Earner
- Cars as status symbols
- Does Dave Ramsey recommend ever financing a car?
- What it means to finance a car
- How to get a car without financing
- What I’m Doing
- Who Has the Best Car Insurance?
- Shopping smart for your next car
- The Dough Roller Approach
- What to Do With the Money While You Wait
- Other Car Purchase Calculators
What is a reasonable car payment?
Many financial experts recommend keeping total car costs below 15% to 20% of your take-home pay. For example, if your monthly paycheck is $3,000, your car payment would be about $300 and you’d plan on spending another $150 on automotive expenses.
How much should I spend on a car if I make $60000?
How Much Should I Spend on a Car If I Make $60,000 a Year? You should spend no more than half of your yearly salary on a car, so if you make $60,000 dollars per year, you should buy a car that costs $30,000 or less.
Is Dave Ramsey right about car loans?
As a general rule of thumb, the total value of your vehicles (anything with a motor in it) should never be more than half of your annual household income. Dave doesn’t recommend buying a new car—ever—until your net worth is more than $1 million.
Should I pay off my car before investing?
Paying off a car loan can be beneficial for your finances, but that money could be used more effectively by putting it toward retirement, a Health Savings Account or some other tax-advantaged financial account. The same may go for general investing if your auto loan interest rate is low.
Customizing your car budget
Although 10% to 15% of your take-home pay works well as a general guideline for buying a car, you also need to take into account your current spending habits.
Ideally, after factoring in your car payment, you should still be able to:
- Pay for all the necessities
- Put 10% to 20% of your income into a savings account
- Have disposable income remaining for non-essential expenses
Look over your budget to see how much you're spending and saving each month. This will give you the most accurate idea of how much you can spend on a car.
For example, if you've been saving 30% or more of your income, then you have the flexibility to spend more on a car. On the other hand, if you aren't able to save much money, then putting 10% to 15% of your income toward a car payment may be far too much.
If you're wondering how much the monthly payment on a personal loan might be, use the calculator below. Enter the amount you'd like to borrow, then set either the monthly payment or loan term to what you're looking for. Experimenting with different numbers can help you find a loan term that works for you.
The Financial Samurai Approach
While living below your means is necessary to achieving your financial ambitions, don’t take this advice too far. A publication by the name of Financial Samurai believes in the 1/10th rule. This means that 10% of your annual income should be allocated towards the purchase of a car. A chart is also provided to show the types of vehicles a person should buy at each income level. The recommendations in this chart are absurd. According to this rule, you shouldn’t buy a Toyota Camry until you make at least $200,000 a year! As mentioned previously, the average income in the United States is about $60,000 per year, meaning someone could only spend $6,000 on a car if they followed this rule. This isn’t realistic for most people.
The Average Income Earner
The average income earner can spend up to $20,000 on their car based on a $60,000 salary. Cars they could purchase include a slightly used/new Toyota Corolla, Honda Civic, or Toyota Camry. These cars might not be the most luxurious choices, but they are extremely reliable.
Cars as status symbols
Why would someone want to spend so much on a car? Well, there are many reasons.
Some view an expensive vehicle as a status symbol. And some believe the nicer the car, the more authority they have on the road. Of course, that’s not true. Others may want more expensive vehicles to support a personal image or give others the impression of wealth.
According to Financial Samurai, spending money on a car that you can’t afford actually detracts from the enjoyment of owning the vehicle. If you fall on hard times and can’t keep up with payments, the car could be repossessed. And if you’re in an accident, repairs might be expensive. Plus, parts could be hard to find if you own an exotic car.
Does Dave Ramsey recommend ever financing a car?
Dave believes that financing a car is a painful process for most Americans. Especially in an instance where the car won’t be driven on the highway again.
For the majority of Americans, the first on their to-do list is to approach the nearest dealership or a used car lot to finance the latest brand of their preferred car model. But is it a financially smart decision to finance Floyd’s replacement? Let’s go through Dave Ramsey’s opinion on that:
What it means to finance a car
Most Americans think that their only option for financing a car is through car payments. But Dave believes that financing a car is synonymous with signing John Hancock on a contract or lease agreement. He describes it as a fancy IOU that allows you to drive off the car from the dealership with the promise that you’ll make monthly payments.
He claims that what salesmen hide from you is that financing your car is the most expensive option. When you finance a vehicle, you’re paying the principal plus fees, taxes, and interest to your creditor. And since they’re good at their job, they’ll attempt to squeeze every cent from your pocket.
How to get a car without financing
According to Dave Ramsey, if you can’t afford to pay cash for a car, then you can’t afford it. As such, what you need to imbibe is the ability to delay gratification and save for the future. To purchase a car, Dave recommends saving and purchasing a fairly used vehicle by cash. He gave a quite interesting example of saving $700 monthly and purchasing a fairly used car for $8,400. Instead of the headache of making monthly car loan payments that can last for numerous years.
Also, buyers with cash can negotiate a much better price on a car since car dealers will be getting their cash right away.
So, if you in Dave Ramsey’s Baby Step 1 or 2, what I would recommend is to check out a list of top vehicles under $5000 in cash. You can save up more in your emergency fund or put together a sinking fund to get that new vehicle as quickly as possible.
One question to consider is whether to get an extended warranty. Thankfully, Dave Ramsey may have some ideas on extended warranties to consider.
What I’m Doing
As I mentioned, we’re only a few months away from having the car loan paid off. We’ll be saving $411.91 a month on car payments!!
Since we both bought new vehicles, our oldest is only 6 and a half years old. The goal is to keep it for at least another 6 years. I plan on performing the recommended maintenance on the vehicle as well to ensure that I am able to keep it running in tip top shape. The longer I hold onto this vehicle the longer I will have an extra $412 a month.
As far as what we are going to be doing with the money, I would like to open a Roth IRA and invest it. That way it grows at a decent rate. In addition, with Roth IRAs you can pull out the amount that you’ve contributed to the account over the years at anytime penalty-free and tax-free as long as you have proof of how much you have been putting in. If you go over the amount, i.e. into any interest gained, you will have to pay income tax on that amount plus a 10% penalty.
The idea will be to use the initial principle contributions to pay for a car 6 or so years down the line and NOT take out any money that I’ve earned in interest. I am going to make sure that I am very diligent about keeping track of what I put in the account until it’s time to purchase a new vehicle. In addition, I don’t want to just invest the money in a standard investment account because the interest I earn on the account will be tax-free and penalty-free once I reach the ripe ole age of 59 1/2.
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Shopping smart for your next car
There's a lot that goes into buying a car. It's a big purchase, and you definitely don't want to make a bad financial decision. When you take some time to evaluate your budget, you'll be able to calculate exactly how much money you can spend on a car, both per month and in total.
The Dough Roller Approach
Here’s my rule of thumb–pay cash. Now I can hear what you’re saying. You just graduated from college and have a great job making $60,000 a year. But if you pay cash, you’ll be lucky to drive to work in a car that costs $2,000. Everybody else will be driving new cars that cost “just” 60 “easy” payments of $500. So you want me to drive a sled (as they use to say in my day)? Yep.
DR, is that what you did when you got out of school? Nope. And I regret it. Do everything in your power to pay cash for your car. And if that means driving around in a car that doesn’t compare well to the cars your co-workers and friends are driving, so be it. That’s the advice I’ll give my children. And that’s the advice I wish I had followed.
What to Do With the Money While You Wait
The ideal thing to do would be to invest it or put it in a short-term CD while you wait.
Pretty much anything aside from stuffing it in your mattress would be better than putting it in the average savings account making 0.01% interest.
You want to make sure our money is liquid though so that in 10 months when you pull it out to buy a car, you won’t have any trouble.
An online savings account at 0.5% is probably your best bet as this will be the most liquid and the most interest rate.
Other Car Purchase Calculators
Recognizing that you may not follow my advice, here are some additional online car calculators to help you decide how much car you can afford. You plug in a few pieces of information. Then the calculator tells you what you can afford.