Everyone has tried to figure out how much they should spend on a car at one point or another. We bought our last car around 5 years ago. We’re hoping to keep it another 8 to 10 more years, so hopefully, I won’t have to ask about it again for awhile.
We bought a Subaru Forester because it was cheap and perfect for a growing family, New England snow, a muddy dog, and the beach sand. We bought an Acura MDX, because the family grew bigger, my wife’s commute is longer, and the luxury makes a difficult day bit better.
However, yesterday, I came across a Tweet that made me think:
Just saw another bad car-buying rule of thumb:
"Never spend more than 5% of your net worth on a car."
???
Some people have a negative net worth and need to get places to change that.
— Stephonee | PoorerThanYou (@stephonee) April 13, 2019
Now obviously it makes sense that people with negative net worth still need to have a car. However, I had never thought about tying the amount of car to net worth. It didn’t seem to make sense at first.
Then I thought about it in terms of my own money journey. It seemed to fit, but maybe it was a little low. Here are some examples:
Net Worth | Car Price (5%) |
---|---|
$300,000 | $15,000 |
$500,000 | $25,000 |
$800,000 | $40,000 |
$1,200,000 | $60,000 |
$1,500,000 | $75,000 |
What I like about this is that it seems to curb lifestyle inflation. I think that was intention of the advice, but I don’t know where it originated. Besides the error, for low/negative net worths, it was too strongly worded for me. I rarely like to give advice by telling people what to do. Instead, I like to just explain what I’m doing and why I’m doing it. Your situation may be different, but maybe by following along with my thinking, you’ll be able to adapt it to your own.
So let’s pretend that I feel like buying a $75,000 luxury car. I look at the chart and see that it matches up with a $1.5M net worth. I’m not a fan of buying expensive cars, but if you have a 1.5M net worth, a $75,000 car is probably going to work out.
I decided I’d try to make the advice a little better by eliminating the negative/low net worth problem and making it more flexible (removing the “never” language). So I went with:
What if we try to fix it? Something like "Buy the cheapest reliable car that fits your needs. If you want a better car try to spend less than 5% of your net worth."
Feel like there should be some income guidelines too.
— LazyManAndMoney (@LazyManAndMoney) April 14, 2019
It was kind of a quick thought and while it is better, it’s not all that great. I think it keeps the flavor of the original advice which is all I was trying to do.
However, what if I tried to do more? What if I tried to come up with a very good answer for…
How Much Should I Spend on a Car? (Formula 1)
I think any formula is going to be doomed to failure. Nothing is going to work for everyone. People value things differently. For some, like my wife, a car could be one of the few luxury they car to spend money on. For others, like myself, a car is a convenient way to get from point A to point B.
It’s very hard to find “universally accepted” advice in personal finance. At the same time, if we can help a bunch of people with a rule of thumb, why not give it a shot?
With that in mind, I came up with three concepts that I wanted to be part of a rule of thumb:
Net Worth
As I mentioned above, I like the idea of incorporating net worth. It can be used to give license to people who have done a great job saving. It can also be used as a check to stop you from buying too much car.
Negative/Low Net Worth
We have to incorporate something that allows everyone to buy transportation. It might not be great transportation, but we can’t say, “Sorry, you can’t have a car to make money.”
Income
If you are making a lot of money, but just starting out a career with low net worth, you should be able to get a more expensive car. If you are low income, a lower priced car is going to be a better fit.
I fired up my spreadsheet program and created my first formula. It was:
Since I’m still trying to figure out how to write a calculator for WordPress here’s a table of what that formula might look like:
Income | Net Worth | Formula |
---|---|---|
$25,000 | $0 | $7,500 |
$50,000 | $0 | $10,000 |
$75,000 | $0 | $12,500 |
$100,000 | $0 | $15,000 |
$125,000 | $0 | $17,500 |
$25,000 | $25,000 | $8,500 |
$50,000 | $25,000 | $11,000 |
$75,000 | $25,000 | $13,500 |
$100,000 | $25,000 | $16,000 |
$125,000 | $25,000 | $18,500 |
$25,000 | $50,000 | $9,500 |
$50,000 | $50,000 | $12,000 |
$75,000 | $50,000 | $14,500 |
$100,000 | $50,000 | $17,000 |
$125,000 | $50,000 | $19,500 |
$25,000 | $100,000 | $11,500 |
$50,000 | $100,000 | $14,000 |
$75,000 | $100,000 | $16,500 |
$100,000 | $100,000 | $19,000 |
$125,000 | $100,000 | $21,500 |
$25,000 | $250,000 | $17,500 |
$50,000 | $250,000 | $20,000 |
$75,000 | $250,000 | $22,500 |
$100,000 | $250,000 | $25,000 |
$125,000 | $250,000 | $27,500 |
$25,000 | $500,000 | $27,500 |
$50,000 | $500,000 | $30,000 |
$75,000 | $500,000 | $32,500 |
$100,000 | $500,000 | $35,000 |
$125,000 | $500,000 | $37,500 |
$25,000 | $750,000 | $37,500 |
$50,000 | $750,000 | $40,000 |
$75,000 | $750,000 | $42,500 |
$100,000 | $750,000 | $45,000 |
$125,000 | $750,000 | $47,500 |
$25,000 | $1,000,000 | $47,500 |
$50,000 | $1,000,000 | $50,000 |
$75,000 | $1,000,000 | $52,500 |
$100,000 | $1,000,000 | $55,000 |
$125,000 | $1,000,000 | $57,500 |
That’s a long table, but hopefully you can find some numbers close to your own to get a quick estimate. If you need more rows at the end, that’s a good “problem” to have.
As you can see, everyone can buy a car of some kind. If you make more money, you can buy more car. If you’ve had a history of saving and growing your net worth, you can buy even more car. We can play around with the numbers some, but I’m thinking that income should possible be a bigger factor. Since these numbers are estimates, I’ll let you experiment on your own. Please let me know in the comments if this produces a good estimate for your own financial situation.
How Much Should I Spend on a Car? (Formula 2)
Something doesn’t sit well with me on that first formula. It doesn’t factor in other expenses.
If you make $125,000 a year, but spend almost all of it on housing, child care, student loans, etc. you aren’t going to have much left over for a car. On the other hand, if don’t have any of those expenses (limited property tax on a house already paid off), you are going to be able to afford more car.
So rather than just use income by itself, I decided to come up with numbers of income – necessary expenses. My working formula is:
Here’s another rough table using several income minus necessary expenses numbers:
Income - Expenses | Net Worth | Formula |
---|---|---|
$0 | $0 | $0 |
$4,000 | $0 | $800 |
$8,000 | $0 | $1,600 |
$12,000 | $0 | $2,400 |
$16,000 | $0 | $3,200 |
$0 | $25,000 | $1,250 |
$4,000 | $25,000 | $2,050 |
$8,000 | $25,000 | $2,850 |
$12,000 | $25,000 | $3,650 |
$16,000 | $25,000 | $4,450 |
$0 | $50,000 | $2,500 |
$4,000 | $50,000 | $3,300 |
$8,000 | $50,000 | $4,100 |
$12,000 | $50,000 | $4,900 |
$16,000 | $50,000 | $5,700 |
$0 | $100,000 | $5,000 |
$4,000 | $100,000 | $5,800 |
$8,000 | $100,000 | $6,600 |
$12,000 | $100,000 | $7,400 |
$16,000 | $100,000 | $8,200 |
$0 | $250,000 | $12,500 |
$4,000 | $250,000 | $13,300 |
$8,000 | $250,000 | $14,100 |
$12,000 | $250,000 | $14,900 |
$16,000 | $250,000 | $15,700 |
$0 | $500,000 | $25,000 |
$4,000 | $500,000 | $25,800 |
$8,000 | $500,000 | $26,600 |
$12,000 | $500,000 | $27,400 |
$16,000 | $500,000 | $28,200 |
$0 | $750,000 | $37,500 |
$4,000 | $750,000 | $38,300 |
$8,000 | $750,000 | $39,100 |
$12,000 | $750,000 | $39,900 |
$16,000 | $750,000 | $40,700 |
$0 | $1,000,000 | $50,000 |
$4,000 | $1,000,000 | $50,800 |
$8,000 | $1,000,000 | $51,600 |
$12,000 | $1,000,000 | $52,400 |
$16,000 | $1,000,000 | $53,200 |
Is this calculation any better? It’s certainly a little more complex. I’m not so sure because it’s harder for me to test. I don’t have a good set of numbers to plug in. This is where I could really use your help. If you could let me know in the comments I’d appreciate it.
Final Thoughts on Car Spending
Just before publishing this, I decided to do a little reading to see what the experts say. Many suggested using a debt percentage and limiting your debt overall. I didn’t like getting into that because sometimes there’s good debt and bad debt. It’s reasonable to consider it though. You’ll also have to think about all the extra costs associated with a car, from insurance to storage with Auto Vault, they all add up.
At the end of the day, the estimate is just that… an estimate. There are things you can do to get more value for your dollar when spending on cars. Here are some tips to save money on cars and how to save money on gas.