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Message
Is there a rule of thumb for the ratio of monthly car payment to monthly gross income?
Posted on 4/4/17 at 2:28 am
Posted on 4/4/17 at 2:28 am
What is a financially reasonable/responsible amount of money a household should put towards car payments as a ratio of their monthly income? Is there such a thing?
9
Posted on 4/4/17 at 2:58 am to saintforlife
wise arse money talk answer - if you cant pay cash for a car, you cant afford it
reasonable answer - it depends on several variables but the most important are your other expenses (ie house, food, insurance, RETIREMENT SAVINGS [which come first]) and how much of your salary is left over after you pay taxes and all the above. The left over amount is what you have to work with. Now, you need a car, but you can get a used Honda civic pretty cheap and that would probably be just about the best bang for you buck as far a transportation goes.
Lets use an example, Ill use easy round numbers. lets say you make $5000 a month (after tax), your expenses/taxes/saving are $3000. That leaves you with $2000 a month for car and fun money.
How much car do you want and how much fun do you want to have?
There is no set percent of gross income for car payments.
I personally don't believe in spending that much on a vehicle, it's just a tool to get you from here to there. By most scales I am an OT baller and I drive a standard ford F150. Mrs. Perch drives a Honda pilot (although hers has all the bells and whistles). We would rather spend our money on travel and experiences.
This may have been a rambling answer, I writing this while busy working the night shift.
reasonable answer - it depends on several variables but the most important are your other expenses (ie house, food, insurance, RETIREMENT SAVINGS [which come first]) and how much of your salary is left over after you pay taxes and all the above. The left over amount is what you have to work with. Now, you need a car, but you can get a used Honda civic pretty cheap and that would probably be just about the best bang for you buck as far a transportation goes.
Lets use an example, Ill use easy round numbers. lets say you make $5000 a month (after tax), your expenses/taxes/saving are $3000. That leaves you with $2000 a month for car and fun money.
How much car do you want and how much fun do you want to have?
There is no set percent of gross income for car payments.
I personally don't believe in spending that much on a vehicle, it's just a tool to get you from here to there. By most scales I am an OT baller and I drive a standard ford F150. Mrs. Perch drives a Honda pilot (although hers has all the bells and whistles). We would rather spend our money on travel and experiences.
This may have been a rambling answer, I writing this while busy working the night shift.
Posted on 4/4/17 at 4:00 am to saintforlife
Start with not buying too much car - the best way is to multiply 28% times your gross annual income (or, even better 25% times your net). Don't spend more than that on a car. From a car standpoint that's "who you are" - spending more is a luxury, with depreciation and interest (if you finance).
But, the balance of your question is more complex - you can't just take your income and say, "Well X is how much I spend on a car." You take your income and say, "Well X is how much I can spend to service debt."
And, not just service but retire - if you make $100,000 a year (say your take home pay is $66k, after taxes, insurance, 401k, the whole smash.) - but you owe $38k on various things - you can't afford a whole lot of car debt. If you're debt free, you can afford "more" than average.
I would say the calculus changes if you want to buy a house in the near future - you want to keep good cash flow and a DTI ratio of 43% or under if you want to qualify for a mortgage. Obviously, you should never take a car note that puts you over that if you're going to buy a house before you retire that auto loan.
(And, yeah, if you can't pay cash for the car, you can't really afford it, but I feel like I'm talking to the wall half the time, so this is the "conventional" advice above.)
But, the balance of your question is more complex - you can't just take your income and say, "Well X is how much I spend on a car." You take your income and say, "Well X is how much I can spend to service debt."
And, not just service but retire - if you make $100,000 a year (say your take home pay is $66k, after taxes, insurance, 401k, the whole smash.) - but you owe $38k on various things - you can't afford a whole lot of car debt. If you're debt free, you can afford "more" than average.
I would say the calculus changes if you want to buy a house in the near future - you want to keep good cash flow and a DTI ratio of 43% or under if you want to qualify for a mortgage. Obviously, you should never take a car note that puts you over that if you're going to buy a house before you retire that auto loan.
(And, yeah, if you can't pay cash for the car, you can't really afford it, but I feel like I'm talking to the wall half the time, so this is the "conventional" advice above.)
This post was edited on 4/5/17 at 6:03 pm
Posted on 4/4/17 at 8:16 am to saintforlife
quote:
What is a financially reasonable/responsible amount of money a household should put towards car payments as a ratio of their monthly income? Is there such a thing?
I'll give the same answer I always give. The first step in any personal budget is to set your savings goals independent of any other budgeting items. Once you set that target then you can rearrange the other items in your budget however you like. Some people would like to spend $400/month on eating out and $400/month on a car. Others would rather do 200 on food and 600 on a car or vice versa.
Posted on 4/4/17 at 8:23 am to Ace Midnight
quote:
28% times your gross annual income (or, even better 25% times your net)
Do you apply this to the total cost of the car, or the cost minus say trade in value?
Just asking because I don't think it's absurd for someone making 100k to buy more than a 28k car. Even if they own a house or have other reasonable debts.
Posted on 4/4/17 at 8:29 am to KG6
quote:
Just asking because I don't think it's absurd for someone making 100k to buy more than a 28k car. Even if they own a house or have other reasonable debts.
I would call it absurd, but I understand that's just my opinion.
Posted on 4/4/17 at 8:52 am to white perch
quote:
wise arse money talk answer - if you cant pay cash for a car, you cant afford it
No, that would be called common sense.
Posted on 4/4/17 at 8:53 am to saintforlife
if you can afford it buy it. if you cant afford it dont buy it.
Posted on 4/4/17 at 10:32 am to saintforlife
I would base it solely on expendable cash on a monthly budget. This will vary based on individual preferences.
personally, i budget such that all my known/static/repeating/etc. type bills or costs leave me with at least $1k/month in unallocated cash. If a loan, service, payment, etc. pushes me below that threshold I won't do it.
Find the spot you feel most comfortable.
personally, i budget such that all my known/static/repeating/etc. type bills or costs leave me with at least $1k/month in unallocated cash. If a loan, service, payment, etc. pushes me below that threshold I won't do it.
Find the spot you feel most comfortable.
Posted on 4/4/17 at 10:38 am to notsince98
There isn't a "rule of thumb" but the decision should be made based on disposable income after all other requirements are paid for (retirement, housing, food, education, etc.). Then, it is just a decision about how you want to prioritize your available budget. Some folks see a car as A to B and nothing more, while others love a luxury vehicle and spend 10+ hours a week driving. You have to decide where you find value and enjoyment in life.
Posted on 4/4/17 at 11:29 am to saintforlife
Budget your monthly expenses with your monthly income. Include things like entertainment, which is inconsistent but still likely to be paid for over time. Include retirement savings. Anything left over can be used for paying for your car, though a good rule of thumb would be no more than 10% of your monthly income (if you have more than 10% left over after expenses and retirement savings).
And if you're asking us how much you can afford to spend on a car, then I'd suggest you save money over the next year and buy a car that you can afford in cash
Edit: I just came up with 10%, but I think its a decent idea for a max. A lot of this stuff comes down to how much you spend on everything else though
And if you're asking us how much you can afford to spend on a car, then I'd suggest you save money over the next year and buy a car that you can afford in cash
Edit: I just came up with 10%, but I think its a decent idea for a max. A lot of this stuff comes down to how much you spend on everything else though
This post was edited on 4/4/17 at 11:34 am
Posted on 4/5/17 at 4:00 pm to Upperdecker
quote:
A lot of this stuff comes down to how much you spend on everything else though
Wife and I maximize our 401(k)s and IRAs every year and shove the remaning into low cost ETFs and MFs. Our only debt is the mortgage on our homes and the car payments. We lead fairly simple lives and don't really go out much these days since we have an infant at home. I just ran the numbers and I see that our car payments is about 4% of our net income / 2% of our gross. We can probably afford more expensive cars (we drive small Volkswagen and Chevy cars) and one of us will probably upgrade to a larger car when the kid gets older or when we have a second one. This was a good discussion. Thanks to everyone that replied.
Posted on 4/5/17 at 6:01 pm to KG6
quote:
Do you apply this to the total cost of the car, or the cost minus say trade in value?
I apply it, pretty strictly myself. It keeps one in the realm of reasonable. Now, am I going to get on a guy that goes maybe $31k on $100k salary? If he's relatively debt free, probably not.
At what point do you think it becomes "absurd"? $40k? $50k? On $100k gross - that's a pretty extravagant purchase to devote that kind of fraction of annual resources to transportion (a depreciating asset, typically with interest BTW, however, nominal).
Does that calculus change, slightly, if the person is making a living with the car? Sure. But, just to run back and forth to work, shopping and school carpool? "Absurd" is a good word to describe devoting 1/3 or 1/2 of a (gross) annual salary to such a frivolous end. A "nice car"? Madison Avenue at its finest (well, after cigarettes.)
Posted on 4/5/17 at 6:54 pm to Ace Midnight
quote:
$40k? $50k?
A $50k car on a $100k annual salary isn't 1/2 annual salary.
Posted on 4/5/17 at 7:00 pm to DisplacedBuckeye
quote:
A $50k car on a $100k annual salary isn't 1/2 annual salary.
It is exactly half. It isn't half the cash flow, but that doesn't matter. Cash flow is how you service the debt - annual income versus the price is how we value anything significant. You don't factor your home mortgage (or you shouldn't) based on the payment. It's based on annual income.
So should a car - even more so because of the highly variable interest rates, as well as the shorter repayment period.
But, like most of these threads devolve to - y'all do what you want. The OP asked for "financially responsible" advice and I gave mine.
Buy a $100k car on a $100k salary if you want and finance it for 12 years if you like. Just don't pretend that's financially responsible.
Posted on 4/5/17 at 7:09 pm to Ace Midnight
quote:
It is exactly half.
Not where it matters.
quote:
It's based on annual income.
And why is that?
quote:
You don't factor your home mortgage (or you shouldn't) based on the payment. It's based on annual income.
This isn't the same thing, and you know it.
You can word it that way if you like, but it's not correct.
Posted on 4/5/17 at 7:11 pm to DisplacedBuckeye
quote:
And why is that?
Because it is sane to do it that way?
quote:
This isn't the same thing, and you know it.
Yes it is. It's almost exactly the same thing. Wait - there is a significant difference - if you overbuy on a house and survive it, at least you've got the equity you built up. If you overbuy a car, you're extra screwed.
Posted on 4/5/17 at 7:16 pm to Ace Midnight
quote:
Yes it is.
No, it isn't.
quote:
if you overbuy on a house and survive it, at least you've got the equity you built up.
There you go.
Your wording is still poor.
quote:
$40k? $50k? On $100k gross - that's a pretty extravagant purchase to devote that kind of fraction of annual resources to transportion
Posted on 4/5/17 at 8:53 pm to saintforlife
quote:
Is there a rule of thumb for the ratio of monthly car payment to monthly gross income?
As little as possible while still having confidence that the car won't break down.
Posted on 4/5/17 at 9:13 pm to saintforlife
quote:
Is there a rule of thumb for the ratio of monthly car payment to monthly gross income?
A lot more should go into this decision than the max that you can afford.
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