What formula do you use to justify how much car you can afford?

Get the nicest Honda Civic you can afford.

I’m not a Dave Ramsey disciple at all but I saw a YouTube clip where I understood his rule for cars is pay cash and the sum of all of your vehicles/toys/things with motors has to be less than 50% of your yearly salary.

I won’t get into the paying cash aspect, but think the 50% rule is pretty reasonable. If single then this gives you a $50k budget. If married and wife had a car valued at $20k then you have a $30k budget, etc. IMO there are way too many middle income households that make $100k-$150k/year with both spouses driving $50k vehicles. This rule of thumb keeps you from having to drive a $5k beater but also provides some reasonable limits.

I'm cheap when it comes to cars. On 100k a year I would probably spend 25K max on a decent used car.

All that being said I definitely over spend on entertainment. It's just a preference to not have a car note or much sunken into a vehicle.

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I’m not sure there is an answer that is perfect.

If you’ve already maxed savings, spend whatever you like to get what you want.

YOLO.

The 50% idea above is a good place to start. However, if you’re not sacrificing your retirement or emergency funds, putting discretionary income toward a vehicle is just as reasonable as any other place. If it’s important to you, do it. As you mentioned above, what’s the point of making money if you can’t enjoy it, and who are we to tell you what you should or shouldn’t enjoy.

Money guy show has a good philosophy on buying a car.

20/3/8 rule

Always put at least 20% down (to avoid being upside down on car), do not finance it more than 3 years (or just pay it off in 3 years if you finance it longer for a special APR) and the payment should not exceed 8% of your gross income. SO even with a $100k income, by their rule your car payment shouldnt exceed $666.67 a month, and thats on a 36 month payoff cycle. So you're looking at a $30k car or so with $6,000 down to cover the 20% portion there.

Whole idea is you dont have so much of your capital tied up in a fast depreciating asset. They also say if you buy a luxury brand, you have to pay it off in 12 months (as they simply dont want people buying luxury cars when really still building wealth phase).

Cars keep americans poor more than anything else, so just dont do anything dumb. Too many people making $50k a year or less driving around cars worth as much or more than their annual salary...and so many who buy used BMW/MB/Audi dont understand the maintenance that comes with them is extreme in many cases compared to non-luxury brands. Especially if you want to get ripped off by the dealer (dont do it).

My biggest regret is back in my 20s buying my new Honda Accord because I was like "oh now I'm making some money, time to buy a new car". Qualified for 0.9% 5 year APR and all, etc...Wish I had just bought a decent used car instead of getting killed on depreciation end on my car. $25k car now worth about $10,500 even in this very inflated used car market. We bought my wife's MDX 3 years used back in 2017 (it's a 2014) for almost half what it was brand new. It's still worth about $16k-$17k today, which isnt bad compared to what we paid ($24k-$25k), and we've put a ton of miles on that car in 4 years or so. Wife always wanted a 90s R129 Mercedes SL as her dream car (which is a much more realistic dream car than my mid 80s Porsche 959 by comparison ), so we recently bought one of those in cash for just under $10k as a 3rd car. Buying an extra vehicle IMO it's hard to justify unless you're just going to pay cash.

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My biggest regret is back in my 20s buying my new Honda Accord because I was like "oh now I'm making some money, time to buy a new car". Qualified for 0.9% 5 year APR and all, etc...Wish I had just bought a decent used car instead of getting killed on depreciation end on my car. $25k car now worth about $10,500 even in this very inflated used car market

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The market value of your honda only matters if you plan on selling it.
I get the concern with value depreciation. But if you look at Hondas in terms of functional value (and you never sell), you should finish up with no regrets in terms of cost of ownership.

Ive never bought a new car and i dont plan on doing so. But there is value in 0 miles, warranty, probably better financing new, etc..
If you never sell, the depreciation is moot. Just the total cost of the vehicle and financing (along with maintenance) versus the number of miles that you get.

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One question about its implementation...
Is it based on value of the cars or purchase price of the cars?

If i spend $25k on a car and own it for 7 years, does that leave $25k for a second toy? Or $35k for a second toy because of the depreciation of the first car purchase?

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I think you have to understand the philosophy behind the guy behind the rule to understand that it’s not “one of the commandments.”
1) all debt is bad
2) buying a home with debt is acceptable
3) I once heard him make a loose exception of philosophy regarding the buy-in for partnership for a doctor, dentist, or lawyer. He said it was generally ok to delay debt payment to put up for a partnership that would pay out favorably in something like 3 years. It’s about the only “leverage” I’ve ever heard him not decry.
4) various other explanations of “debt” and “badness”

The rule isn’t meant to be a “buy expensive and count depreciation in the budget for the next thing” rule. He generally doesn’t promote consumerism as a goal. He doesn’t find it bad if it’s what you’re into, either.

So the rule is, “if you have more than half your annual income in things that roll, it's probably too much.” It doesn’t mean you can’t justify it on your own (and it actually make sense!), but the folks calling him are making $80K, driving an ‘18 Escalade, wondering if they can put off retirement contributions another year, wanting to know if he thinks they can afford the ‘21 model and a trip to Paris.

So, for a guy keeps the car for 7 years who is wondering if he has jet ski money, he probably doesn’t (but if it is a Corolla with 30k miles, and you think it’s rolling another 7, maybe you do).
If he wants to hand down the old Corolla to his daughter to buy a new(er) Camry, he probably can


It’s sort of like Jim Dahle of White Coat Investor’s “how much house can I buy?” rule. Target audience is physicians, so probably $150-450k single income families. His general rule is to keep the house around 1x for an easy path to an awesome life and early retirement. 2x is the high end of what’s ok, and you’re going to start sacrificing things (kid’s college, retirement age (another thing he promotes is “financial independence is probably only 10 years away”), car value, nights out, travel). You still have enough to do most things, but you’ll probably have to skimp on something once you get above that range, which is essentially a given in the high cost of living areas (Manhattan, San Francisco, LA, etc)



Both are just loose approximations of budgetary constraints.