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How Much to Spend on a Car: Automotive Sites vs. Financial Sites

Posted by Sean | Posted under Budgeting, Cars | June 8, 2008

Car-payment calculators are everywhere. The problem is they simply follow our directions. They calculate what we want to spend, or think we can spend, and neglect to tell us how much we should spend.

I’ll probably need a new vehicle in a few years, so I’m trying to work some math in advance. Unfortunately, it is not easy to find consistent spending guidelines. This might be due in part to differences at automotive sites and financial sites. For example…

Financial Sites

money.cnn.com - "he doesn’t think it’s prudent to pay more than 8 percent of your monthly gross income on a car payment" (converts to more net, depending on tax rates.)

financialplan.about.com - "financial experts recommend spending no more 12 to 15% of your after-tax monthly income for car payments."

Automotive Sites

edmunds.com - "shouldn’t exceed 20 percent of your monthly take-home pay"

automotive.com - "good rule of thumb is roughly 20 percent of your net income can be used for a car payment."

What accounts for the difference? Sure, car dealers earn more when you splurge on cars, and financial advisors earn more when you scrimp for retirement, but is there more to it?

Besides the percentages, I’m struck by the wording that surrounds them. The financial sites use words like prudent and recommend. The automotive sites use words like can be and shouldn’t exceed. In my mind, these sites are talking about two different things!

To me, "prudent recommendations" address an audience that wants to retire on more than Social Security. In contrast, "shouldn’t exceed" sound like how much a banker will approve, with an emphasis on their short-term default risk instead of our long-term retirement risk.

My inclination is spend as little as possible, but I’ve yet to put it in mathematical terms.

The primary takeaway for now has less to do with numbers, and more with how we settle on financial information: researching opposing viewpoints, questioning their assumptions and motivations, and maintaining an active mindset.

Okay, back to the lab for more math…

Your thoughts?

What is the "right" amount of
money to spend on a vehicle?

p.s. I believe this is an issue even if paying with cash,
but I want to explore that angle in an upcoming post.

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3 Comments so far
  1. John June 9, 2008 12:15 am

    To me the right amount is the minimum amount I can spend that buys me a a car that satisfies my requirements.

    I would certainly never get anywhere near 20% of my net income!

  2. Pinyo June 9, 2008 10:58 am

    20% is way too much. Also, it depends what what other payments you have going on already. If 100% of your income is already committed, you’re in no position to buy a car.

  3. budget123 June 10, 2008 6:35 pm

    That is interesting.

    “In contrast, “shouldn’t exceed” sound like how much a banker will approve, with an emphasis on their short-term default risk instead of our long-term retirement risk.”

    - That is a lesson so many people have learned over the last few years with housing, huge buses as cars, farm land, etc.. Just because you get approved doesn’t make it safe to borrow that much! Would be interesting to know the percent of people that borrowed the max allowed for their home purchase and are now in trouble.