Did you know that one-fifth of everything you earn goes to buying a car. If you make $50,000 a year, that means you’re probably spending $10,000 of your hard-earned money on transportation. The largest part of that is probably a loan or lease payment. And don’t underestimate the cost of maintenance and repairs, including:
- Gas and oil
- Car washes and detailing
- Parking and storage
- Electrical system
- Belts, pumps, filters, etc.
- Dings, scratches, and other minor body damage
And that’s if you don’t have anything major happen! Think of accidents, natural disaster like a flood or hail storm, vandalism, or theft. As you figure out what you can afford, remember the cost of transportation isn’t just your payment.
What Is Your Current Vehicle Situation?
Nearly 90% of American households own at least one vehicle. The average U.S. household spent $9,049 in 2016 on their cars, about 16% of their total household expenses. Overall, Americans are spending less on their vehicles than in recent years, but not in every area. While there was an 8-9% dip in spending on car purchases, there was a 4.6% rise in “other vehicle expenses.” This includes finance charges, maintenance, insurance, and rentals/leases/licenses. While car purchases are going down, the cost of maintenance, insurance, and auto financing are going up.
How much you spend on your car depends on how old you are. If you are between 35 and 54 years old, you spend the most. People over age 75 spend the least on transportation. This is likely because they drive less and owe less on their loans. Americans age 25 and under also spend a lot less. Their parents may help out and they tend to drive older, less expensive vehicles.
Budgeting To Buy A Car
Your ideal transportation budget depends on your needs and circumstances. Just because the average American pays up to 20% of their income on their cars doesn’t mean you have to. The first step to buying a car is to find out how much you are spending currently. This takes a little time. But if you are serious about buying a car or leasing in the near future, the upfront research could save you money. We recommend the following steps to take budget properly for your next car:
How Much Car Can I Afford?
Once you’ve figured out how much you currently spend on transportation costs, you can use the above calculation to figure out your maximum monthly transportation spending. For example, if you know that 20% of your monthly income is $500, then all of your car expenses including loan payments, insurance, gas, and maintenance need to add up to less than $500 per month.
If you want to play around with some scenarios, try an affordability calculator. It can take some effort to find the right deal for you and it might mean sacrificing a few items off your wish list. We also recommend the following best practices when shopping for the perfect vehicle while still staying within your budget:
As with any spending decision, your transportation costs come down to your preferences, lifestyle, and budget. The best advice is to be honest with yourself. Yes, you might be able to afford the monthly payment when you buy a car with flashy amenities. But will you be able to afford the insurance and maintenance? What else would you have to give up? If you spend one-fifth of your income on transportation, that means less money going to other expenses debt and saving for your future.