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
  • Insurance
  • Car washes and detailing
  • Parking and storage
  • Tires
  • Electrical system
  • Belts, pumps, filters, etc.
  • Upholstery
  • 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.

How do you compare?

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.”
That 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.
Older white Hyundai car on a dirt road. 

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.

Step 1

Gather bank statements, insurance bills, car loan or lease statements, credit card bills, and any other records you have of your transportation spending from the past month.

Step 2

Add up all car-related expenses, including loan payments, insurance, parking, repair bills, gas, etc. Some banks and credit unions will categorize your expenses for you automatically, but the system might miss some charges or put some costs in the wrong categories, so it’s a good idea to double check.
 
Note: If you only pay car insurance every six months, calculate how much it’s costing you per month. For example, if your bill is $600 for six months, it is $100 per month.

Step 3

Identify your monthly income. If you want to compare yourself to other Americans, look at your gross salary, which is how much you make before taxes.
 
If you are paid an annual salary, it’s easy. Divide your salary by 12. So, if you make $60,000 a year, you divide 60 by 12 to find that you make about $5,000 per month before taxes and payroll deductions.

Step 4

Divide your monthly transportation expenses by your monthly income.
 
Example: $750 in expenses divided by $5,000 income = 0.15 Move the decimal two places to the right to make it a percent: 0.15 = 15%
You are spending about 15% of your monthly income on your transportation costs.
Once you have a clear picture of how much you are currently spending, you can start to run some scenarios. As you research possible cars and loan terms, estimate how they would change your budget.
 
If the monthly loan or lease payment by itself puts you close to the 15% mark, you might want to reconsider. Once you add on insurance, maintenance, and other costs, the deal might not be as affordable as you think.

Ways to lower your costs

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.
 

How Much Car Can I Afford?

 
Here are a few ways to lower your transportation costs:

Do your research

Whether buying a car new or used from a dealer or an individual seller, do some research! This can be daunting, but there are many websites out there to help you. Check reviews, read about safety recalls, taxes, registration, and license fees. All of these factors contribute to your overall cost.

Adjust your insurance coverage

You will be subject to whatever your state’s minimum insurance coverage regulations are. You might be able to save by having a higher deductible or bundling coverage.
 
Just be careful that you don’t lowball your insurance too much. If an accident does happen, you might regret it.

Improve your credit before buying a car

The better your credit, the lower your interest rate will be on a car loan. If you’re thinking about buying a car soon, request a copy of your credit report from AnnualCreditReport.com. It is the only site authorized by the federal government to supply free credit reports from all three credit bureaus (TransUnion, Equifax, and Experian).
 
You can request a single free report from all three bureaus once a year. Or you can request a report from a different bureau every four months on a rotating basis.
Note: Every time you apply for a new line of credit—like a car loan—it is marked as an inquiry on your credit report. Too many inquiries can lower your credit score. If you are looking to get a new car loan, just try to keep all your loan requests to about a two-week window.
 
The credit bureaus lump all of these similar requests together. They view them as one incident rather than a bunch of separate credit inquiries.
 
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