How Much Should You Spend On A Car Based On Your Income?

How Much Should You Spend On A Car Based On Your Income?

As Jalopnik’s resident car buying expert and professional car shopper, I get emails. Lots of emails. I’ve decided to pick a few questions and try to help out. This week we are discussing how to budget for a car based on a percentage of your income, smallish SUVs for taller folks and buying an extended warranty on an old Acura.

First up, what percentage of your income should you spend on a car?

I wanted to get your thoughts on this article on CNBC. The chart at the bottom in particular. A household making $US200,000 (about $293,000) – $US250,000 ($367,000) a year in income should be driving an Accord. WHAT?!!

Here is the gist of it –

To save others from making this costly mistake, I came up with the 1/10th rule for buying a car. It’s simple: Spend no more than 10% of your gross annual income on the purchase price of a car.

Why? Because the upfront cost of a vehicle isn’t going to be the only thing you pay for, and cutting down your base price budget is the most effective way to save money.

If you make the median per capita income of about $US42,000 ($62,000) a year, for example, you should limit your budget to $US4,200 ($6,161). If you make the median household income of about $US62,000 ($91,000) a year, don’t spend more than $US6,200 ($9,000) on a car.

Oh boy, another “millionaire” dolling out car buying advice that is typically both not-helpful and limited in scope. These types of articles come up from time to time. While the central thesis that most people should be spending way less on cars than they currently are is fairly sound advice, to assume that someone who brings home $US60,000 ($88,000) should be grabbing a $US6,000 ($9,000) beater from Craiglist is pretty unrealistic.

Believe it or not, it is possible to make a modest income and responsibly carry a car payment. Perhaps this ten per cent approach should be looked at from a different angle. Let’s say someone makes $US60,000 ($88,000) a year which very roughly equates to $US45,000 ($66,000) take-home after taxes. That leaves a monthly budget of $US3,750 ($5,500). If you took ten per cent of that number which is $US375 ($550) and used it as a target car payment, you would have a more realistic middle ground between blowing way too much of your paycheck on a car note and buying a really cheap car. If we assume a 60-month loan at around four per cent APR, this person could buy a car that would cost around $US20,000 ($29,000). Obviously, if they had some down-payment funds that would increase the budget accordingly.

I’m not implying that this so-called “ten-per cent rule” is for everyone, but the best advice I can give is to be honest with your own budget and understand your total expenses.

Next, what is a small-ish crossover/SUV for taller people?

I’m 6’3″. Both my sons are 6’8″. (Wife is just 6′.) Currently we drive a 2014 RAV4 that is getting ready to retire.

I mostly like the RAV4 well enough except for the fact that it’s noisy on the road. I’m willing to spend significantly more for something nicer and especially quieter — ideally very quiet — that is about the same size but it can’t be too much longer/wider or it won’t fit in my crowded garage. Some pluses like auto-adjusting seats for different drivers would be nice too.

Whatever we get has to have enough headroom & legroom in the front for a son to drive it; plus if all of us are in the car, and one or two sons are in the back, their heads need to not hit the roof, and they need a bit more legroom than the average passenger. The RAV4 just barely squeaks by on those criteria (the boys and I don’t like being in the back seat when the driver has the front seat all the way back) – less wouldn’t work. But as I said, a really big SUV instead of something crossover-sized just wouldn’t fit in the garage.

A very secondary issue is range: we live in South Florida and a big gas tank and good mileage would help if we ever have to flee an oncoming hurricane. The 2014 RAV4 has a tiny tank, so it’s bad in that regard, but we’ve lived with it. On the other hand, there may be no car with enough gas to get you out of state on a single tank once the roads are clogged, so this isn’t a deal-breaker, just a wishful thought.

What should we be looking at?

While there are some cars that are considered “compact” that offer a fair amount of room, it seems that given that almost everyone in your crew is on the taller side most people would be more comfortable trekking around in something mid-size. The new Hyundai Santa Fe (or formally called the Santa Fe Sport) is a mid-size, two-row crossover that is roomier than your “compacts” like the RAV4, CR-V, and Subaru Forester. Similar sized cars would be a Ford Edge or Nissan Murano, though they tend to be a bit thirsty with their large V6 motors. I’m not entirely clear on your budget goals but for the cost of a fairly well-equipped Santa Fe/Edge/Murano, you may be able to find a lightly used Lexus RX350h. This will offer that mid-size body to make everyone comfortable, but also paired with a hybrid powertrain for better miles per gallon.

Finally, is buying an extended warranty worth the money if the car has some age on it?

I have a 2012 Acura TSX Wagon with 59.2k miles and in generally very good condition. After bringing the wagon to the dealer for its regular servicing, the service manager asked me if I’d be interested in hearing about an extended warranty for the car. I said yes and then spoke to a manager about the warranty, which covers mechanicals (transmission, engine, suspension, electronics, brakes) for 4 years / 48 k miles and excludes routine maintenance, tires, body, and the like. He quoted a premium of $US2,881 ($4,226), which seemed expensive. Are these warranties worth it or is it just a source of additional profit margins for the dealer?

You may have heard that dealers don’t really make a lot of money on the cars themselves. Where the big profit comes in is in selling things like warranties and service plans through the finance office. While these extras can be worth it in the case of notoriously expensive and unreliable cars (see Range Rover) generally purchasing something like this is like gambling at a casino…the house usually wins. You would be spending $US2,800 ($4,108) on one of the most reliable cars Acura has ever made. I bet if you socked that money into an emergency fund for 4 years you wouldn’t use all of it for maintenance and repairs.

This article has been updated since its original publication.

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