Key Points –
- Some experts recommend only spending 10% of your annual income on your vehicles. $90,000 income means $9,000 in vehicles.
- Experian 2019 report says that the average loan for a new and used car hit record levels in the first quarter at $32,187 and $20,137 respectfully.
- Good rule of thumb is to have your total vehicle cost at 25% of your annual combined income.
Episode 1, Segement 3 audio transcript.
CRAIG: How much to spend on a car? What is your rule about buying a car? Some millionaire experts says you should only spend 10% of your annual income on a car. I’m like, wait a minute $90,000 a year means a $9,000 car?
AMANDA: Yeah, that’s it a little I mean I think that that’s not taking the whole picture into consideration. I agree that yeah because at $9,000 now, what are you talking about like now you that’s probably a car that’s probably used. I don’t know any brand new cars that are nine thousand dollars and then you’ve got maintenance costs and repair costs.
CRAIG: Exactly I went on carvana real quick this morning as I was typing out these show notes and I was like what can $9,000 buy me? I went to Consumer Reports and a 2013 Honda Civic was a great year so I went over to Carvana for a Civic that’s almost six years old and it was still $13,000 because those things hold their value.
AMANDA:I watch the Price is Right nearly every day because I have the luxury of working from home and I’ve not seen a single car that is less than 13,000 dollars. They’re not given away the the high end vehicles. It’s like Kia’s and Honda’s that they’re giving away and they’re not all souped up but they may even have rolled on windows. I haven’t seen one less than $10,000.
CRAIG: According to Experian 2019 report that just came out says the new vehicle average amount borrowed hit a record at $32,187 for the first quarter of this year. The average used car loan hit $20,137 which can almost buy you a brand new Civic loaded. I mean, you can buy on your LX without a sunroof get all the other fancy things for about $21,000. 20% of borrowers are taking out loans of $50,000 or more. That’s insane! Those are pickup trucks
AMANDA: Yeah those pickup trucks are pretty expensive. Yeah don’t get me started on that.
CRAIG: Okay, well we’ll leave that alone. What they’re saying is this equates to a medianincome earner buying median income price vehicles are spending 80% of their gross salary and if you take away the effective tax rate, they’re basically spending 100% of their net income on a car.
AMANDA: The other problem here Craig is that these dealerships are willing to finance things for six years nowadays, so five, six years down the road that’s long past one year warranty has expired and things are ready to go wrong, you know. You have to think about a lower monthly payment isn’t always the best long-term plan.
CRAIG: 25% of annual income is where your car should be that’s the amount of vehicles you own – all your vehicles compared to all your income.
AMANDA: I think it also depends on what your priorities are so substitute experience with joy in their vehicles …
CRAIG: Yeah because their mom didn’t hug him.
AMANDA: That’s it. That’s the priority and you’re willing to give up and sacrifice other areas, you know, you don’t want to travel and you don’t want to eat out every time, every day or whatever but you love your car then that’s a personal decision to make but yeah 25% sounds like a good rule of thumb.
What do you think?
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