How Much Car Can I Afford?

How much car can I afford?

How much car can I afford?A vehicle is a large purchase that can greatly impact your month to month finances so the answer to this question is important. In order to buy a car responsibly, we recommend buying a car that costs no more than 15% of your after tax monthly income. Don’t know how much that is? We’ve got you covered.

How To Determine How Much Car You Can Afford

  1. Check your monthly pay stub or LES.
    1. You can use last month’s base pay or average the last three months for a more accurate number.
  2. Enter that number below:

Example: If you made an average of $3000/month over the last three months you can afford a car that costs $450/month.

Why 15% and how is cost defined?

Why 15% is the magic number

15% of your salary is our recommended contribution level to your retirement account (401K or TSP). If you’re just getting started, it’s okay to include an employer match in that number but work towards making that the amount you contribute. For most people, 15% will provide solid retirement savings.

Limiting vehicle costs to 15% keeps your vehicle costs (likely your largest expense besides housing) at or below your retirement contribution. This is a simple way to make sure that you are managing your money effectively and investing more in your future than the average household.

Finally, only 30% of your salary is committed to these fixed costs. That leaves plenty of flexibility for you to deal with housing, life, or our favorite: other investments. In order to keep this level of flexibility it is important to accurately estimate the total cost of a vehicle.

What goes into cost?

Cost does not mean your car payment. Your car payment is the largest component, but not the whole picture.

Estimating Fuel Cost

According to the Bureau of Labor and Statistics, in 2019 the average person spent $2094 annually ($175/month) on fuel and related items. For most people this is a reasonable estimate.

Additional Considerations:

  • Average fill up cost for pickups is $101.92, so you might have to pay a bit more.
  • An EV owner who drives 540 miles a month and charges at their house at the average energy price will pay $25.20/month in energy according to Kelley Blue Book. This is a good guideline for EV fuel cost.
  • It’s easy to check how much you spent on fuel over the past few months if you look at your spending history on USAA, Navy Fed, or a budgeting app like Mint.

Estimating Insurance Cost

Estimating insurance cost is as simple as getting a quote for the vehicle you are interested in. You can do this prior to going to the dealership from information available online. Generally, all you need is:

  • VIN
  • Mileage
  • Purchase Price
  • Expected Usage (miles)

If unable to get a quote, you can also use the average insurance cost of $73/month according to a survey by Value Penguin.

Putting It All Together

In our previous example, we could afford a car that costs $450/month on our $3000/month salary. We’ll use the average values of $73/month for insurance and $175/month for fuel to determine what our car payment should be.

A car payment of $200/month will help keep the total monthly cost of the vehicle to $450 or 15% of a $3000 salary.

Why do gas and insurance affect how much car I can afford?

Most people only consider vehicle payments when buying a car. I made this mistake when I bought my Kia Stinger. The result is that you end up in an uncomfortable situation of high car payments and additional expenses. Your total monthly cost will quickly exceed 15%, which can feel pretty overwhelming.

Factoring in gas and insurance allows you to make sure that your 15% is an accurate assessment of monthly vehicle cost. This puts you in a much more comfortable position and keeps you from blowing your hard earned paycheck.

Married? Kids? Single Income Family?

In general, it’s a great thing if you can keep your total transportation expenses at or under 15% of your total household income. That said, there are many service members with spouses that are in school, looking for a job after completing yet another PCS, or at home taking care of the kids while the service member is so often at work, gone for training, or deployed.

Very frequently in these situations, the service member needs to drive to and from work while the remainder of the family needs to make it to school, practice, doctor’s appointments, and complete the never-ending family errands. This leads to families spending a large proportion of their monthly finances to pay for two cars, and in many cases it’s quite difficult to keep that number under 15%. In fact, we’ve met a lot of service members (especially young ones) that spend much more than 15% of their household income on transportation.

If this sounds like you, here are a couple of things you might consider:

  1. Could you get away with a more economic car?
    •  If you’re the type of couple with a Hellcat and an F-150, we get it. If you’re strapped for cash though, ask yourself if you could get away with a Cruze and a CR-V instead. Lift kits, horsepower, and style are all well and good, but any parent or spouse will tell you that providing for a family and looking after its future are much more important. Oftentimes, trading in the horsepower for a more efficient choice can save hundreds a month and well over a thousand a year.
  2. Do you live on base?
    •  If so, consider carpooling into work with someone else in your unit who lives close. If you don’t know of anyone, start asking around or even ask your senior enlisted or OIC if they know of anyone that could help give you a ride to/from work since you’re nearby work. We’ve met families that live on base that have consolidated to one car and carpooled in with friends who live a few blocks over or out in town. Floating a friend $50 or a dinner each month for the extra 4 minutes it takes him to pick you up and drop you off beats paying for two cars if you can help it. This strategy doesn’t work forever, but frequently it can save a family a lot of money during a duty assignment or a deployment workup. You might be surprised at how willing your friends or your chain of command might be to help you out for a while. It all starts by reaching out.
  3.  Just can’t do it?
    • If you live in town, absolutely need two cars, are a single income family, and have done everything that’s reasonable to reduce your transportation costs, we get that too. If you’re early in your career and can’t do it, don’t let it stress you out. It can be a tough thing to do during the first several years in the military, and in some cases it’s nearly impossible or not worth it. Again, we get it. Going forward, realizing that your base pay will increase based off of time in service and rank will enable you to get closer to achieving the goal of spending no more than 15% of your monthly income on transportation. It’s worth looking at what you and your spouse expect to be making a few years from now and coming up with a plan to get your monthly costs where you want them going forward. 

Money Gouge

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Lessons Learned

Still wondering why 15% is necessary? Read the experience that led to us writing this article.

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