Cars are expensive, no doubt. But unless someone cracks the code to teleportation soon, we all have to pay for this necessary evil to help us get from point A to B in life.
It’s common knowledge that buying a secondhand, reliable vehicle is the smartest financial move. But given the wide price range and endless vehicle choices these days, how much should you actually spend on a used car?
The short answer is: As little as possible! (This is a money site, after all. And we want you to keep as many of those hard-earned dollars in your pocket as you can!)
Jokes aside, figuring out your exact car budget can be tough. Because if you go too cheap, you could be stuck with a clunker that breaks down every second week.
And if you overspend on a whip that’s above your means, you might be sacrificing other important financial goals in exchange for that sweet ride. So where is the sweet spot middle-ground?
The 10% rule:
We’re fans of the 10% rule of thumb for car expenses. It basically states that your entire budget for automotive costs shouldn’t exceed 10% of your income each year.
This guideline gives you decent leeway to spend money on cars but also ensures that you can still afford all the important stuff in life with the remaining 90% of your income.
For example, let’s say you earn $60,000 per year. The 10% rule allows you $6,000 per year to spend on car costs – or $500 per month.
This budget should also include insurance, registration, gas, maintenance, etc. We’re not talking about just the car payment itself.
What if you spend more than the 10% rule?
Don’t worry, the 10% rule is just a guideline. It’s a goal that “most people” should shoot for to keep their overall financial balance in check.
For folks who are WAY ahead in their retirement savings and have a high income, they may want to spend a little more on having a nice car. Say, 15% of their income.
But for folks who are way behind on retirement savings, living paycheck to paycheck, they should specifically opt to spend as little per month as possible on a reliable ride.
What about the total purchase price?
The 10% rule gives us a good average monthly budget, which might be great for people financing a car with monthly payments.
But what about paying cash upfront? What is a good price range people should car shop for?
First off, paying cash for a car is ideal. Not having a payment brings real financial bliss!
If we extrapolate the 10% rule monthly figure by multiplying it over many years of ownership, (and also remove estimated gas, insurance, and maintenance costs) we can then calculate a rough budget for purchasing a car.
Here’s an example: Let’s say you earn $60,000 per year and want your overall car expenses under $500/m. If we assume $200/m for gas, $70/m for insurance and reg, and $80 for maintenance ($350 total), the leftover amount is $150/m.
Taking that $150 and multiplying it by 5 years is $9,000. If you multiply it by 10 years it becomes $18,000!
So in theory, if you spend $18,000 on a used car, drive it for 10 full years, and don’t pay more than $350 per month to operate/insure/drive it, you’ve stuck to the 10% rule nicely!
Here’s a rough guide that’s by no means perfect…
Generally speaking, the higher your salary, the more you can spend on a car and stay within the 10% rule.
BUT, it’s important to note that more expensive cars don’t mean they’ll last longer or be more reliable. And just because someone might make $200k a year, that doesn’t mean they should buy a car in the upper limit of their budget.
In fact, many millionaires drive very average, low-cost cars. (That’s probably one of the reasons they become – and stay – millionaires!)
Other considerations affecting price:
We’ve used hypothetical examples so far and rough numbers. Before car shopping, we highly recommend delving deeper into the cost estimates and matching them with your personal situation.
This will give you a much clearer answer about how much you should spend on a used car. Here are some things to calculate:
Car insurance
As of early 2024, the average cost of full coverage car insurance in the US was $167 per month. And for minimum coverage car insurance it’s just $46 per month. That’s a HUGE range. You’ll need to get quotes that are specific to your situation and vehicle.
Many things affect car insurance costs. The age of the car, your location, how much you drive, your credit score, age, and about a thousand other things. Here’s a guide to saving money on car insurance.
Brands with the lowest maintenance cost
Here’s my favorite chart from Consumer Reports – which is an awesome resource for researching and comparing car models you’re interested in.
This chart plots car brands, compares their average maintenance cost within the first 10 years of ownership, and cross references with reliability scores.
Now you know why my last two cars were Toyotas. I bought a used 2010 Prius for $12k back in the day that I drove for 8 years. I had zero mechanical or maintenance issues. My newest car is a 2015 Toyota Sienna that I just paid a whopping $21k for. OUCH. But it has extremely low miles and I plan to put 200,000 more on it!!!
Long story short, Toyotas are bomb dot com and I won’t buy anything else. But as you can tell by the chart, Mazda, Honda, and Lexus are some of the top brands too.
When you are trying to estimate maintenance costs, google the common issues with the car models you are looking at, and at what mileage major things need to be replaced. Build those costs into your annual maintenance budget.
You’ll never be able to predict these costs perfectly, so estimate on the high end to be safe.
Vehicle safety and reliability
Spending within the 10% rule might mean some low-income earners are buying cars in the $5,000 -10,000 range. And these vehicles will be much older, have a lot more mileage, and likely necessitate more maintenance costs.
When you buy a used car, no matter the age, you really should get it inspected by a mechanic you trust. They might not be able to predict all the things that will go wrong with the car, but they’ll absolutely call out any red flags or things that need immediate attention.
They are your best bet when it comes to avoiding buying a lemon. Finding an old gem is possible, but it requires more research, shopping, and diligence.
How many miles do you drive?
Driving more costs you more. Driving less costs you less. Simple, but true. Expected mileage plays a huge factor in how much you should spend on a used car.
The average American drives about 13,500 miles per year according to the Federal Highway Administration. But this varies a lot across age and gender groups.
Calculating your mileage should be fairly easy based on your current driving patterns. To calculate your estimated gas costs you can use an online fuel calculator like this one. Just input the cost of fuel in your city, your approximate mileage driven per year, and the estimated miles per gallon your new car will get you.
How long do you tend to keep cars?
The longer you can keep and drive the same car, the cheaper the overall cost of ownership becomes.
Especially when it comes to buying pre-owned vehicles that have already taken a substantial depreciation hit.
When car shopping, think about your personal and family needs for the next decade or so. What type of vehicle will suit your needs for many years to come?
Most Americans change cars every 6-8 years. But frugal folks who prioritize financial independence will want to stretch that even further. Challenge yourself. Can you keep your car for 10, 15 or even 20 years?
Your current debt situation
Folks with large existing debts or consumer loans should take greater precautions when buying cars. Overspending on a vehicle when you’re neck-deep in debt is like pouring fuel on a fire. Cars are the last thing you should be splurging on if you’re in financial distress.
That doesn’t mean you should walk everywhere. That might make it impossible to get to work! But it does mean being extra vigilant and sticking with the lowest cost option possible. Sticking to the 10% rule is an absolute must.
Do you really need a new car?
Delaying a car upgrade, or even living without a car temporarily can work wonders on your financial life! If you can sock away $500 per month into savings instead of sinking it into a car, you’ll have a cool $6k at the end of a year.
That could give you a healthy e-fund or allow you to funnel big bucks into a Roth IRA!
Another thought – can you get away with using rideshare services instead of owning your own car? If your car budget is $500 per month, and you mostly work from home, could you get by with Uber rides and electric bike rentals for less? Think outside the box!
The Bottom Line:
The goal of buying a used car is to pay as little as possible and get the most reliable vehicle that suits your needs the longest. By using the 10% rule of thumb, you can quickly determine how much of your monthly income can be spent on car costs without jeopardizing any of your other financial goals.
For most folks, buying a used car within the $10,000 – $25,000 range is a great way to proceed. We always recommend saving up and buying cars with cash instead of financing them when possible. This makes the overall cost of ownership far cheaper and leaves you with more money in the bank for more important things!
Related posts:
- How to buy a used car (without breaking the bank)
- When does buying a NEW car make sense?
- The best (and cheapest) way to finance a used car
