Cars. Where do we begin? Technology has evolved drastically over the last few decades and cars depict this very well. Features such as autopilot, collision-avoidance, etc. make the cars of today an absolute no-brainer. The cars today have top safety features, comfort features, and so on.
As you know, everything has a price. This brings us to the question of the cost associated with these cars. There are so many costs you need to consider before making your big car purchase.
Let’s face it. Cars are not cheap. Are they? Consider buying your car as a long-term investment. If you buy a car for a cheap price, it would quite likely end up costing more in the long-run. The reason for that is obvious. Cheap car would mean that it’s an older car with problems. You definitely want to stay away from such a car.
Now let’s talk about your income. So you are earning 70k a year. An income of $70k a year may make you feel that buying a high-end car is a very reasonable deal. But there are many factors you need to consider before deciding to make your purchase.
Let’s begin. Shall we?
The Rules
There are a few rules when it comes to buying cars and maintaining them. You can choose the rule that works for you the best.
The 10% Rule
This is the most popular rule. This simply means that you should spend no more than 10% of your annual income on your car payments. Car payments include all the payments you would have to make from buying the car to maintaining the car.
So if you are making 70k a year, you can afford a car that costs you no more than $7,000 a year.
Now this is quite a strict rule. But if you think about it, it makes perfect sense. This is because if you spend 10% on your car, you would have 90% for everything else such as your house, medical expenses, food, utilities, etc. If you spend more than 10% on your car each year, you run into the risk of exceeding your budget. This could cause problems (such as stress) in your daily life.
The 36% Rule
Here’s another rule that you can choose to follow in case the above rule doesn’t work for you. The 36% rule basically limits your total loan payments to 36% of your salary.
Total loan payments include all your loans, such as personal loan, car loan, mortgage and credit card payments.
This means that if you make 70k a year, your total loan payments should not be more than $25,200 per year or $2,100 per month.
The 20/4/10 Rule
If you think the above two rules are absolutely not for you, then here is another rule. This rule takes into account your down payment, the duration of the loan and your annual salary.
According to this rule, you must put down 20% on your car purchase, finance it for a maximum of 4 years and keep your car payments at 10% of your annual income or less.
Car payments also include your insurance expenses, maintenance expenses and the interest on your loan.
Average Car Costs
Never do the new cars in a showroom have a dirty spot on them. They look absolutely clean and shiny. This makes us want to buy those new cars because we are naturally attracted towards shiny objects.
However, realize that a brand new car loses its value right after its driven off the dealer’s lot. In this first year, a car can lost up to 20% of its value. In about 4 years, you car’s value would only be 50%.
A brand new car costs $31,000 on average.
A used car, on the other hand, could be as good as brand new. There are many used cars out there with low mileage that look and as good as new. The difference here is that you can grab a used car, that looks like brand new, for a much cheaper price.
The average cost of a used car is close to $20,000.
Calculate All Your Costs
Make sure to take into account all the other costs associated with a car purchase.
Calculate how much money you would need to register your car, title and tag by checking with your local authorities.
Check with insurance companies too and try to find the best rate for your vehicle. On average, car insurance policy costs around $1,500 a year or $125 per month.
Calculate your maintenance fees. How often would your car need oil changes, tire rotations, etc. The more you drive, the more you must pay for your car maintenance. Car maintenance expenses generally account for 9 cents per mile.
Don’t ignore fuel costs. Fuel costs can add up very quickly. On average, a car owner spends $175 per month on fuel. This may be eliminated if you have an electric vehicle.
Analyze Your Budget And Choose A Rule
Now that you know about the rules, average costs of cars and all other costs associated when it comes to purchasing a car, it’s time for you to analyze your budget and choose the rule that fits you best.
So if you are making 70k a year, take into consideration of how much income you are actually taking home after taxes. This varies from state to state. This will help you give a clear picture on your actual earnings per month after taxes.
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An annual income of 70k a year would mean a gross income of about $5,800 per month. If you follow the 10% rule, you would have up to $580 per month to spend on your vehicle. This $580 should cover your monthly loan payments, maintenance, car insurance and fuel.
If you are following the 36% rule earning 70k a year and you are already paying 30% in loans, you would only have 6% or $350 per month to spend on your monthly car payments.
With the 20/4/10 rule, you need to have at least 20% of cash in hand to put down. Do you have that amount of money to go with this rule? In addition, you would have to pay monthly payments in a maximum of 4 years by taking 10% or less of your salary each month.
Conclusion
In conclusion, purchasing a car can be an expensive investment, and it is essential to take into consideration all the costs associated with it. The three rules discussed in this blog post, the 10% rule, the 36% rule, and the 20/4/10 rule, can help you make a better-informed decision on how much to spend on a car. It is also important to remember that buying a brand new car may not be the best option, as it loses its value as soon as it is driven off the lot. Finally, calculating all the additional costs associated with a car purchase, including insurance, maintenance, and fuel costs, will help you make an informed decision that fits your budget. By following these guidelines, you can make a smart car purchase and ensure that your investment is a wise one.