How Much Car You Can ACTUALLY Afford (By Salary)

What's up, Graham? It's guys here. So have you ever wondered how much money you need to make to afford a car like this or this or even this? Well, wonder no longer because today we'll cover exactly how much money you need to make to afford the typical car in every price point based on dealership markups, interest rates, and lender guidelines. Because chances are the car you want is a lot more expensive than you think, especially with the average car payment now nearing almost $800 a month. Which, let's be real, the amount of money you actually need to be making to afford something like that is pretty absurd, as I'm about to share with you.

Although before we go into how much car you could buy throughout every income bracket, including the true cost of ownership on something like this, do me a quick favor and hit the like button. Your like really does make a huge difference. Thank you so much. Now, let's begin.

All right, so to start, just like home ownership, it's really important to understand as soon as possible that your monthly car payment is never going to be the true cost of owning a car. And if you're curious what I mean by that, here's the reality. First, on the most basic level, like we just discussed, you're going to have the cost of financing. Overall, it was found that 85% of new vehicles and 55% of used car purchases are bought with debt, and 25 to 50% of those loans are given to people who might not be able to afford them on terms as long as 72 months.

This means with a typical interest rate between 6.5% and 11%, you're going to have to budget for a monthly payment that's going to last at least a few years. In addition to that too, we also have gas mileage. Look, a large portion of that cost is going to be dictated by whether or not you're driving a fuel-efficient Prius or a Hummer H1.

But with the average car getting 25.2 MPG, at an average commute of 41 miles a day, you're looking at an extra $150 a month in fuel costs. In addition to everything else, like insurance, this cost is going to depend entirely on your age, driving history, car location, mileage driven, education, and a million other factors that car insurance companies use to jack up your rates. But overall, the average insurance cost is another $170 a month, with a chance of going even higher if you're under the age of 25.

Four, you also have car registration. Every year, your state is going to charge you a fixed amount based off the MSRP or purchase price of the car. It usually ranges a few hundred a year. Five, you then have the dreaded maintenance and repairs. Now, this one's a little bit difficult to predict, but chances are if you're driving a Mercedes, BMW, or Porsche, your cost is going to be a lot higher than someone driving a Toyota or a Honda, which is why your cost of ownership could be a lot higher than what you think.

And finally, we have something that a lot of people don't talk about, and that would be depreciation. In my opinion, this is something that absolutely needs to be taken into consideration because, as much as you don't want to hear it, a new car will depreciate 11% the moment you drive it off the lot. Within a year, it's lost 25% of its value. After 3 years, it's lost 46%, and within 5 years, the average car is worth 63% less than it would cost new.

Now, even though I'll cover some cars later in the video that'll hold up really well or even increase in value, for everything else, that's a cost that you're going to have to pay for, which brings me, of course, to what's called the 238 rule in terms of how much car you could afford based on your salary. This method goes out to the money guys who suggest that first you should put 20% down. This means that you'll pay 20% of the car's value up front so that you could lower the amount that you'll need to finance.

And this does two things: one, it means you'll pay less interest over the lifetime of the loan with usually better terms because you're putting more money down and two, it decreases the chances that you'll be upside down on the loan the moment you drive it off the lot. The second you should pay off the car in 3 years or 36 months. The goal is that a short-term loan usually carries less interest, more of your payment goes towards paying down the loan, and within 3 years, you're going to own the car outright, allowing you more money left over for other opportunities like saving and investing.

This also works by discouraging people from taking on the typical 72-month loan on a car they'll only keep an average of 79 months, meaning as soon as they paid off the car, they basically just go and buy a brand new car and start the process over again, which is bad. Don't do that.

And finally, third, you should spend no more than 8% of your pre-tax income on transportation costs. This means if you make $50,000 a year, your total transportation cost should not exceed $4,000 a year or $333 a month. This is meant to keep your transportation cost as low as possible since cars are a depreciating asset, and by keeping it within this structure, you'll minimize the chances of spending more than you need to on something that's not going to give you long-term financial freedom.

As an example of what you could buy with this method, let's take the typical person making $45,000 a year. This means that you would be able to afford a car worth about $8,000 because with $1,600 down, your monthly payment will come in to just under $200 a month and leave you with a $100 a month left over for everything else, like gasoline, insurance, and maintenance.

Or, if you have an income of $75,000 a year, you'd be able to comfortably spend about $500 a month in transportation, which works out to a $16,000 car. Like this, with $3,200 down, with all the other remaining money going to the cost of running the car. At an income of $225,000 a year, you'd be able to comfortably afford a car in the $26,000 bracket, and at $200,000 a year, you could pay for a $40,000 car, again assuming 20% down and a three-year loan.

Now, obviously, these numbers are meant for people who prioritize paying down the loan as soon as possible, living below their means, and ensuring they have as much money left over as possible to save and invest. However, I also understand that waiting until you make $200,000 a year to buy a $40,000 car is somewhat unrealistic, especially with the average used car selling for $26,000. So because of that, there's another similar rule that you could follow known as the 2410 rule.

Just like the previous example, this suggests that you should put 20% down on a term of no more than 4 years, spending no more than 10% of your gross income, and with this, you will be able to afford a lot more car. For example, on a $50,000 a year salary, the 2410 rule would allow you to spend up to $11,000 on a car, which would result in a $300 car payment and $100 left over for everything else.

At $80,000 a year, you'd be able to buy something around the $28,000 range. With $125,000 a year, you could buy something between $45,000 and $50,000. At a $200,000 income, that's a car in the $70,000 to $75,000 range. The downside with this is that you're going to end up spending more money on transportation while extending out your loan term for a year.

So yes, it is doable, but you will be burdened with even more payments, which is pretty much the exact opposite of the next approach, and that would be the Dave Ramsey method. For those unaware, Dave Ramsey is one of the most successful authorities in all things personal finance, saving money, and building wealth. He wrote five New York Times Best Sellers, he owns the largest independently operated radio talk show in the country, and is more than $600 million worth of fully paid-off real estate.

So when it comes to cars, he has a few choice words to say. In a perfect world, he says the car that you could afford is the car that you could buy outright in cash. That's right, no loan, no payment, no nothing. Just buy a car that you could afford and then drive it until it doesn't work anymore. His thinking is that the monthly cost of car ownership is very distracting towards other more rewarding opportunities. Cars are almost always a bad investment financially, and if your entire objective is just to get from point A to point B, it doesn't really matter what kind of car you drive as long as it gets you there safely without breaking the bank.

In addition to that, he also practices the belief that the cost of your car should never exceed half of your take-home salary. So, if you make $50,000 a year, your total car's value should not exceed $25,000. If you make $100,000 a year, that's $50,000, and so on. He also found that throughout a survey of more than 10,000 millionaires, the average millionaire drives a 4-year-old car with 41,000 miles on it, and 8 out of 10 millionaire car buyers drive it away debt-free without carrying a car payment behind them, and that all just helps them be the millionaire that they are today.

Separate from that, another rule that I really enjoy comes from the financial blogger, the Financial Samurai, who recommends that you should spend no more than 10% of your gross income on a car that you intend to keep for at least 10 years. So with this, if you make $100,000 a year, spend $10,000 on a car. If you make $50,000, spend $5,000. You get the idea.

Now even though this might not sound like a lot of money and it seems excessive, the truth is owning a cheap, reliable used car allows you so much more discretionary income to spend elsewhere. You won't have the financial stress of being burdened by high payments, and you'll be financially free to spend more money in other areas where you get more joy.

However, even though all of these car buying rules are usually centered around being financially responsible and saving money, dealerships, on the other hand, will give you pretty much anything that you could qualify for, and this is where things get shocking. Just like buying a house, car dealerships look at what's called your debt-to-income ratio, which calculates how much money you have left over after expenses.

In this case, most car dealerships will qualify you with a debt-to-income below 45%, which means no more than 45% of your gross income could be going towards your debt payments. For example, if you make $5,000 a month, a lender would allow you to spend up to $2,300 of that, which, if all you have is an existing $500 student loan and a $200 credit card payment, they'll gladly finance the remaining $1,500 a month, which could buy you a lot more car than you would expect.

See, here's the thing: when you finance a car, lenders don't look at you and think, "Oh, that's too expensive for him; he shouldn't be doing that. That's a bad idea." Instead, lenders just care about the cost of the car every single month, and because of that, they'll finance pretty much whatever they could give you if the terms are right.

For instance, let's just say you make $6,000 a month and your expenses include $1,200 in rent, $200 in student loans, and $100 as a credit card payment. In this case, your debt-to-income ratio is 25%, which leaves you with another 21% or $1,200 a month to finance a car. If that's the case, let's just say you want to use this towards financing a Mercedes C63 convertible. Well, on a three-year loan with no money down, that comes to almost $2,000 a month, which you can't afford, and they won't qualify you for flat out; you'll get denied.

But since lenders only care about the monthly payment, if you instead opt for a 72-month loan, all of a sudden your monthly payment drops to about $1,100 a month, and congratulations! Now you could buy the car. I guess just look at it this way: if your monthly budget is $500, you could buy a standard $16,000 car over 36 months, or you could buy a $30,000 car over 72 months. Other places even offer terms of up to 996 months, which could extend your purchase price all the way up to $37,000, again all with the exact same $500 a month budget.

The truth is lenders are able to do this because as long as you make the first few payments on your loan, they could then go and resell your loan to third parties for a profit, giving them a quick rate of return and then allowing them more money left over to issue the loan to somebody else. Needless to say, dealerships do not have your best interest at heart, which is why it's so important to come up with the budget ahead of time and then stick with it.

Personally, though, as a car enthusiast, I do get the appeal of wanting to spend more money on a car, and as much as I enjoy Dave Ramsey's advice or the 238 rule, there are ways to own a car without spending any money or even making money. Like, here's a few examples: the first car that I ever bought was a 2005 Toyota Prius in 2008, and I bought this car for $8,500 with about 70,000 miles on the clock.

I drove that car for 4 years; I put on another 50,000 miles, and by the time I moved on from it, it was worth about $5,500, which meant that I only lost about $62 a month in depreciation, which isn't bad. At the same time, I also bought a 2006 Lotus Elise for $30,000. I drove it for 2 years and then I sold it for $33,000. I then bought a 2008 Lotus Exige 240 for $50,000, and then I drove it for 2 years and sold it for $50,000.

There's also my 2005 Ford GT, which is worth about 25% more than what I paid for it, or my Tesla Model 3, which is still worth more than what I paid in 2019 after rebates. Generally, the cars that I buy and drive barely lose any value or they actually end up making money because I'm a car fanatic, and anything that I drive, I just want to make sure it's not going to plummet in value.

Now, in terms of which cars could work for something like this, in my personal opinion, I tend to believe that might include something like the Honda S2000, an older Mazda Miata, mid-2000s Corvettes, mid-2000s BMW M3s, early 2000s Porsche Boxsters, Subaru Impreza, Toyota FJ Cruiser, late 2000s Audi R8s, and of course a used Mercedes G-Wagon.

Or if you've got a lot of money, there's also the BMW Z8, any manual Ferrari F430, or Lamborghini, a Mercedes SLS AMG, or almost any Dodge Viper. Now yes, I get those are very specific specialty cars, but there's a market for them, and because of that, the values tend to climb.

Beyond that, though, you can also buy a more commuter-friendly car, and this would typically be a 5 to 7-year-old vehicle with anywhere between 30,000 to 50,000 miles on the clock that you could drive without any major issues for another 5 to 15 years. All of that is to say that if you just need a car for commuting, buy something that is used, reliable, good on gas, that you could afford to pay for with less than 10% of your overall salary over 3 years, if you don't buy it outright in cash.

For everything else though, preferably keep your payments to a minimum, keep good insurance on the car at all times, find a good honest local mechanic that you trust, and then just drive it until the wheels fall off—figuratively speaking. When it comes to transportation, most of the time cars are just a money pit that detract from things that really matter the most.

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