How Much Car You Can REALISTICALLY Afford! (By Income Level)
Summary
TLDRIn this informative video, the host shares financial strategies for determining how much car one can afford based on income and personal finance rules like the 204010 and 50/30/20 rules. They debunk common myths, particularly the dealership's monthly payment trap, and emphasize the importance of considering total car ownership costs beyond just the sticker price. The video also offers advice on choosing reliable car brands to minimize maintenance costs and the benefits of buying a 2-3 year old car for optimal value retention.
Takeaways
- 🚗 The video aims to help viewers determine how much car they can afford based on their income and financial situation.
- 💰 The speaker warns against car salesmen asking for desired monthly payments, as it may lead to being scammed into buying a more expensive car than one can afford.
- 📉 The car market has seen fluctuations with used car prices dipping since 2023, but interest rates remain high compared to the pandemic period.
- 📈 The price of the average car has risen significantly more than the median income over the years, making it harder for people to afford the car they want.
- 🔢 Two key formulas discussed are the 204010 Rule and the 50/30/20 Rule, which help in calculating the affordability of a car based on income and financial allocation.
- 🏦 The 204010 Rule suggests that if you finance a car for 4 years or less with a 20% down payment, the total monthly car cost should be less than 10% of your monthly income.
- 💹 The 50/30/20 Rule recommends allocating 50% of income to needs, 30% to wants, and 20% to savings, with transportation being a part of the needs category.
- 🚘 The video suggests that buying a car that is 2 to 3 years old can be a smart strategy as the depreciation curve has usually leveled off by then.
- 📉 Luxury cars may depreciate faster due to higher maintenance costs, making them less desirable from a cost perspective compared to reliable brands like Toyota or Honda.
- 📋 It's important to calculate the total cost of car ownership, which includes more than just the monthly payment, such as insurance, maintenance, and other associated costs.
- 💡 The video emphasizes that the decision on how much to spend on a car is personal and should be based on individual circumstances and financial responsibility.
Q & A
What is the main topic of the video?
-The main topic of the video is how to determine how much car one can afford based on their income and financial situation.
Why should viewers listen to the advice given in the video?
-Viewers should listen because the speaker owns multiple cars, has experience with different financing options, and is knowledgeable about the financial aspects of car ownership.
What is the problem with the question 'What do you want your monthly payment to be?' when asked by a car salesman?
-The problem is that it can lead to a scam, as it may push buyers towards more expensive cars and longer financing options that they might not actually afford.
What are the two main formulas discussed in the video for determining car affordability?
-The two main formulas discussed are the 204010 Rule and the 50/30/20 Rule.
What does the 204010 Rule suggest about car affordability?
-The 204010 Rule suggests that if you put down 20% on a car, finance it for 4 years or less, then the total monthly cost of your car should be less than 10% of your monthly income.
What is the 50/30/20 Rule and how does it relate to car affordability?
-The 50/30/20 Rule recommends allocating 50% of your income towards needs, 30% towards wants, and 20% towards savings. For car affordability, it suggests that only 10% of the 'needs' portion should be spent on transportation.
Why is it important to consider the total cost of car ownership and not just the monthly payment?
-It's important because the total cost includes insurance, maintenance, fuel, and other expenses that can significantly increase the overall cost of owning a car.
What is the recommendation for buying a used car in terms of depreciation?
-The recommendation is to buy a car that is about 2 to 3 years old, as the depreciation curve has typically leveled off by this time.
Why is it advised to be cautious about buying luxury cars that have depreciated a lot?
-It's advised because the high depreciation is often due to high maintenance costs, which can make the overall cost of ownership much higher than initially expected.
What is the general advice for determining how much to spend on a car based on annual income?
-The general advice is not to spend over 30% of your yearly income on a car.
Why might the formulas discussed in the video not work for everyone?
-The formulas might not work for everyone because personal financial situations vary greatly, and what is affordable for one person might not be for another.
Outlines
🚗 Understanding Car Affordability
The video aims to educate viewers on how to determine the right car for their budget. It starts by emphasizing the importance of understanding the financial aspect of car ownership, debunking common myths, and warning against the deceptive tactics of car salesmen. The presenter introduces two key formulas: the 204010 rule and the 50/30/20 rule, which help in calculating the affordable car cost based on monthly income and overall financial health. The 204010 rule suggests that if you finance a car with a 20% down payment for 4 years or less, the total monthly cost should not exceed 10% of your monthly income. The 50/30/20 rule advises allocating 50% of income to needs, 30% to wants, and 20% to savings, with transportation costs ideally not exceeding 10% of the needs portion.
💰 Financial Strategies for Car Ownership
This paragraph delves deeper into the financial strategies for buying a car. It discusses the importance of considering the total cost of car ownership beyond just the monthly payments, including insurance, maintenance, and other associated costs. The presenter advises against financing cars for more than 4 years, as longer terms can lead to higher overall costs. They also highlight the need to be conservative with car expenses, especially if one cannot afford a 20% down payment. The video suggests using online loan calculators to determine affordability and recommends not spending more than 30% of one's annual income on a car. Additionally, it emphasizes the benefits of buying a 2-3 year old car, as this is when the depreciation curve typically levels off, making it a smart financial decision.
🏡 Personalizing Your Car Budget
The final paragraph emphasizes the need for personalization in determining one's car budget. It acknowledges that the provided formulas may not apply to everyone, especially those with high incomes, and encourages viewers to create a custom formula based on their unique financial situations. The presenter advises considering the total cost of ownership, including insurance, which can vary significantly based on factors like the car's make, the driver's age, and location. They also caution against the trap of longer financing terms, which can make cars seem more affordable than they actually are. The video concludes by encouraging viewers to use logic and the provided context to make informed decisions about their car purchases, and to enjoy the experience of owning a car that aligns with their financial capabilities.
Mindmap
Keywords
💡Affordability
💡Car Depreciation
💡Financing
💡Sticker Price
💡Monthly Payment
💡Interest Rates
💡Down Payment
💡Total Cost of Ownership
💡Budgeting Rules
💡Car Salesman
💡Personal Finance
Highlights
The video discusses how to determine the affordability of a car based on income and financial strategies.
The presenter warns against car salesmen's tactics that may lead to overpaying for a vehicle.
The 204010 rule is introduced as a formula to calculate the maximum car cost based on monthly income.
The 50/30/20 rule is explained as a guideline for budgeting, with 50% of income allocated to needs, including transportation.
The importance of considering personal financial circumstances when applying these rules is emphasized.
A custom formula for car affordability is recommended based on individual financial situations.
The presenter suggests that car affordability should not exceed 30% of annual income.
The benefits of buying a 2-3 year old car for optimal depreciation are discussed.
The risks of luxury cars with high maintenance costs despite their significant depreciation are highlighted.
The total cost of car ownership, including insurance and maintenance, is stressed as being more than just the monthly payment.
The impact of location and driving record on car insurance costs is mentioned.
The presenter advises against dealerships' push for longer financing options that may lead to overcommitment.
Using online loan calculators to determine car affordability based on custom formulas is recommended.
The video mentions that the car market has been volatile, with used car prices dipping since 2023.
The presenter's personal experience with owning multiple cars and seeking the best financial deals is shared.
The video concludes with the message that car affordability is a personal decision and should be based on logical calculations.
Transcripts
hey guys so in today's video I'll be
answering the question how much car can
you actually afford break down by income
level use versus new cars looking at the
overall picture of your finances just my
general tips on how you guys can save
money when buying a car because yes
there is a lot of strategy to this and I
want you guys to save as much money as
possible so why should you guys actually
listen to me well I own multiple cars
two of which are paid in cash one is
financ I'm obsessed with the financial
aspect of owning cars I'm always looking
for the best deals possible so yeah this
is a topic that I absolutely love and
you know when you go to a car dealership
and the car salesman asks you what do
you want your monthly payment to be so
many people think oh this is a question
that if I answer I'll know exactly how
much I can afford but the truth is if a
car salesman ever asks you that question
just know you are about to get scammed I
think there are so many myths and
intricacies when it comes to figuring
out how much you can afford on a car so
I really hope that this video can be
helpful so a little bit of background
the car market has been absolutely crazy
the last few years you guys saw used car
prices shoot up in value but luckily
since 2023 they have sort of dipped
interest rates are still pretty high
they're not as high as they once were
but they're still extremely high
compared to the 23% interest rates that
people were getting during the pandemic
and yeah overall it's just getting
harder and harder for people to be able
to actually afford cars so while the US
median income has risen from $69,000 to
$77,000 per year over 23 years adjusted
for inflation the price of the average
car has risen way way more than that and
yeah so it just means that it's harder
for people to be able to afford the car
that they want these days luckily I will
say that there are tons of things you
guys can do both financially and in your
personal life that make car ownership a
lot more financially responsible and the
first thing I want to talk about is the
formulas that you guys can use to
calculate how much car you can afford
now just know that there are thousands
of formulas on the web it really depends
on who you ask so for example if you ask
Dave ramsley he'll tell you that you can
only afford a car if you can pay cash
for it right now there's other people
that follow these percentage based
formulas and you can sort of plug in
your income and see how much car you can
afford using those formulas yeah there
are two formulas we're going to be
talking about in this video one is the
2410 Rule and then the other is the
503020 rule it's really important to
take both of these formulas into
consideration when figuring out how much
car you can afford so first let's start
off with the 204010 rule basically what
this says is that if you put down 20% on
a car finance it for 4 years or less
then the total monthly cost of your car
should be less than 10% of your monthly
income this includes Transportation cost
insurance gas your car payment
maintenance and stuff like that so what
I've done is I've sort of broken this
down into a chart so on the left you
basically have your post tax income this
is the monthly money that is coming in
after you pay taxes so for example if
you're making let's say $2,000 per month
we're going to want to hit that Target
10% which means you're spending $200 or
less on your total car payment as well
as all car Associated costs if you make
$4,000 a month that 10% is going to fall
on $400 and this basically just goes up
the more you make right like a $10,000
income can technically afford $11,000 a
month on their car cost one using this
formula now this is just the target
amount right there's also the very safe
amount which is 5% there's the semi-
target which is 15% definitely over 10%
but still not absolutely crazy there's
over Target which is 20% and then if
you're keeping up with the Joneses
that's going to be 30% or more yes there
are people that spend over 30% of their
monthly income on their car you see this
actually a lot but what we're going to
try and do is be financially responsible
and stay far away from that so for most
of you guys watching this video I'd say
that 5 to 15% is is where you want to be
and essentially what you want to do is
you want to take this formula and
combine it with other things that you
believe in so for example if you believe
with Dave Rams these teachings you'll
also want to have the cash on hand to
technically just pay it off right now
does that mean you need to buy the car
cash right now and not Finance it no and
other thing we need to do is we need to
take this formula in consideration with
other formulas like the 50 3020 rule
this formula is so important because it
looks at your overall Financial picture
right you can't just look at the car
formula when determining how much car
you can afford there's so much context
that goes around it and we really need
to be able to understand that so
basically the 50 30 20 rule recommends
putting 50% of your money towards needs
30% towards wants and 20% towards
savings so the portion of this formula
that we will be talking about most is
the 50% part because that's the money
that's going towards your needs and for
most people a car is a need if you have
a significant amount of money being
spent on other needs then of course that
means that the amount you spend on your
car should be less right because
according to the formula we talked about
only 10% of that 50% should be spent on
your transportation the rest should be
split between your housing your food
groceries and stuff like that now what
happens is if your expenses for the
other needs are quite High then that
leaves less room for us to spend on our
car conversely if the amount of money
you're spending on your other needs is
actually less so for example if you are
living with your parents or something
like that then yes technically you
should be able to spend a little bit
more on Transportation the reason why
20% of of your total needs category
should be spent on Transportation it's
just because when you look at life in
general the car you drive is not that
important right it's about 20% of what
you should be spending on your needs the
far more important things are things
that actually keep you alive so that's
going to be your housing and your food
of course everyone is different that is
why personal finance is called personal
finance it's a personal decision it's
really based on your personal
circumstances so just know that
everything I'm saying in this video has
an asteris to it you really need to look
at it in the context of your own life
and just basically adjust everything
we're talking about so that it fits your
life ideally I want you guys to come up
with a custom formula for most people I
don't think you need to have the cash on
hand to pay off the car fully that's a
very very conservative approach and I
think that thinking is a bit outdated
but let's say you don't have 20% down
and you want to put 10% down on your car
in that case I think a lot of people
would think since I'm putting less money
down on the car I can technically afford
to pay a little bit more per month but
my logic is actually the opposite so if
I'm only able to put down let's say 10%
on the car then I shouldn't be spending
10% of my monthly costs on the car I
should be spending let's say 7% and that
basically is because if you don't have
20% to put down on the car that probably
means you have less money for your
emergency fund and that means you do
need to be more conservative with how
much you spend on the other hand if you
have enough money to pay the car in full
right now then maybe it makes a little
bit more sense to spend 15% of your
income on your car now I do want to give
you guys a warning because the sale
price of your car car is actually going
to be significantly higher than what it
says on the sticker for example if you
agree to buy a car for $20,000 that's
not all you're going to pay generally
you're going to pay about 10% on top of
that and this does depend on where you
live that's basically due to different
state taxes and stuff like that but in
general expect to pay about 10% on top
of the sale price of the car so the more
expensive the car the higher that amount
is going to be of course now if you guys
go to a dealership they'll actually
likely push you towards financing that's
longer than 40 8 months right it's very
standard for people in the US to go with
60 and 72-month financing options the
reason why they can push you towards
this is because it can actually lower
your monthly payment and make it seem
like you can afford more car than you
can actually afford that's why when the
car salesman asks you what do you want
your monthly payment to be that is a
trap and I know for sure that they are
going to try and you know push you
towards longer financing options so that
you actually go for the more expensive
car what I recommend you guys do is just
find a free online loan calculator plug
in the numbers with your custom form
fora that you have made based on this
video and use that to figure out how
much car you can afford and if you don't
want to look at it from a monthly
payment point of view I recommend just
don't spend over 30% of your yearly
income on your car so for example if
you're making $100,000 a year don't
spend over $30,000 on the car if you're
making $50,000 per year don't spend over
$115,000 so yeah how much car you
actually can afford depends on what rule
you go with but just create your custom
rule based on all these different things
and that's probably the best way to do
it now obviously some cars are a better
buy than others some cars appreciate a
lot faster some hold their value
extremely well and this all really boils
down to the depreciation curve and this
is different for every single car on the
market what I recommend for most people
is you want to buy a car that's about 2
to 3 years old now 2 years ago this
wouldn't have been my advice since used
car prices were so high they're so
inflated compared to new car prices but
now that used car prices have come down
I think this is the Smart strategy the
reason why 2 three years is The Sweet
Spot is because by this time the
depreciation curve has sort of leveled
out usually new cars you see a pretty
big hit in the first year you still see
a pretty big hit in the second year and
then by year three that's when the
depreciation starts to level off let's
take a car let's say it costs $330,000
new by the end of year 1 let's say that
car is worth $24,000 so that's $6,000
depreciation in the first year let's say
after the second year it's now worth
$21,000 so we have $3,000 of
depreciation in that second year in that
year three it's only depreciating about
$2,000 per year that's essentially why
buying at year 2 or three is the sweet
spot for depreciation you sort of let
that first owner take that big hit of
depreciation and you're basically
souping in once that depreciation has
sort of leveled off now I will say this
only applies if you buy a Dependable
brand like let's say Toyota or Honda
there are tons and tons of luxury cars
out there that depreciate a ton and you
might be thinking oh I can get this
$80,000 car for $20,000 the reason why
it has depreciated so much though is
because of the maintenance cost because
trust me if that car didn't cost any
money to maintain there is no way it
would depreciate that much it still be
worth closer to the original amount and
that is really why it's so important if
you're trying to save money to buy a
reliable brand yes those cars depreciate
a little bit less but the cost to
actually maintain that once it's in your
possession is so much less that makes
the overall cost of ownership very low
compared to some of those crazy luxury
cars another mistake that a lot of
people make is they don't actually
calculate what their total cost of
ownership is going to be there are so
many factors that are well beyond just
the monthly payment so for example if
you are a young driver your insurance is
going to be more I really recommend you
guys go to a broker get some quotes from
different companies and make sure that
they are car specific right some cars
they're going to be extremely expensive
to ensure and some are going to be
extremely cheap to Ure it also depends
on where you live right so if you live
in Miami then yes the cost to Ure pretty
much any car is quite high and also keep
in mind your driving record so if you do
have points on your driving record that
does mean that your insurance rates are
going to be higher and just really know
that there are so many additional costs
to owning a car Beyond just the monthly
payments and yeah that is just a mistake
that a lot of people make that makes
them think they can afford cars that
they really can't now this is a video
that applies to most Americans but these
formulas They Don't Really Work If you
make a lot of money I'm really not going
to talk about that too much in this
video because we could really talk about
this topic for 2 3 4 hours and I still
wouldn't be done talking because there's
just so much stuff there are so many
different situations
there are so many different classes of
cars you can buy and so I do want to say
that these rules they don't apply to
everyone if you guys thought this video
was going to be a very simple oh this is
exactly how much car you can afford
based on a few numbers then sorry to say
that's not the case but hopefully it
gave you guys enough context to sort of
do the math on your own figure out what
you are comfortable and feel responsible
spending on your own car and yeah as a
car lover I do want to say that for
people that really love cars yes you
only live once having a fun car can be
sort of like investing in your own
experiences for some people they
absolutely don't care what car they
drive as long as it gets them from point
A to point B and yeah this is just a
hugely personal decision I'd say for
most people they sort of go emotional
with how much they want to spend on a
car basically the whole takeaway is
there are formulas you guys can use you
guys can use more logic when it comes to
determining how much you can afford and
I really hope you guys can do that
before buying your next car I also have
links to some of the resources we talked
about in this video in the description
down below and yeah hopefully you guys
enjoyed the video hopefully you guys got
some value from it if you guys did make
sure to hit that like button and also
subscribe for more content just like
this this whole channel is dedicated to
helping you guys live more financially
successful lives thank you so much for
your time and I'll see you in the next
video peace
[Music]
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