How Much Car You Can REALISTICALLY Afford! (By Income Level)

Summary

In 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

00:00

🚗 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.

05:01

💰 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.

10:02

🏡 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.

Keywords

💡Affordability

Affordability refers to the ability to pay for something without financial strain. In the context of the video, it is about determining how much a person can reasonably spend on a car without overextending their budget. The script discusses various rules and formulas to assess car affordability relative to one's income, such as the 20/4/10 rule and the 50/30/20 budgeting rule.

💡Car Depreciation

Car depreciation is the loss of value a car experiences over time due to factors like age, wear and tear, and market conditions. The script mentions that buying a car that is 2 to 3 years old can be advantageous because the initial steep depreciation has already occurred, making it a more cost-effective purchase.

💡Financing

Financing involves borrowing money to pay for a purchase, which is then paid back over time with interest. The video script warns against longer financing options that may seem affordable but can lead to paying much more for a car over time, emphasizing the importance of understanding total costs.

💡Sticker Price

The sticker price is the manufacturer's suggested retail price for a vehicle. The script points out that the actual cost of a car will be higher than the sticker price due to additional fees such as taxes, which can add about 10% to the final price.

💡Monthly Payment

A monthly payment is the amount paid towards a loan or lease each month. The video discusses how car dealerships may focus on lowering the monthly payment to make a car seem more affordable, which can be misleading if the total cost over the life of the loan is not considered.

💡Interest Rates

Interest rates are the percentage of the loan amount charged by lenders as the cost of borrowing money. The script notes that although interest rates have decreased from pandemic highs, they remain high, affecting the total cost of car financing.

💡Down Payment

A down payment is the initial amount of money paid toward the purchase of a car before financing the rest. The video script suggests that the size of the down payment can influence the monthly cost of the car, with smaller down payments potentially requiring more conservative monthly spending.

💡Total Cost of Ownership

Total cost of ownership encompasses all expenses associated with owning a car, including purchase price, maintenance, insurance, and fuel. The video emphasizes the importance of considering the total cost of ownership, not just the monthly payment, when determining car affordability.

💡Budgeting Rules

Budgeting rules are guidelines for allocating income towards different financial categories, such as needs, wants, and savings. The 50/30/20 rule mentioned in the script is an example, where 50% of income should go to needs, 30% to wants, and 20% to savings, helping to manage car affordability within a broader financial plan.

💡Car Salesman

A car salesman is a person who sells cars, often working at a dealership. The script warns viewers that car salesmen may ask about desired monthly payments as a way to steer customers towards more expensive cars and longer financing terms, which can be financially disadvantageous.

💡Personal Finance

Personal finance refers to an individual's financial decisions, including budgeting, saving, and investing. The video script highlights that personal finance is unique to each person's circumstances, and decisions about car affordability should be made within the context of one's overall financial situation.

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

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