How Much Car You Can ACTUALLY Afford (By Income) - Not What You Think!

Summary

This video breaks down how much income you need to afford different cars, considering not just monthly payments but the full cost of ownership, including financing, insurance, fuel, maintenance, registration, and depreciation. It explores multiple budgeting rules like the 238 rule, 2410 rule, Dave Ramsey method, and Financial Samurai approach, showing how each affects car affordability. The host also highlights the impact of credit, loan terms, and dealer practices, while sharing personal experiences with depreciation-proof cars. Practical tips focus on buying reliable vehicles, minimizing payments, and maximizing long-term savings, empowering viewers to make financially smart car-buying decisions.

Takeaways

• 🚗 Owning a car costs more than the monthly payment; consider financing, fuel, insurance, registration, maintenance, and depreciation.
• 💰 The 238 rule suggests 20% down, a 36-month loan, and total transportation costs ≤ 8% of annual income.
• 📊 The 2410 rule allows 20% down, a 48-month loan, and total transportation costs ≤ 10% of annual income for more expensive cars.
• 🤑 Dave Ramsey's approach emphasizes buying a car outright in cash, ideally worth ≤ 50% of annual income, to avoid monthly payments.
• 🔧 Maintenance and repair costs vary significantly depending on the car brand; luxury vehicles cost more to maintain.
• ⛽ Fuel costs are influenced by vehicle efficiency and average commute; budgeting around $120/month is common for the average car.
• 📉 Depreciation is a major cost: new cars lose 11% immediately, 25% in one year, 46% in three years, and 63% in five years.
• 💳 Credit plays a crucial role in financing; better credit results in lower interest rates and easier loan approvals.
• 🏎️ Depreciation-proof cars and collectible vehicles (e.g., Honda S2000, Mazda Miata, Tesla Model 3, Mercedes G Wagon) can retain value and reduce long-term loss.
• 🛠️ Reliable used cars with 5–7 years of age and 30–60k miles are ideal for commuters, offering lower depreciation and maintenance costs.
• 📈 Lenders often approve larger loans than financially advisable, focusing on monthly payment and debt-to-income ratio rather than total affordability.
• 💡 Smart car buying includes budgeting, minimizing payments, maintaining insurance, and using trustworthy mechanics to save money long-term.

Q & A

What factors should be considered when calculating the true cost of owning a car?

The true cost of owning a car goes beyond the monthly payment. It includes financing costs, fuel, insurance, registration, repairs, maintenance, and depreciation. Each of these can significantly affect the overall cost of owning a vehicle.

Why is it important to factor in depreciation when purchasing a car?

Depreciation is critical because it represents the loss in value of the car over time. A new car loses 11% of its value the moment it’s driven off the lot, and it continues to depreciate rapidly in the first few years. Factoring this in helps you understand the true financial impact of buying a car.

What is the 238 rule, and how does it help determine what car you can afford?

The 238 rule suggests you should put 20% down on a car, finance it over a 36-month loan period, and spend no more than 8% of your pre-tax income on all transportation costs. This rule ensures that your car purchase remains financially sustainable without overextending your budget.

How do monthly car payments and loan terms influence the cost of a car?

Longer loan terms generally lower monthly payments, but they can result in paying more interest over the life of the loan. It's crucial to balance monthly payments with loan terms to avoid excessive interest costs while staying within your budget.

What are the advantages and disadvantages of following the Dave Ramsey method for buying cars?

The Dave Ramsey method advises paying for a car in full with cash, which eliminates monthly payments and the burden of debt. This approach saves money on interest and encourages financial discipline, but it may limit your ability to afford higher-end vehicles without significant savings.

How does the 2410 rule differ from the 238 rule in terms of car affordability?

The 2410 rule allows for a longer 4-year loan, spends 10% of your income on transportation costs, and recommends putting 20% down on the car. It offers a bit more flexibility in purchasing a higher-priced car compared to the 238 rule, but it comes with higher monthly payments and a longer loan period.

What role does your credit score play when financing a car?

Your credit score impacts the interest rate you're offered, the loan terms, and even whether you get approved for a loan. A higher credit score typically leads to better financing terms, lower interest rates, and more affordable monthly payments.

Why should you aim to keep your car payments below 10% of your annual income?

Spending more than 10% of your income on a car can limit your financial flexibility and hinder your ability to save, invest, or handle unexpected expenses. Keeping payments below this threshold ensures that you're not overburdened by car-related costs.

What are some cars that retain their value well over time?

Cars like the Honda S2000, Mazda Miata, mid-2000s Corvettes, BMW M3s, and Porsche Boxers tend to retain their value well. These cars have strong demand and limited depreciation, making them good options if you want to minimize financial losses from owning a vehicle.

What are the risks of dealership financing, and why should you be cautious about it?

Dealerships may offer financing terms that seem appealing, but they can lead to higher total costs due to extended loan terms and high interest rates. Dealerships primarily focus on getting you approved for a loan, often without considering whether the terms are financially responsible for you.