Cars are expensive, and they are not always the best investment, especially in the current economic environment. This guide will show you the correct amount of money to spend on a car, depending on your salary.
Can You Afford A 40K Car?
According to the 35% rule, if you have an annual income of $120,000, you can afford a 40K car.
If you’re trying to identify a suitable amount to spend on a car, 40K is a good starting point. According to Investopedia, you could get a new car for $47,000 in 2021, which falls within the 40K range. In contrast, a used car was roughly $27,000.
In other words, you’re not wrong in setting your sights on a 40K car. But determining whether or not you can afford it is easier said than done because the rules tend to vary. Some experts argue that you should 35 percent of your annual income or less on a car.
Others are convinced that 25 percent and 15 percent are more viable. Regardless of where you fall in that conversation, everyone agrees that you shouldn’t spend everything you earn on a car unless the vehicle in question is an asset that guarantees greater earnings down the line.
Find a rule that works for you and follow it. Otherwise, you risk spending too much. Keep the following in mind:
1). Additional Charges
Even if you have 40K in cash, don’t assume you have enough money to buy and drive a 40K car. Car purchases attract hidden fees, including taxes, insurance, fuel costs, traffic tickets, etc.
What happens when the car develops an expensive fault soon after you buy it? Can you afford the hefty repair costs? Do you have the money to refuel the vehicle? Consider all these factors before throwing every penny you have at a new 40K car.
2). Buyer’s Remorse
What would happen if you invested a portion of that 40K? What if you spent a decade pouring those small monthly payments into the stock market? You would multiply your investment significantly. This sounds like a hypothetical scenario, but it happens more frequently than you think.
Consumers buy expensive assets all the time, only to regret it a few months or years down the line when a lucrative investment opportunity appears. The disappointment is strongest when the consumer in question buys a vehicle on a whim.
But you are less likely to experience such regret if the cost of the car was only a tiny fraction of your annual earnings. This is why financial experts encourage consumers to follow the 10, 15, 25, or 35 percent rule, depending on where they fall.
While it is tempting to spend everything you’ve saved on a new 40K car, you are better off settling for a cheaper vehicle and investing the remnants of your savings.
3). Peace of Mind
A smaller purchase will give you peace of mind. For instance, if that 40K is just 10 percent of your annual income, you won’t stress as much the next time another driver scratches your new car.
If you already bought your car for more money than you should have spent, and the guilt is still haunting you, CNBC suggests selling the vehicle and using the money to buy a replacement that fits within your budget.
How Much Money Do I Need To Make To Afford A 40K Car?
Now that you know the importance of managing your expenses, you can use the calculator on cars.com to identify a vehicle you can afford based on your earnings. You can also make a rough estimate by taking the following into account:
1). Monthly Expenses
How much money do you spend on groceries, rent, bills, and the like? Can you comfortably cover your monthly expenses? Do you have the money to pay for everything that matters to you once you add monthly car payments to that equation?
Sometimes, consumers make decisions based on their annual earnings, forgetting that they get paid monthly. Unless you have 40K in savings, your monthly expenses will determine the amount you can spend on a car.
2). Duration
If you can afford to add the car payments to your monthly expenses today, can you maintain those payments for the next twelve months? What about twenty-four months? How long are you willing to tolerate the monthly car payments?
Nerd Wallet has noticed that some consumers buy cars because the notion of owning a new vehicle excites them. But then that excitement wears off after a few months, forcing them to spend the next several years making payments for a car they no longer want.
If you expect a significant expense to enter the picture in the near future, you should rethink your decision to buy a car.
3). Loan
If you prefer to get a car loan, talk to a financial expert. They will consider factors like your credit score to determine the amount you can afford. Again, your monthly expenses will determine whether or not you can afford the payments on your loan.
4). Target Price
This is the most important variable. How much are you willing to spend on a new car? A 40K car requires an annual income of $120,000. But only if you use the 35 percent rule. Money-Under-30 recommends the 35 percent rule.
In other words, you shouldn’t spend more than 35 percent of your annual income on a car. If you make $60,000, you should buy a 12K car. To be clear, these rules reveal the maximum you can spend. The 35 percent rule doesn’t compel you to spend 35 percent of your income on a car.
You can spend less than 35 percent if you want. 35 percent is the upper limit. But how do you identify the rule to follow? Your attitude will guide you. The average consumer uses 15 percent because they don’t care about cars. Sometimes, they will cut back to 10 percent.
They want a vehicle that serves a purpose. They have no interest in driving the fastest or flashiest cars the market has to offer. Any vehicle that gets them to their destination will do. This category of drivers will happily purchase a used car because they can save money. They are less likely to buy a 40K vehicle.
What about the 20 to 25 percent crowd? Comfort matters to these individuals. Functionality is not enough. They may tolerate a used car on occasion, but they prefer a brand-new vehicle. These drivers are willing to extend the limit to 30 percent to get a larger car instead of settling for smaller models like the Kia.
No one spends 35 percent of their monthly income on a vehicle unless they love cars. People in this category want a fun and luxurious ride. Where do you fall? 40K means different things to different people.
Is Buying A 40K Car Worth It?
40K is a lot of money for a person that gets bored with their car every few years. On the other hand, 40K is a decent investment for drivers that keep their vehicles for long periods. In fact, if your interest in cars wanes quickly, stop buying these assets. Follow Edmunds’ advice and lease a vehicle. It is the more sensible option.
The most important consideration is your income. A 40K vehicle is not worth it if you earn less than $100,000 (According to the 35 percent rule). You are better off investing that 40K and using the profits you make in a few years to buy the car of your dreams.
What About A 30K Car? Can You Afford It?
30K is less than 40K. However, 30K is still a lot of money. Unless that 30K car is an asset for your business, and its purchase will boost your earnings in the long run, there is no justification for buying a 30K car. You should aim for a 4K or 5K vehicle.
A 30K purchase is especially problematic if 30K is more than 35 percent of your annual income.
How Much Money Do I Need To Make To Afford A 30K Car?
You need an income of at least $90,000 annually to buy a 30K car, assuming you want to follow the 35 percent rule.
What About a 50K Car?
A 50K car is a luxury. It is not worth the money. You should only buy one if you make a lot of money or if you’re retired and don’t have any debts.
How Much Money Do I Need To Make To Afford A 50K Car?
Based on the 35 percent rule, you need an annual income of $150,000 to buy a 50K car comfortably. You can make a similar purchase on a yearly income of $100,000. But it is risky to buy a vehicle whose value is worth half of your annual income.
Is Buying A 60K Car Worth It?
No one should buy a 60K car unless they have tens of thousands of dollars to spare every year after paying all their bills and adding to their savings. Otherwise, there is no justifiable reason to spend 60K on a car.
People who spend that much on a vehicle have a passion for cars. They are looking for a status symbol as opposed to a tool that transports them from place to place.
How Much Money Do I Need To Make To Afford A 60K Car?
You need an annual income of $200,000 for a 60K car to make sense. You can buy a 60K car on a $100,000 income, but your financial adviser will discourage you from doing so. Stay within the 25 percent to 35 percent range.