Budgeting for a New Car – How Much to Spend?

Experts say time and again that it’s easy to spend too much when you buy a new or used vehicle.  They call this “overbuying.”

But that begs the question:  how much should I spend on a new car?

Well, the trusted financial advisers at Consumer Reports recommend that your monthly payments toward all of your debts should not exceed 36% of your monthly income.  So if you make $5,000 per month pre-taxes, your total debt payments for items like mortgage/rent, credit cards, any outstanding loans, and your new car payments should be less than or equal to $1800.

A 4 Step Guide to Determining How Much Car You Can Afford

• Divide your yearly pre-tax income by 12 months (ex:  $60,000 / 12 = $5000)
• Multiply this monthly income by 36% (ex:  $5,000 x .36 = $1,800)
• Total up your monthly payments (ex:  rent + credit card + insurance, etc = $1,300)
• Subtract the total of your monthly payments from this 36 percent figure (ex:  $1,800 – $1,300 = $500)

In this example scenario, you have $500 available per month for your vehicle payments.  Of course, if your spouse or significant other has income to put toward the vehicle, you might want to calculate these numbers based off household income and costs rather than just your individual salary and payments.