Here鈥檚 how to stay out of trouble when you鈥檙e ready to buy your next car, truck or SUV:
- 鈥� Apply our version of the 20/4/10 rule.
- 鈥� Know your limit for total spending.
- 鈥� Stick to it regardless of temptations.
But, if you鈥檙e not great at math 鈥� and a lot of car shoppers will concede that they aren鈥檛 鈥� what does that mean when you鈥檙e on the car lot looking at new- or used-car stickers.
To get at some conclusions, we could have applied the standard 20/4/10 rule (20 percent down, four-year term, spending no more than 10 percent of annual gross income) recommended by financial experts, but we went with our own 10/12/4 rule at various income levels instead. That is, 10 percent of income divided by 12 monthly payments then multiplied over four years.
So, for example, a car shopper earning $10,000 a year can spend $1,000 a year on his or her vehicle, which computes to an $83 monthly car payment and a vehicle costing $3,749 鈥� including taxes and documentation fees 鈥� using the TCalc online calculator and a four-year term. That shopper could purchase a slightly more expensive vehicle 鈥撀�$4,618 total 鈥� with a five-year term.
In both cases (for simplicity鈥檚 sake), we assumed $0 down payment, but every dollar you put down adds to the value of the vehicle you can purchase. So, if our shopper above managed to set aside $500 for a down payment, the total vehicle price would rise to $4,249 over four years, $5,118 over five years.
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A more realistic example might be a car shopper earning $50,000 a year as an individual or family. Calculations using the above 10/12/4 rule results in a monthly car payment of $417 and a vehicle costing $18,836 (four-year term) or $23,203 (five years), again assuming $0 down payment. Adding a down payment, say $2,500, boosts those maximums to $21,336 and $25,703.
But all of these numbers would require subtracting taxes (which vary by state) and other costs, so the affordable sticker price in all cases would be lower than the prices cited.
Here are our calculations for various income levels, with monthly payment, followed by total cost over four years and over five years based on the TCalc calculator:
$10,000 = $83/month = $3,749 ($4,618 @ 5 years)
$20,000 = $167 = $7,543 ($9,292)
$30,000 = $250 = $11,292 ($13,913)
$40,000 = $333 = $15,042 ($18,529)
$50,000 = $417 = $18,836 ($23,203)
$60,000 = $500 = $22,586 ($27,822)
$70,000 = $583 = $26,335 ($32,440)
$80,000 = $668 = $30,129 ($37,114)
$90,000 = $750 = $33,878 ($41,732)
$100,000 = $833 = $37,628 ($46,351)
$110,000 = $917 = $41,422 ($51,025)
$120,000 = $1,000 = $45,171 ($55,643)
In the end, many shoppers get vehicles they can鈥檛 afford and shouldn鈥檛 purchase. You can avoid that trap by starting out knowing your limits.
