Deciding how much of your salary to commit to a car payment before you find the car of your dreams is a wise financial move. Because cars constantly depreciate, Bankrate recommends that you follow this and a few additional best practice guidelines even if you have few other bills. Take the affordability factor one step further and include total ownership costs to make sure the car you choose truly is one you can afford.
Budgeting Best Practice Guidelines
Use your net monthly income, not the wages you actually earn, to create a more accurate estimate of how much car you can afford. Setting an optimal car payment as a percentage of net wages is another best practice recommendation. However, no set percentage works for everyone. Recommendations range from 6 percent to 20 percent, with some financial experts including all transportation costs in this number and some including only your car payment.
The 20 Percent Rule
Bankrate says that no more than 20 percent of your net income should go towards car payments. However, this percentage includes all of your existing car loans. If you follow this recommendation and your net monthly income is $3,000, the most you should commit towards all monthly car payments is $600.
Cost of Ownership Guidelines
In contrast, TIAA-CREF Financial Services recommends that you commit no more than 10 to 15 percent of your salary towards all transportation costs. This includes your car payment, repairs and maintenance, insurance and savings for unexpected costs. If you follow this recommendation and your net monthly income is $3,000, the most you should commit to paying all transportation costs is $300 to $450 per month.
The size of your down payment and the length of the loan also play a role in determining how much car you can afford. DriversEd.com recommends that you make a down payment of at least 20 percent and keep the loan term to no more than 48 months. Use an auto loan calculator to make the car payment, including interest, fits within the salary percentage you decide to commit to a car payment.