What Percent of Annual Income Should I Spend on a Car?

Buying a car is one of your largest expenses, aside from housing and food costs. I believe that you should never finance a car. Cars are depreciating assets that do not hold their value. If you are going to finance something, finance an asset, not a liability.

An asset is defined as “Something that puts money into your pocket”—it’s something that produces cashflow. Financing an investment property (provided the numbers make sense) is wise. The investment property is an asset whose value should increase over time—the asset will put money into your pocket. Likewise, financing a business (that produces cash flow) is wise because the business is an asset that will put money into you pocket.

On the other hand, a liability is something that takes money out of your pocket. You do not want to finance liabilities. Unless your car is an expensive collector’s item (that will appreciate over time), financing the vehicle is not a wise idea.

Percent of Annual Income To Spend on a Car

As a general rule, do not spend more than one-third of your annual income on a car. In fact, I suggest spending a lot less than one-third.

You can find a good-looking, reliable, used vehicle for $6,000-$7,000. Unless you spend lots of time in your car, it’s better to buy “the-most-reliable-combined with-least-expensive” vehicle you can find. You need something that gets you from Point A to Point B reliably, safely, and consistently.

If you decide to purchase an expensive car (as a special treat to yourself), pay for it with cash. Don’t finance it. More information on How & Why to Buy a Used Car.