How Much to Spend on a New Car

Planning & Saving
on April 9, 2013

If you are thinking about buying a new car, how much can you afford to spend? To get an easy answer, all you have to do is follow the 20/4/10 rule. This rule states that you want to put 20 percent of the cost down, finance the car for a maximum of four years and the payment should not be more than 10 percent of you gross income.

Don’t Exceed 10 Percent Of Your Gross Income

The first thing that you want to do is determine your gross monthly income. You then want to make sure that your payment is not more than 10 percent of that number. For example, if you make $3,000 a month, you don’t want to spend more than $300 for a car payment. If you make $5,000 a month, you don’t want to spend more than $500 a month for a car payment.

Put 20 Percent Of The Price Down

Let’s say the car that you are interested in costs $10,000. This means that you want to put at least $2,000 down when you buy the car. The good news is that you don’t have to necessarily pay cash to achieve this goal. Your old car can be traded in to be used as a down payment. This can help help you out if you are having trouble saving money.

Keep The Loan To A Maximum Of 48 Months

You want to make sure that you are done paying for the car as soon as possible. When you are done paying for the car, you can keep driving your car for several years without having a car payment. This will allow you to put extra money in the bank instead of forking over more interest to the bank for another year or two.

Saving money is a lot easier when you don’t have excessive debt. Therefore, make sure that you purchase your next car with the 20/4/10 rule in mind. If you do, you will be able to put more of your money in the bank instead of giving it to the bank because you are still paying off your car loan years from now.

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