How Much Car You Can ACTUALLY Afford (By Salary)

what's up Graham it's guys here so have you ever wondered how much money you need to make to afford a car like this or this or even this well Wonder no longer because today we'll cover exactly how much money you need to make to afford the typical car in every price point based on dealership markups interest rates and lender guidelines because chances are the car you want is a lot more expensive than you think especially with the average car payment now nearing almost $800 a month which let's be real the amount of money you actually

need to be making to afford something like that is pretty absurd is I'm about to share with you although before we go into how much car you could buy throughout every income bracket including the true cost of ownership on something like this do me a quick favor and hit the like button your like really does make a huge difference thank you so much and now let's begin all right so to start Just Like Home Ownership it's really important to understand as soon as possible that your monthly car payment is never going to be the true

cost of owning a car and if you're curious what I mean by that here's the reality first on the most basic level like we just discussed you're going to have the cost of financing overall it was found that 85% of new vehicles and 55% of used car purchases are bought with debt and 25 to 50% of those loans are given to people who might not be able to afford them on terms as long as 72 months this means with a typical interest rate between 6 and a half and 11% you're going to have to budget

for a monthly payment that's going to last at least a few years in addition to that too we also have gas mileage look a large portion of that cost is going to be dictated by whether or not you're driving a fuele efficient Prius or a hmer H1 but with the average car getting 252 m a gallon at an average commute to 41 m a day you're looking at an extra $150 a month in fuel costs in addition to everything else like three insurance this cost is going to depend entirely on your age driving history car

location mileage driven education and a million other factors that car insurance companies use to jack up your rates but overall the average insurance cost is another $170 a month with a chance of going even higher if you're under the age 25 four you also have car registration every year your State's going to charge you a fixed amount based off the MSRP or purchase price of the car it usually ranges a few hundred a year five you then have the dreaded maintenance and repairs now this one's a little bit difficult to predict but chances are if

you're driving a Mercedes BMW or porish your cost is going to be a lot higher than someone driving a Toyota or a Honda which is why your cost of ownership could be a lot higher than what you think and finally we have something that a lot of people don't talk about and that would be depreciation in my opinion this is something that absolutely needs to be taken into consideration because as much as you don't want to hear it a new car will depreciate 11% the moment you drive it off the lot within a year it's

lost 25% of its value after 3 years it's lost 46% and within 5 years the average car is worth 63% less than it would cost new now even though I'll cover some cars later in the video that'll hold up really well or even increase in value for everything else that's a cost that you're going to have to pay for which brings me of course to What's called the 238 rule in terms of how much car you could afford based on your salary this method goes out to the money guys who suggests that first you should

put 20% down this means that you'll pay 20% of the car's value up front so that you could lower the amount that you'll need to finance and this does two things one it means you'll pay less interest over the lifetime of the loan with usually better terms because you're putting more money down and two it decreases the chances that you'll be upside down on the loan the moment you drive it off the lot the second you should o pay off the car in 3 years or 36 months the goal is that a short-term loan usually

carries less interest more of your payment goes towards paying down the loan and within 3 years you're going to own the car outright allowing you more money left over for other opportunities like saving and investing this also works by discouraging people from taking on the typical 72-month loan on a car they'll only keep an average of 79 months meaning as soon as they paid off the car they basically just go and buy a brand new car and start the process over again which is bad don't do that and finally third you should spend no more

than 8% of your pre-tax income on Transportation costs this means if you make $50,000 a year your total transportation cost should not exceed $4,000 a year or $333 a month this is meant to keep your transportation cost as low as possible since cars are a depreciating asset and by keeping it within this structure you'll minimize the chances of spending more than you need to on something that's not going to give you long-term Financial Freedom as an example of what you could buy with this method let's take the typical person making $45,000 a year this means

that you would be able to afford a car worth about $8,000 because with $1600 down your monthly payment will come in to just under $200 a month and leave you with a $100 a month left over for everything else like gasoline insurance and maintenance or if you have an income of $75,000 a year you'd be able to comfortably spend about $500 a month in transportation which works out to a $116,000 car like this with $3,200 down with all the other remaining money going to the cost of running the car at an income of1 $225,000 a

year you'd be able to comfortably afford a car in the $26,000 bracket and at $200,000 a year you could pay for a $40,000 car again assuming 20% down and a three-year loan now obviously these numbers are meant for people who prioritize paying down the loan as soon as possible living below their means and ensuring they have as much money left over as possible to save an invest however I also understand that waiting until you make $200,000 a year to buy a $40,000 car is somewhat unrealistic especially with the average use car selling for $26,000 so

because of that there's another similar rule that you could follow known as the 2410 rule just like the previous example this suggests that you should put 20% down on a term of no more than 4 years spending no more than 10% of your gross income and with this you will be able to afford a lot more car for example on a $50,000 a year salary the 2410 rule would allow you to spend up to $116,000 on a car which would result in a $300 car payment and $100 left over for everything else at $80,000 a

year you'd be able to buy something around the $288,000 range with $125,000 a year you could buy something between $45 and $50,000 at a $200,000 income that's a car in the $ 7 to $75,000 range the downside with this is that you're going to end up spending more money on Transportation while extending out your loan term for a year so yes it is doable but you will be burdened with even more payments which is pretty much the exact opposite of the next approach and that would be the Dave Ramsey method for those una aware Dave

Ramsey is one of the most successful authorities in all things personal finance saving money and Building Wealth he wrote five New York Times Best Sellers he owns the largest independently operated radio talk show in the country and is more than $600 Million worth of fully paid off real estate so when it comes to cars he has a few Choice words to say in a perfect world he says the car that you could afford is the car that you could buy outright in cash that's right no loan no payment no nothing just buy a car that

you could afford and then drive it until it doesn't work anymore his thinking is that the monthly cost of car ownership is very distracting towards other more rewarding opportunities cars are almost always a bad investment financially and if your entire objective is just to get from point A to point B it doesn't really matter what kind of car you drive as long as it gets you there safely without breaking the bank in addition to that he also practices the belief that the cost of your car should never exceed half of your take-home salary so if

you make $50,000 a year your total cars value should not exceed $25,000 if you make $100,000 a year that's $50,000 and so on he also found that throughout a survey of more than 10,000 millionaires the average millionaire drives a 4-year-old car with 41,000 M on it and 8 out of 10 millionaire car buyers drive it away debt free without carrying a car payment behind them and that all just helps them be the millionaire that they are today separate from that another rule that I really enjoy comes from the financial blogger the financial Samurai who recommends

that you should spend no more than 10% of your gross income on a car that you intend to keep for at least 10 years so with this if you make $100,000 a year spend $10,000 on a car if you make $50,000 spend $55,000 you get the idea now even though this might not sound like a lot of money and it seems excessive the truth is owning a cheap reliable used car allows you so much more discretionary income to spend elsewhere you won't have the financial stress of being burdened by high payments and you'll be financially

free to spend more money in other areas where you get more enjoy however even though all of these car buying rules are usually centered around being financially responsible and saving money dealerships on the other hand will give you pretty much anything that you could qualify for and this is where things get shocking just like buying a house car dealerships look at what's called your debt to income ratio which calculates how much money you have left over after expenses in this case most car dealerships will qualify you with a debt to income below 45% which means

no more than 45% of your gross income could be going towards your debt payments for example example if you make $5,000 a month A lender would allow you to spend up to 2,300 of that which if all you have is an existing $500 student loan and $200 credit card payment they'll gladly Finance the remaining $1,500 a month which could buy you a lot more car than you would expect see here's the thing when you finance a car lenders don't look at you and think oh that's too expensive for him he shouldn't be doing that that's

a bad idea instead lenders just care about the cost of the car every single month and because of that they'll Finance pretty much whatever they could give you if the terms are right for instance let's just say you make $6,000 a month and your expenses include $1,200 in rent $200 in student loans and $100 as a credit card payment in this case your Deb to income ratio is 25% which leaves you with another 21% or $1,200 a month to finance a car if that's the case let's just say you want to use this towards financing

a Mercedes C63 convertible well on a three-year loan with no money down that comes to almost $2,000 a month which you can't afford and they won't qualify you for flat out you'll get denied but since lenders only care about the monthly payment if you instead opt for a 72-month loan all of a sudden your monthly payment drops to about $1,100 a month and congratulations now you could buy the car I guess just look at it this way if your monthly budget is $500 you could buy a standard $116,000 car over 36 months or you could

buy a $30,000 car over 72 months other places even offer terms of up to 996 months which could extend your purchase price all the way up to $37,000 again all with the exact same $500 a month budget the truth is lenders are able to do this because as long as you make the first few payments on your loan they could then go and resell your loan to third parties for a profit giving them a quick rate of return and then allowing them more money left over to issue the loan to somebody else needless to say

dealerships do not have your best interest at heart which is why it's so important to come up with the budget ahead of time and then stick with it the personally though as a car Enthusiast I do get the appeal of wanting to spend more money in a car and as much as I enjoy Dave Ramsey's advice or the 238 rule there are ways to own a car without spending any money or even making money like here's a few examples the first car that I ever bought was a 2005 Toyota Prius in 2008 and I bought

this car for $88,500 with about 70,000 Mi on the clock I drove that car for 4 years I put on another 50,000 mil and by the time I moved on from it it was worth about $55 $0000 which meant that I only lost about $62 a month in depreciation which isn't bad at the same time I also bought a 2006 Lotus Elise for $30,000 I drove it for 2 years and then I sold it for $330,000 I then bought a 2008 Lotus EX s240 for $50,000 and then I drove it for 2 years and sold

it for $50,000 there's also my 2005 4 GT which is worth about 25% more than what I paid for it or my Tesla Model 3 which is still worth more than what I paid in 2019 after rebates generally the cars that I buy and drive barely lose any value or they actually end up making money because I'm a car fanatic and anything that I drive I just want to make sure it's not going to plummet in value now in terms of which cars could work for something like this in my personal opinion I tend to

believe that might include something like the Honda S2000 an older Mazda Miata mid-2000s Corvettes mid-2000s BMW M3s early 2000s Porsche boxers a US Subaru Impreza the Toyota FJ Cruiser late 2000s Audi R8s and of course a used Mercedes G wagon or if you've got a lot of money there's also the BMW Z8 any manual Ferrari F430 or Lamborghini a Mercedes SLS AMG or almost any Dodge Viper now yes I get those are very specific specialty cars but there's a market for them and because of that the values tend to climb beyond that though you can

also buy a more commuter friendly car and this would typically be a 5 to 7year Old vehicle with anywhere between 30 to 50,000 m on the clock that you could drive without any major issues for another 5 to 15 years all of that is to say that if you just need a car for commuting buy something that is used reliable good on gas that you could afford to pay for with less than 10% of your overall salary over 3 years if you don't buy it outright in cash for everything else though preferably keep your payments

to a minimum keep good insurance on the car at all times find a good honest local mechanic that you trust and then just drive it until the wheels fall off figuratively speaking when it comes to Transportation most of the time cars are just a money pit that detract from things that really matter the most like subscribing if you haven't done that already now seriously if you find this video helpful Please Subscribe it would make my day and if you do that you'll see more videos just like this anyway I hope this helps if you have

any specific questions I'll do my best to respond to as many comments as I can down below thank you so much for watching also feel free to add me on both Snapchat and Instagram and also if you guys want free stocks I do have a paid affiliate link down below in the description if you guys are interested those free stocks could be worth all the way up to a few thousand when you make a deposit more information is down below thank you so much for watching and until next time