MONEY HACKS: How Much Should You Really Spend on a Car?

Car prices have climbed sharply over the past decade. And in recent coaching conversations, one question keeps coming up: How much should I really spend on a car?

We see people caught in a tough spot. They need a vehicle, but they’re unsure what’s truly “affordable.” Some try to pay cash and drain their savings. Others jump into financing without realizing how quickly the costs can add up and not just the loan, but insurance, maintenance, and everything in between.

It’s an easy trap to fall into. But the ripple effect can be real. A high car payment or surprise repair can throw off your entire budget. And when that happens, it’s easy to slip into short-term choices that undermine long-term goals.

Recently, our financial coach, Sam, went through the car-buying process and wants to share some things to keep in mind.

Buying a car is more than a purchase; it’s a financial commitment. And the more prepared you are, the more confident and less stressed you’ll feel behind the wheel.

Have questions or a topic you’d like us to cover next? Money Hacks is built around real conversations with people just like you. Let us know what’s on your mind.

Video Transcript

Today I want to talk about car buying. With car prices rapidly increasing over the last 5 to 10 years, we’re getting a lot of questions like: How much should I spend on a car? What do I do if I need to finance it? And how do I prepare for the ongoing expenses of owning a vehicle?

As someone who has recently purchased a car, I’m still fresh in the process, so I want to go over some best practices and tips if you’re looking to buy a car soon.

One of the biggest questions we get is: How much should I spend on a car?

If you’re trying to buy one outright with cash, the answer is really how much you can afford to save for that vehicle.

In general, they say that the total car price should not exceed about 50 percent of your annual income. So if you make $60,000 a year, your car’s price should not go above $30,000. But for most of us, saving $20,000 to $30,000 is not feasible with the other expenses we have. So if you need to borrow money and take out a car loan, then we look at how much your monthly payments should be.

The general rule of thumb is that your car payment should not be more than 10 percent of your after-tax income. So if you bring home $4,000 a month, your car payment should not exceed $400.

Right now, the national average car payment in the U.S. is over $700 a month for new vehicles. For used vehicles, we’re seeing payments over $500 a month. So a lot of people are going above that 10 percent rule.

Although it’s a helpful guideline, it’s really important to look at your own personal finances to see what you can realistically afford. If your expenses are already high, you might not have 10 percent of your budget available for a car payment.

So take the time to look at what works for you. If you have some time before you need to buy, I highly recommend saving up for at least a down payment. The more money you can put down, the less you’ll need to finance.

If you’re flexible with your timing, keep an eye out for promotions, sales, and especially zero percent financing.

A lot of dealerships offer zero percent APR on certain makes and models. So if you’re not too picky about the car you want, that can save you a lot by avoiding interest charges.

But if you do end up financing with interest, don’t underestimate how much it matters. For loans in the $20,000 to $30,000 range, even a one percent difference in interest rate can significantly affect your monthly payment.

It’s worth doing things now to improve your credit score, so you can qualify for a lower rate. A better credit score can save you money on your loan and also reduce your insurance costs.

Car insurance has seen a lot of inflation recently, so anything you can do to lower that bill is helpful. And keep in mind, buying the car is not the end of the costs.

There are many ongoing expenses with vehicle ownership. If you’re financing, you’ll typically need both collision and comprehensive coverage. That could increase your insurance rate, at least while you’re still paying off the loan.

Then there are upfront costs like tax, title, and registration. Plus, recurring costs like emissions testing, renewing your registration, and regular maintenance — oil changes, brake pads, tires. These aren’t monthly expenses, which makes them harder to plan for.

Here are two ways to stay prepared:

1. Set up a separate savings account just for vehicle expenses. When something comes up, you can pull from that fund instead of scrambling or breaking your monthly budget.
2. If you prefer budgeting month to month, build in a small cushion for irregular costs like an oil change or registration renewal. That way, you’re not relying on credit cards or dipping into other funds when those expenses pop up.

Owning a car can be expensive, but with some planning and preparation, you can make better financial decisions and reduce stress in the long run.

Hope this helps, and we’ll see you in the next one.