Who Can Afford the Average Car Price?
Only Folks in Washington D.C.

Americans are spending far too much money on new cars

The report by Interest.com shows that Washington, D.C. is the only American metropolitan area in which a family earning the city's median income can afford the average price of a new vehicle, which was $32,086 in 2013, according to Kelley Blue Book. That price equates to a monthly payment of $633, assuming the buyers put 20 percent down, financed for 48 months and principal, interest and insurance did not exceed ten percent of the household's gross income. 

Average-earning residents of Washington, D.C., can afford to pay $32,531, or $641 per month, for a vehicle. The rest of the nation can afford significantly less. Simply put, people are spending far too much money on their cars.

DYI Comments:  The ten percent level is at the maximum range and be considered reasonable.  In order to get ahead financially one must temper your three biggest costs; housing, cars, and education.  For this post I'll stick to cars.

The first thing to do is to stop thinking in the terms of monthly payment but what is the total cost of the car or truck in relation to your income.  To put it bluntly when folks come into a dealership they don't sell you vehicle they sell a monthly payment.  Their job (as they see it) is to put the public into the largest payment the individual can afford.

How much car can you afford? The 20% Rule

Buy a new car only if you can afford it with cash!  That’s right.  Cold, hard, cash.  We’ve been duped into spending our hard earned money on expensive cars for way too long.  Your car is not a status symbol that lets the world know you’re successful.  In fact, if you’re trying to use your car as a status symbol, you’ll probably never be rich!

How much car can you afford based on salary?

The math is simple.  How much money do you make in a year?  Take 20% of your gross annual income (before taxes, social security, etc) and that’s how much car you can afford.  Preferably, you should purchase with cash as well.

Quick example:  one person makes $40,000 and the other makes $30,000.  The combined salary of $70k means $14k worth of cars can be purchased.  If you need to buy two cars in one year, you can split up the $14k however you’d like – keeping in mind the majority will probably go to the wife!

DYI Continues:  That's right if you have a $50,000 dollar a year job the most you should spend is $10,000 bucks.  This changes one's thought process completely and most will reject it.  Those who embrace this direction end up with a life without financial drama.  Those who breaking this rule substantially end up being broke.  Those who overspend on housing, cars, and education are what financial planners title "looking good and going no where fast (financially)."

Here is a link to a list price of cars and the average income to owner.  It is a bit dated going back to 1997 however it is interesting to say the least.  If I come across an up to date stats I'll certainly post it.  Back then the most frugal was Saab 9000 owners who had a $225,000 income purchasing a $36,695 car.  That computes to a 6.1 income to car cost.  At 20% of income they can spend $45,000 or in this case 16.3%.  That's frugal.  Ever wonder why so many millionaires drive used cars?  I think you now know the answer.

DYI