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Buying a car is one of the biggest purchases many people will make. With the average price of a new car over $47,000 in 2022, it’s important to figure out how much you can realistically afford. If you make around $40,000 per year, here are some tips on determining an optimal car budget.
Calculate Your Take-Home Pay
First, you need to figure out your monthly take-home pay. This is your income after taxes and other deductions are taken out. If you make $40,000 a year, your monthly take-home pay is about $2,730 if you pay the standard tax rate of 31%. When making a budget for a car payment, this is the number you need to know.
Recommended Budget Percentages
Financial experts generally recommend spending no more than 10-15% of your monthly take-home pay on a car payment For someone making $40,000 a year, that equates to
- 15% of $2,730 = $410 maximum monthly car payment
- 10% of $2,730 = $273 minimum monthly car payment
So based on this, an affordable car payment range for someone making $40,000 is $273 to $410 per month.
Factor in Additional Costs
In addition to the car payment, you need to budget for insurance gas and maintenance. These costs typically add up to 5-10% of your monthly income. Let’s add 7% to be conservative
- 7% of $2,730 = $191 for insurance, gas and maintenance.
Adding this to the maximum 15% car payment guideline means your total monthly car costs should be:
- Car payment: $410
- Insurance, gas, maintenance: $191
- Total car costs: $601
This is 22% of your $2,730 monthly take-home pay. Still within the recommended 20-25% range for total car costs.
Calculate Affordable Purchase Price
Once you know how much you can spend and how much you can afford each month, you can figure out what price you can afford.
Here are price examples for used and new cars:
Used Car:
- $273 monthly payment
- 5 year loan at 7% interest
- Allows purchase price of $14,000
New Car:
- $410 monthly payment
- 5 year loan at 4% interest
- Allows purchase price of $22,000
Attempt to make at least 10% down payment to lower your loan amount. Cut the length of your loan if you can to save money on interest.
Consider All Ownership Costs
When deciding how much to spend, take a big picture view of ownership costs over time, not just the monthly payment. Things like:
- Insurance premiums
- Expected maintenance and repairs
- Fuel costs
- Potential resale value
For instance, a luxury car might have low monthly payments on the loan, but it will cost more in the long run for gas, insurance, and repairs.
Shop Around for Best Deals
Once you set your target budget and price range, shop around to get the best deal. Consider:
- Used cars to save money
- Certified pre-owned for peace of mind
- Comparing prices online and negotiating at the dealership
- Securing pre-approval for auto loans from your bank or lender
The goal is to find the most car for your budget. Taking the time to research all options will pay off in the long run.
Summary
For someone making $40,000 annually, limiting your total monthly car costs to around 20-25% of your take-home pay is a good rule of thumb. This allows for a car payment, insurance, gas and maintenance. Carefully calculate your target price range and shop around for the best deals. Finding an affordable and reliable vehicle you can pay off in a few years will put you on solid financial footing.
Determine Fuel and Insurance Costs
Before you buy or lease a car, you should think about how much gas will cost and how much car insurance will cost. Both of these costs depend heavily on your situation, such as your location, driving history and vehicle type.
The U.S. Department of Energy provides a detailed list of fuel economy figures as well as a comparison tool that allows you to check different vehicles’ annual fuel cost estimates.
For auto insurance quotes, reach out to your agent or an insurance company you’re interested in. You can easily get and compare car insurance quotes from companies to get a sense of what you’ll pay. Get started with some of our recommendations for the best car insurance companies. When you figure out your monthly car payment and other costs, try to keep your total costs less than 20% of your monthly take-home pay.
Calculate Your Monthly Car Payment
To start, calculate your monthly payment potential. Start by gathering your wage or salary information, current bank statements and records of any monthly or annual expenses.
Our team suggests starting with your net pay, which is your pay after taxes, instead of your annual salary or gross pay. This lower number gives you a more accurate picture of how much you can pay for a car payment.
Remember to deduct recurring expenses, bills and other monthly budget items from your take-home pay to reach a low-risk potential monthly payment range.
Don’t max out your budget. Stay prepared for unexpected financial strain by keeping your anticipated monthly car payments within reasonable ranges. Always allow room in your budget for extra expenses.
It’s also important to be realistic about how long you want to make monthly payments. Most loan companies offer terms between 24 and 84 months for used and new cars. Choosing a longer loan term can help you get lower monthly payments, but you’ll pay more overall because of the additional interest that accumulates.
Longer loan terms also increase your risk of going upside-down on your loan. This happens when borrowers end up owing more on the loan than the vehicle is worth. Since a vehicle’s value decreases over time, weigh your options carefully before choosing which vehicle to purchase.
The table below shows our team’s recommended monthly car payment limits based on your post-tax take home pay per month.
| Monthly Take-Home Pay (Post-Tax) | Monthly Car Payments Should Not Exceed… |
| $1,500 | $150 to $225 per month |
| $3,000 | $300 to $450 per month |
| $4,500 | $450 to $675 per month |
| $6,000 | $600 to $900 per month |
| $7,500 | $750 to $1,125 per month |
| $9,000 | $900 to $1,350 per month |
How Much Car Can You Really Afford? (By Salary)
FAQ
How much should I spend on my car?
As much as possible, try to spend less than 10% of your take-home pay on your car payment and less than 20% of your total car costs. Use this car affordability calculator to determine your budget.
How much car can you afford?
To figure out how much car you can afford, financial experts say that your total monthly car payment should be 10% or less of your gross monthly income. They also say that you shouldn’t spend more than 15% of your take-home pay on car costs and that your total vehicle costs, including loan payments and insurance, shouldn’t be more than 20% of your monthly income.
How much should you spend on a car loan?
NerdWallet suggests spending no more than 10% of your take-home pay on a car loan payment and no more than 20% for total car expenses — which also includes things like gas, insurance, repairs and maintenance. You can figure out how much you can borrow for a car loan by figuring out how much you can afford to pay each month.
How much should you buy a car if your salary is $100,000?
You might comfortably afford a vehicle costing roughly half of your salary. So, if your annual salary is $100,000, then you might shop for a car (or cars) worth a total of $50,000. However, every financial situation is unique and people have different priorities.
How much money can a new car pay a month?
Paying an estimated 20% in income taxes would translate to a monthly income of about $3,148 for a buyer we’ll call John. If we follow our 15% rule, John could handle a monthly car payment of up to $472. In September 2019, the average amount financed for a new vehicle was $32,928, according to Edmunds data.
How much money should you put down on a car?
The amount of money you’re able to put down on your car purchase helps you afford more car. Most experts recommend that you put at least 20% down on a car because new cars depreciate quickly. A 20% down payment will prevent you from going upside-down (owing more than your car is even worth) on your loan in a few years.
How much would my car payment be for $40,000?
| Total Loan Amount | $40,000.00 |
|---|---|
| Total of 60 Loan Payments | $45,290.96 |
| Total Loan Interest | $5,290.96 |
| Total Cost (price, interest, tax, fees) | $61,715.96 |
| Loan Breakdown 88% 12% Principal Interest |
What’s a good down payment on a 40k car?
It’s ideal to put down at least 20% on a new car, and 10% on a used car. Making a down payment (even if it’s smaller) can help you get a better rate and make it easier to get approved. Skipping your down payment can lead to negative consequences like an upside-down car loan.
How much car can I afford on a 50k salary?
Income-Based Guide to Buying a Car
For example, if you bring home $50,000 per year after taxes, your monthly take-home pay is probably around $4167. Based on the 10 percent recommendation, you could reasonably afford to pay around $416 for a car payment each month.
Should I buy a 40k car if I make 60k a year?
A person making $60,000 per year can afford about a $40,000 car based on calculating 15% of their monthly take-home pay and a 20% down payment on the car of $7,900. However, every person’s finances are different and you might find that a car payment of approximately $600 per month is not affordable for you.