What Car Can You REALLY Afford at Each Income Level?

hey money mavericks welcome back to the channel i'm Ben Hedges aka the credit shifu your go-to guy for crushing it with credit cards and personal finance today we're tackling a big one how much car i.e how expensive of a car can you actually afford without turning your budget into a total wreck and there are going to be a lot of automotive puns in this video just warning you now so buckle up look there's another one anyway I've made some car buying mistakes back in the day and trust me you don't want that regret so stick around for the rules to keep your wallet cruising smoothly if you're ready to roll smash the subscribe button and let's hit the gas so nothing beats that new car smell or a ride with some serious horsepower but here's the deal overspending on a car is the fastest way to jack up your finances like some guy bragging about his $70,000 truck on a $50,000 salary spoiler that's a crash waiting to happen a financial crash that is so today we're breaking down two killer guidelines 35% rule and the 2410 ratio to help you and your money stay in your lane moving in a positive direction guideline one the 35% rule first up let's talk gross income your paycheck before Uncle Sam takes his cut a solid rule of thumb is to spend no more than 35% of your annual pre-tax income on a car so if you're pulling in $50,000 a year that's going to be $17,500 max for your ride if you make $100,000 per year that's $35,000 you can spend and if you make $200,000 a year only then can you afford a brand new Cybert truck paying cash now if you are earning around $50,000 a year which is a pretty average salary in America that a lot of people earn you are probably thinking "I can't even get a new Toyota Corolla for 35% of that." And that's true but hear me out that's prime territory for a reliable used car think a 2019 Honda Civic or a Ford Escape with low miles jeff Bezos the billionaire founder of Amazon was still driving a beat up old Honda for many years even after he became a billionaire you yourself are worth somewhere in the vicinity of 9 or 10 billion today what's with the Honda this is a perfectly good car with a secondhand car depreciation has already hit literally as soon as you drive it off the dealer's lot the car loses 10% of its value this is because the average sales incentives in other words the average discount on new cars over the past few years have been about 10% of the retail price of the car it's a little lower at the moment but on average 10% so anyone who would buy that car secondhand but with very low miles so in like new condition is going to assume that you got it for around 10% below MSRP and thus that is all they will pay since in theory they could go to a dealer and negotiate that price too but in reality many people do pay MSRP when they buy their car then it'll lose another 10% for a total of about 20% of its value in the first year and then about 13% in its second year another 13% in its third year for a total of 46% in three years the Bureau of Labor Statistics also has depreciation data which gives you an even higher depreciation of 23% in the first year and 11% for the next 2 years now this is going to vary by brand and market conditions but on average if you buy a car that is 3 years old you are getting it at an almost 50% discount and appreciation slows down as more time goes on so the idea is you let the first owner absorb the largest amount of depreciation and then you own the car once it is depreciating at a slower rate perhaps only in the single digits per year this also eliminates the need for gap insurance to cover the difference between what you paid for the car and what the car is actually worth this is especially important if you have a loan since in the first year the car will be depreciating faster than you are paying down the loan and speaking of loans let's get into our next section which is specifically aimed at people with monthly payments on their car whether it's a loan or a lease guideline two the 2410 ratio if you are financing and most Americans are here is the golden 2410 rule write this down 20% down drop at least a fifth of the price up front for that $17,500 secondhand car that's going to be $3,500 it slashes your loan by 20% and it keeps payments low and saves you from being upside down or owing more than the car's worth after it drops 20% in year 1 in this case there is no need for gap insurance next 4-year loan max keep it short and sweet longer loans mean more interest paid and you pay down the loan slower which means you risk being underwater on the car if you end up owing more on the loan than the car is worth 3 years is even better if you swing it if you need 5 years to make it work technically you're buying too much car for your salary but it could be a compromise next 10% of your monthly income your total payment principal interest and insurance shouldn't top 10% of your gross monthly pay at $50,000 a year that's going to be $416 a month it keeps your emergency fund and vacation plans safe and this means that your whole budget won't be eaten up by your car payment so you should still have money left over after that car payment and your mortgage or your rent and your spending to be able to contribute to an emergency fund vacation fund whatever you want check out this table for details on different levels of income so if you earn $25,000 per year you should only be spending $28 per month including insurance this is pretty hard to do in current market conditions with car loans around 8 to 10% interest here's the cheapest pre-owned car I could find at my local Toyota dealer and the car is actually a Honda which is kind of confusing but I guess it's something someone traded in but with a 20% down payment it comes out at $272 a month and that's with a 5year loan instead of a 4year and it doesn't include insurance which will probably add at least $100 per month so in reality people in this income range $25,000 a year or so should be looking at older cars with higher mileage and purchase prices from around $5,000 to $8,000 you can also save on insurance by not having full coverage just having liability for other people's cars that you crash into which you have to have legally but not your own car since these cars aren't worth that much anyway you could just take the hit in the unlikely event that you crash it and obviously if someone else crashes into you their insurance will pay if you earn $50,000 per year then you can afford up to $416 per month so when you add on insurance you could afford that Honda that I just showed you for $272 a month which with insurance would end up being somewhere around $400 if you wanted to lease you could also lease this Tesla Model 3 for $300 per month with insurance you'll probably be around the $416 budget let's keep going what if you earn $75,000 per year well the monthly payment and insurance shouldn't be more than $625 per month that opens up secondhand cars in the 20 to $30,000 range like this 2024 Toyota Camry for almost $25,000 once you add full insurance coverage since this is a nicer car okay you do need it you don't want to be out $25,000 if you crash it your monthly payment of $428 plus your insurance should still be within your $625 per month budget and at $100,000 per year in income what car can you afford well your budget is $833 per month so what could you get with that well you're still not getting a brand new Cybert truck i'm sorry but it's just not going to work but if you do want a brand new Tesla the new Model Y is $817 a month to finance with 20% down although that is on a 72-month loan term which is 6 years okay and then you need to add insurance on top of that so at this level of income you should actually be looking more at something like what I have a secondhand Jeep Grand Cherokee Trailhawk their top-of-the-line off-road model that I got for around $32,000 or maybe $34,000 I can't quite remember but it's costing me approximately $600 per month and with insurance of say $150 per month that is well within the monthly budget of someone earning $100,000 per year if you abide by the rules in this video you will not go bankrupt because of a high car payment but in addition to the price and the monthly payment we have a few more tips for you to consider factor in fuel and maintenance a gas guzzler or a car that needs regular repairs can sabotage your budget next finance versus lease leasing can sometimes be cheaper than financing like with this Tesla Model 3 it costs $300 a month to lease but $500 a month to finance but be aware on the leased version they limit you to 10,000 mi in 24 months that's 5,000 mi per year and the highest you can go is 15,000 mi in 2 years that may work great for someone who only drives short distances and can keep under that but if you expect to drive closer to the average miles driven per year by Americans which is about 14,000 it's going to cost you more and may end up the same as financing or more than financing except you don't actually own the car lastly credit scores and interest rates the interest rate you get plays a big part in how high your monthly payment will be and this is influenced by your credit score so get that as high as possible 740 or above and also how long the loan term is look if I wanted this 2021 Corolla at 84 months I'm going to be paying 9.68% in interest but take that down to 60 months which is 5 years and it's just going to be 4.99% and that's with dealer financing if you shop around for financing you can probably get it even lower so there you have it don't go over 35% of your income if you're paying cash and stick close to the 2410 rule for financing and then keep in mind those final street smart tips to keep your car dreams alive without crashing your goals my take skip the $50,000 truck unless you're raking in six figures and if you want that $70,000 Cybert truck you need to be earning around $200,000 a year to make that work unless you have very low expenses in other areas of your budget or you're a complete Elon Musk fanboy and even then I wouldn't do it if I was under $200,000 a year but what's your dream ride or your worst car buying story drop that in the comments below hit the like button if this video saved your budget and subscribe for more financial hacks and credit card tips we'll see you in the next video