Remember when we all got together and discussed whether my boyfriend should trade in his rust bucket for something a little less… rusty? Well, the car is still going strong, but with an upcoming move out of state and a new job on the horizon, the rust bucket’s retirement looms near. We’re not rushing off to the dealership to test drive BMWs or anything yet… well, maybe, but only because we like test driving BMWs!
While it’s not on the top of his list of things to worry about, Zack is still making preliminary plans for replacing the car. It’s a good idea for anyone to start thinking about this long before you actually need to — give yourself time to really evaluate what you can afford, and what you want, so you can save up a down payment and be fully prepared when you finally walk into a dealership (or a used car lot or start answering ads on Craigslist… whichever).
How much money is appropriate to spend on car expenses each month? Heuristic (“rule-of-thumb”) percentages don’t work for everyone, but they’re a good place to start, especially if you’ve never had a car payment before. I went a-Googling to see what heuristics I could find… but I wasn’t entirely impressed with what I found.
10% of Gross Income
According to a post on the Letters Unlimited blog, columnist Liz Pullium Weston wrote in one of her “Money Talks” columns that "Most people are smart to limit their total transportation costs, including car payments, insurance, maintenance and fuel, to no more than 10 percent of their gross income." The Letters Unlimited blogger, Tammy Rosboril, concluded that this is unrealistic for most people, and I tend to agree. If your car is paid off already, this number would be easy to achieve, especially if your gross salary is $50,000 or more. But throw a car payment into it, and it all falls apart… that is, unless you spend nothing on gas and let the car sit in the driveway all the time. Or you make a lot more money.
Using a $50,000 gross salary, a 10% figure gives you $5,000 per year for car expenses. Tammy Rosboril assumes $213.67 eaten up by gas (a high number, but she was calculating this during $4/gallon gas prices, which we may see again), $83.34 per month for insurance, and a conservative $250 per year for maintenance… which would leave you only $98.82 for a car payment. Even with a large down payment, that doesn’t buy you a lot of car.
Total Debt Payment No Greater Than 36% of Gross Income
Consumer Reports offers a different take on the issue, choosing to look at debt payments as a whole. Interestingly enough, they include rent as a “debt” for these purposes, which makes sense because if you had a mortgage, you would include that as a debt. So total debt payments, including rent/mortgage, car payment, credit cards, and any installment loans should all total up to less than 36% of gross monthly income.
Which is made completely insane by the metric I use to judge housing costs: total housing costs should be no more than 27% of gross income. So let’s say that your rent is 25% of your gross income, and utilities and such are 2%. If we ignore utilities, that only leaves 9% of your gross income for all debts, which is less than the 10% above from Liz Pullium Weston… and if you have student loans? You’re screwed.
So, forget heuristics. If you find one that works for you, go with it. Otherwise, figure out what you need and what you feel comfortable with. Taking things back to my boyfriend Zack, here’s the deal: his rent costs will be 22.4% of his gross income. He doesn’t have any other debt payments (which makes me very jealous, what with my huge student loan bills), so he’s got more wiggle room than most of us. If he uses the 36% rule, he’s got 13.6% of his gross income to work with.
13.6% of Zack’s gross income is probably enough, especially if he comes up with a decent down payment. But it sort of proves my point about the 36% rule not working for most people — most people aren’t like Zack, because most people have student loans or some other debt besides housing. And many people spend a greater percentage of their income on housing than he does.
(One thing he will have to keep in mind is that he’ll have to pay a car tax while living in Virginia, a point that was brought up by reader Kamantha in a comment on my earlier post about ditching my car entirely.)
What do you guys think? Is there a good rule-of-thumb out there for how much to spend on transportation? Let me know in the comments!