I’m a Financial Planner: Here’s How Much Money I Recommend Spending on Your Car Per Year
For most of us, having a car is pretty much a non-negotiable. Whether it’s for daily commuting, running errands or taking trips, it’s an essential part of modern life, like it or not. But having a car comes at a cost. It can be a headache figuring out just how much to budget each year for your car and all of the expenses that come with it.
If you have a guideline in place, it can help you know whether your car spending is out of control or not. GOBankingRates spoke to financial planners to provide a few ground rules to help you decide what’s a realistic annual budget for your car.
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Less Than 20% of Your Income
A general rule of thumb is to keep your total car expenses below 20% of your annual household income. But is this a good guideline?
“I would recommend sticking beneath the commonly recommended number of around 20% of your annual take-home income on car costs,” said Carter Seuthe, CEO of Credit Summit Debt Consolidation. “It is still important, of course, to make sure you’re spending enough annually on car maintenance and upkeep, though — otherwise you can end up with a much bigger expense down the line, whether that’s a new car, or lots of expensive repairs you’ve been neglecting.”
Sticking to the 20% rule can help you make sure that your transportation costs don’t consume the bulk of your budget, leaving you with enough money for other areas of your budget.
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Less Than 10% of Your Income
Shawn Plummer, CEO of The Annuity Expert, had different advice.
“Your car should cost under 10% of your total income between payments, gas, insurance and maintenance,” he said. “Ideally, keep that number closer to 5% for more financial flexibility in case you run into emergency repairs or expenses.”
This is a more conservative approach. But this can help free up your budget for savings, investments and other long-term financial goals. Plummer was careful to clarify that this 10% number should include all of your monthly car expenses, not just the monthly payment on your car loan.
“So, if you’re making $80,000, don’t sign up for a car loan with an $800 monthly payment,” he said. “At most, you want all of your car expenses to add up to $800 monthly, though less is more.”
Sticking to this 10% rule might be challenging, especially if you live in an area with high gas prices or long commutes. But it can also give you a real financial advantage by minimizing the drain on your income and allowing you to allocate more resources toward building savings.
Don’t Forget Ongoing Expenses
Regular costs like fuel, insurance and maintenance should definitely be factored into your budget. Depending on where you live and work, you may need to account for parking fees and tolls in your annual car budget. These expenses can add up quickly, so be sure to plan accordingly.
On average, Americans spend around $2,400 per year on fuel, according to GasBuddy. The amount you spend depends on your vehicle’s fuel efficiency, your daily commute and the price of gas in your area.
Your car is also going to need regular maintenance, such as oil changes, tire rotations and brake inspections. You should also budget for unexpected repairs, since even well-maintained vehicles can have issues at some point.
Don’t Think of Your Car as an Investment
Avoid the temptation to go over budget on your car by remembering that cars are depreciating assets — they lose value over time.
“Many people consider cars an investment, but they’re terrible over the long term because these assets significantly depreciate the moment you drive them off the lot,” said Plummer.
A car is a necessary expense, not an investment. Buy a car within your budget and do your best to maximize its lifespan. This is the best way to reduce the overall cost of owning your car.
“Buy within your budget, drive the car until it’s costing you significantly in repairs and use the extra cash to invest in something with better returns,” Plummer advised.
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This article originally appeared on GOBankingRates.com: I’m a Financial Planner: Here’s How Much Money I Recommend Spending on Your Car Per Year
