How Much Should You Spend on Your First Car? (Budget Rules)

If you’re looking for your first car, chances are that you’re in your twenties and tired of having to wait for your parents to lend you the family car. What’s more, if you’re in college or started working, it’s more than essential for you to have your own vehicle.

However, buying a car is one of the biggest expenses an average adult can have. Even if you wish to get a junkyard vehicle and fix it up, this can also cost you a couple of thousand dollars.

Moreover, it’s your first time buying vehicle, there might be some hidden expenses you’re not aware of. In this article, I’ll try to point out most of the costs that you need to keep in mind when planning the budget. Additionally, I will provide you with some tips on how to use your budget more efficiently.

How much should you spend on your first car.

Good Budget for Your First Car: The Basic Budget Rules

It’s common sense to plan your car budget based on your annual salary. However, not all of us have a steady income, which makes it harder to think ahead. Maybe some of these rules can help you make a reliable prediction.

The Rule of the Less

The first rule you can choose to rely on is pretty straightforward — the less you spend on your car, the better. We are all looking for a good bargain, even if we have money to spare. Although this rule is simple, achieving it is harder than you might think.

You don’t just want a cheap car. You want a car that meets both your budget and your needs. So, to balance this all out, there are some more precise rules you can follow as guidance when planning the budget.

The 1/10th Rule

When only the price of the car is in focus, this rule states that you shouldn’t spend more than 1/10th of your annual salary on a new car. It might sound like a bargain when a car’s price has fallen from $70,000 to $40,000. But what difference does it make if your average salary is $46,000? Buying this car would be what we call a financial suicide.

The 1/10th rule provides you with maximum new vehicle suggestions based on your household income. You can rely on this list to help you find your future car:

  • <$25,000 — you’re not ready for a car; a scooter is a better option
  • $25,000 – $50,000 — 6–10 year old economy car
  • $50,000 – $100,000 — 3–5 year old economy car
  • $100,000 – $150,000 — Toyota Yaris, Kia Rio
  • $150,000 – $200,000 — VW Golf, Honda Civic
  • $200,000 – $250,000 — Ford Fusion, Toyota Camry
  • $250,000 – $500,000 — Ford F150, Lexus ES
  • $500,000 – $1,000,000 — Audi S5, Maserati Ghibli
  • $1,500,000+ — Bentley Contly, Lamborghini Huracan

The 36% Rule

The 36% rule states that your overall loan payments shouldn’t take up more than around one-third of your annual salary. This rule is generally more suitable for those who are already in debt, but still in need of a car.

The idea is that you shouldn’t plan your car budget based on the car alone, but with taking other life costs into account. If you’re already paying off mortgage, student loans, and credit card debt, there’s no need for you to buy an expensive car. Furthermore, even the 1/10th rule might be too difficult to follow when you’re already up to your neck in debt.

The 20/4/10 Rule

This rule is most suitable for those of you who wish to put down a certain amount on a car, and then continue paying it off for a couple of years. The logic here is similar to the one you would use when participating in a mortgage payment.

The main idea is that the initial participation amount should be more-or-less equal to 20% of the car’s worth. This amount is ideal since it gives you a head start, but you don’t need to save up for too long.

Furthermore, the payoff period should last no longer than four years. You want to pay off your car as soon as possible, due to the costly insurance rates. 

Finally, the 10 in 20/4/10 stands for 10% of your overall income. If you keep your monthly payment rate at less than or equal to 10%, you are more likely not to feel deprived during the payoff period.

Buying the first car: Rules and hidden cost.

Hidden Costs You Need to Be Aware Of

When planning your budget, keep in mind that it’s not just the car you’re buying. You need to take maintenance costs into account as well. Thus, you should plan your budget with the next couple of months in mind, or even several years ahead.

The first rule you should be aware of states: the more expensive the car — the pricier maintenance awaits. Thus, your first car shouldn’t be more expensive than what you can afford to maintain. In most cases, car maintenance involves:

  • Oil change — between $25 and $50 annually, or 5,000 to 7,500 miles
  • Battery change — anywhere between $59.99 and $200 every three years or so
  • Windshield wipers — from $55 to $88, when replacement is necessary
  • Brake pad — $241 on average, when replacement is necessary
  • Tire rotation — from $35 to $45, every 5,000 to 8,000 miles

These are only some of the most common costs, but any additional costs may come up in case of accidents or breakdowns. Registration costs involve all of the above, and they are higher if the car’s maintenance is more expensive — all the more reason to choose a cheaper and smaller car for your first ride.

You may also like: List of Foreign Car Brand in the US

Wait for the Right Moment to Buy Your First Car

It’s needless to say that buying a car takes more than a day’s work. Browsing through car dealer’s websites and markets can take weeks and sometimes even months. However, it’s not only the length of the search that counts. It might be even more important when you conduct your search, as well as when you agree on a specific price.

Knowing that the car market is turbulent, car prices can vary drastically from month to month. Depending on whether you want a new car or a used one, there are several things to consider regarding perfect timing.

Buying a New Car

For one thing, you can keep an eye on quarterly sales. December and June, in particular, are known as the car sales months. Furthermore, you should read about car news daily to spot potential “facelifted” models that are due to be replaced with newer models soon. Dealers offer a nice price for the older models when new generations come in.

However, if you’re keen on buying the newest model, don’t jump for it the moment it hits the showrooms. Wait a couple of months for the prices to drop, which they inevitably will as soon as the first purchasing wave passes.

Buying a Used Car

In case you’re buying a used convertible, it makes a huge difference whether you buy it in the summer or during the winter. The demand for convertibles is much higher during summer, which gives the dealers more reason to pump up the prices. Same goes for new convertibles.

It’s smart to time buying a used car with the most popular showroom sales months, which are March and September. When the showrooms are blooming with new models, the used car industry is dead. Therefore, your negotiating position is much stronger.

Things to Know About Car Insurance

All cars need to have insurance, so you also need to take this into account when planning your budget. There are several reasons for you to get a decent car insurance.

For one, it’s a legal requirement. If you’re caught driving without insurance, the maximum costs of the fine are unlimited. Plus, you get an extra six to eight penalty points, which brings you much closer to losing your license. Furthermore, you want to be assured that you can pay for any damages caused by you or a third party in case of an accident.

So, car insurance is not something you should save money on, but there are more or less expensive types of insurance. Depending on what level of security you wish to have, you can insure your car on three bases:

  • Third party accidents — covers the damages that you caused to a third party
  • Third party, fire and theft — in case your car gets stolen or catches fire
  • Comprehensive — full package (covers both your damages and those of the third party)

It’s required by law for you to have only third party insurance. However, if you’re a newbie driver, you should think about buying comprehensive insurance anyway.

Final Tips for First-Time Car Buyers

No one said buying a car for the first time is easy — it’s rather quite the opposite. Hopefully, the several rules I mentioned in this article will be helpful. If they’re not enough, you can hire a financial adviser to help you make the right budget plan.

Whichever car you choose, it’s good to keep in mind that there are also some additional costs along with it. Make sure to cover all the details and think ahead before closing the deal. Also, beware of car dealers — they can be very manipulative and persuasive.

When purchasing expensive assets such as cars, it’s crucial to do thorough research and not rush any decisions. Keep in mind that timing is essential, so if you follow the trends on the market, you will surely find the best offers. In the end, remember that cars are just a means of transportation. You can move around in many different ways until you find the best deal.




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