Auto Loan Budget: What Percentage of Income to Set Aside?

When buying a car, especially in the midst of challenging economic times, it’s a good idea to create a budget that reflects a manageable percentage of income. This budget can be different depending on how much you make, as well as how many additional disposable assets you have.

How to Track Your Budget

One great way to make sure that you stay on track when buying a car is to create a budget that includes all of your transportation expenses. These expenses might include your auto loan payments, insurance payments, fuel expenses, maintenance and repairs, taxes and licensing, parking expenses (if applicable), and/or public transportation.

What Percent of Your Income Should Be Budgeted for Your Car?

Many financial experts suggest that the budget in total represent about 9-12% of your income for your auto loan percentage of income. This percentage of income leaves you plenty of room to manage the rest of your life comfortably. The amount that you choose to spend for your vehicle (and accompanying insurance) would of course be the largest of the categories in the transportation budget, but it is definitely a good idea to leave some wiggle room in there to account for rising gas prices and major repairs. Another thing to keep in mind is to find the right car for your budget. If you have a little bit more to work with, such as a savings account or additional assets that you wanted to use for this specific situation, then you may not have to worry as much about the percentage of income in relation to your auto loan budget. However, it’s still not a bad idea when buying a car to create a budget that reflects 9-12% of your overall worth, so that you don’t go overboard simply because you have money set aside in addition to your income.

The more you organize your finances when buying a car, the better, which is why it’s a great idea to create a budget based on a percentage of income. By making sure you can truly afford the vehicle, you won’t ever have to worry about defaulting on a payment and potentially losing what you’ve worked so hard to acquire.