Should Your Car Payment Be Less Than Your Retirement Contribution?
Written by
Crystal Mayer
Edited by
Chris Cluff
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When you are trying to stay in control of your finances while not carrying too much debt and saving for your future, you are likely to encounter an endless array of rules. While the advice may seem sound, it is always a smart idea to assess your individual situation. You should determine whether these recommendations are actually going to help you achieve your financial goals or whether they are going to leave you worse off than before.
One of the most popular rules circulating on Reddit and other sites is that your car payment should always be lower than what you contribute to your retirement each month. While this is good general advice, it may not be the best for everyone.
Younger adults, for instance, may be contributing less toward their retirement in order to save up for a house or pay off credit card debt. A person living paycheck to paycheck might be unable to afford both a car and retirement contributions.
GOBankingRates asked financial experts to explain the merits behind the rule “Your Car Payment Should Be Less Than Your Retirement Contribution” and whether it is a good idea to follow it.
Keeping Your Finances in Perspective
Jake Hill, CEO of DebtHammer, explained, “The idea that your car payment should be less than your retirement contribution is all about keeping your finances in perspective. Although you likely need a car for present-day tasks such as getting to work, saving for retirement is an investment that will benefit you for far longer than your current car purchase.
“With this in mind, I suggest shopping around for a car loan that will keep your payments well below your retirement contribution threshold. However, ensuring you have enough room in your budget for both expenses is also important. If a potential car purchase may mean forgoing retirement savings altogether, you should continue exploring other options.”
Making It Make Sense
“I think this is a good rule to follow if it makes sense for your situation,” said David Kemmerer, CEO of CoinLedger. “However, in my experience, lots of financial advice follows this kind of idealized view of finances; and, for many people, this advice just won’t line up with what’s realistic for them.
“Many people living paycheck to paycheck might not even have a retirement contribution, for instance, or might not have the credit to receive the best possible interest rate on a car payment. In these cases, my advice tends to be to do what you can — while focusing on budgeting well, saving conditionally and continuing to pursue ways to increase your income and reach a better financial standing.”
Age Matters
“This is one of those money rules that I think can really just depend on the individual’s situation,” noted Carter Seuthe, CEO of Credit Summit. “While, of course, it’s always best to start saving for retirement as early as possible, contributing as much as you can, I would argue that for many younger adults, it may be less necessary for their retirement contributions to outweigh their car payment.
“Younger adults are not only the furthest away from retiring, but they are the most burdened by debt and high housing costs; so, in many cases, it’s more important to focus on paying off debts in an efficient manner than contributing the maximum amount to one’s retirement account.”
Keeping Your Financial Priorities in Order
Ann Martin, director of operations of CreditDonkey, stated, “Sticking to the rule that your car payment should be less than your retirement contribution is an excellent way to ensure that you keep your financial priorities in order.
“Purchasing a car that will require high monthly payments reduces your ability to make progress on other financial goals, including saving for retirement,” she explained. “Before you purchase a car, I recommend determining a realistic monthly payment you can afford without having to reduce your retirement (or other savings) contributions.”
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