Use This Rule To Determine How Much To Spend on Your Car, Says a Self-Made Millionaire
Written by
Gabrielle Olya
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Molly Sullivan
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Many Americans are dedicating a significant amount of their budgets to their cars, as monthly payments remain high. According to the latest data from Experian, the average monthly car payment for a new car is now $734, and the average payment for a used car is $525.
These costs are above what many people can comfortably afford. Bernadette Joy, a financial coach, self-made millionaire and author of “Crush Your Money Goals,” recommends choosing a car based on your budget, rather than what you think will impress your friends.
“A car is a tool, not a status symbol,” she told GOBankingRates. “The more money you throw at a fancy ride, the less you have for building real wealth. I’ve seen too many people lock themselves into high car payments that steal their financial freedom.”
Joy recommends sticking to her simple budgeting rule of thumb that will help you choose a car that’s affordable for you.
How Much of Your Budget Should You Spend on Your Car?
According to Joy’s rule of thumb, your car payment should be no more than 15% of your take-home pay.
“Aim to keep car expenses under 15% of your take-home pay, and you’ll have more money for things that actually grow in value,” she said.
If at all possible, pay for your car in cash so you can avoid the hefty interest rates — the average interest rate for a new car loan is 6.84%, while the average interest rate for a used car loan is a whopping 12.01%, according to Experian.
“I personally bought a new (to me) car at the end of 2023 and after the first few weeks, the newness wore off and it was business as usual,” Joy said. “I’m so glad I paid for the car in cash rather than have a recurring payment that now goes toward investing instead.”
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