When you're looking to buy a car, Ramsey and his cohorts explicitly believe you should never spend more than half of your annual household income. In fact, Ramsey Solutions doesn't “recommend buying a new car — ever — until your net worth is more than $1 million.
In other words, you should only consider buying a new car if you have plenty of money to burn. Our rule of thumb: Unless you have a net worth of $1 million or more, choosing a used car over a new one is the smart thing to do. With that out of the way, you need to decide how much you can actually pay for a car.
According to a Ramsey Solutions article, if you wonder what type of car you can afford, the answer is simple: “The car you can afford is the car you can pay for in cash.” “And as a general rule, the total value of all your vehicles combined shouldn't be more than half your annual income,” according to the article.
Ramsey took people to task for the financial hole they put themselves in as they contend with massive car payments. "You've got a car payment bigger than your house payment. The average car payment in America now is $499 — that's suspiciously like 500 bucks," he said.
The 20/3/8 rule stand for:
20% down. Finance no longer than 3 years. Total car payment is no more than 8% of gross income.
What is the 20/3/8 rule for financing a car? — The 20/3/8 rule suggests putting 20% down, financing for no more than 3 years, and ensuring that monthly payments do not exceed 8% of monthly gross income.
But before discussing the pros and cons of using cash for a car, let's discuss why dealership salespeople don't always like the word “cash.” For a dealership, a cash sale could mean a lost opportunity to receive commissions on car loans or extras like accessories and an extended warranty.
For money experts like Ramsey and Suze Orman, there's no rationalization for spending an enormous amount of money on something that depreciates so quickly. According to Carfax, cars lose 20% of their value in the first year of ownership and retain just 40% of their original value after five years.
With a $1,000 down payment and an interest rate of 20% with a five year loan, your monthly payment will be $768.32/month.
How much should I spend on a car if I make $60,000? If your gross salary is $60,000, your take-home monthly pay is probably around $3,750, assuming about 25% of your pay goes toward taxes and other expenses. Based on the 10-15% calculation, you should spend no more than $562.50 on a monthly car payment.
Starting with the 1/10th guideline, created and pushed by Financial Samurai, this guideline states: buy a car in cash that costs less than 1/10th your gross annual pay. If you make $50,000 you should buy a car in cash worth $5000. If you make $100,000, the car you buy should be worth no more than $10,000.
In that case, you need to consider groceries, utilities, and other household expenses. To afford a $100,000 car, it's probable you need to make $300,000 a year conservatively after taxes. For this example, we use our car payment calculator and approach it using the price of the car of $100,000.
Other experts say that a vehicle that costs roughly half of your annual take-home pay will be affordable. Then some frugal personal-finance gurus say you should spend no more than 10%-15% of your annual income on a vehicle purchase.
Some folks will need $10 million to have the kind of retirement lifestyle they've always dreamed about. Others can comfortably live out their golden years with a $1 million nest egg. There's no right or wrong answer here—it all depends on how you want to live in retirement!
Many people take out car loans when they purchase a vehicle. Sometimes, you will end up upside down on your car loan, which means you owe more than the vehicle is worth. Dave Ramsey believes your best course of action is to sell the car in that situation, but if you can afford your payments, this isn't necessary.
What Is the Best Month to Buy a Car? In addition to certain times of the week or holidays, some months are better to buy or lease new vehicles or purchase used cars than other months. In general, May, October, November and December are the best months to visit the car dealership.
Making a large down payment on a car may also limit your financing or refinancing options. Some lenders may not offer financing if you propose to make a down payment that the lender deems too large. You might not meet a lender's financing requirements if you're seeking to put 90% down on a vehicle that costs $25,000.
Buffett seems to like Cadillacs for their style, luxury, and safety. Buffett also doesn't want to spend the time, energy, and trouble learning how a new make and model of car works and has to read the car manual. He prefers sameness and simplicity over owning things and having to learn about them and take care of them.
Lenders often want you to make a down payment to show your commitment to paying back the loan and to get some compensation for the car upfront.
It's typical to put down 20% of the purchase price when financing a car purchase. The lender might not require that amount, but it will help you avoid owing more on the loan than the vehicle is worth and closer to full ownership.
Paying cash may hinder your chances of getting the best deal
"When dealers are negotiating the purchase price, they anticipate making money on the back end, via financing," Bill explains. "So if you tell them up front you're paying cash, the dealer knows he has no opportunity to make money off you from financing.
Generally, yes. Failing to disclose a deferred down payment clearly violates two provisions of the ASFA.