What is a responsible amount to put towards a car if my new job will pay $95k and I have almost $7k in the bank? I also have approximately $30k in student loans I have to pay.
You are currently $30k in debt. I realize it is tempting to purchase a new car with your new job, but increasing your debt right now is heading in the wrong direction. Adding a new monthly payment into your budget would be a mistake, in my opinion.
Here is what I would suggest. Since you have $7k in the bank, spend up to $6k on a nice used car. This will keep $1k in the bank for emergencies, and give you transportation without adding debt and a monthly payment. Then you can focus on knocking out the student loans.
Won't it be nice when those student loans are gone? By not going further into debt, you will be much closer to that day. New cars are a luxury that you aren't in a position to splurge on yet.
What are your goals in life?
If one of them is to appear wealthy then buying a high price import is a great place to start. You certainly have the salary for it (congratulations BTW).
If one of your goals is to build wealth, then why not buy a ~5000 to ~6000 car and have a goal to zero out that student loan by the end of the year? You can still contribute to your 401k, and have a nice life style living on ~60K (sending 30 to the student loan).
Edit: I graduated with a CS degree in '96 and have been working in the industry since '93. When I started, demand was like it is now, rather insane. It probably won't always be like that and I would prepare for some ups and downs in the industry.
One of the things that encouraged me to lead a debt free lifestyle happened in 2008. My employer cut salaries by 5%...no big deal they said. Except they also cut support pay, bonuses, and 401K matching. When the dust cleared my salary was cut 22%, and I was lucky as others were laid off. If you are in debt a 22% pay cut hurts bad.
As someone who has a very similar debt amount and environment (new grad, nice new paying job, want a car, etc), I'd like to share something with you.
Life has unexpected costs.
Luckily I didn't buy that new car the first few months out of college like I had planned to; I'm glad that I didn't because, as a fledgling "adult", despite having lived on my own while in college while working part-to-full time there are some things you just don't realize until it either happens or it happens to someone else. Here are some of those things:
- Car accidents
- Car maintenance
- Higher insurance rates on that new car
- A down-payment on a new car is probably going to wipe a new grads bank account
- A nicer apartment/house/inventory means you should consider an umbrella coverage
- Accidents in general (I shattered my collar bone)
- Price hikes in utilities (or during months of extreme-climates)
- Increases on your rent
- Tooth ache that crops up out of nowhere that needs immediate attention (and money)
- A new job is not a secure job
- You get lonely and realize that a pet is more comforting than a new car
- Deposit/monthly fee on that pet
- Vet bill
- Dating is not cheap
- You grow up and realize that eating healthy is more expensive than Dominoes
- Kitchen essentials if you want to push that healthy diet to the max (a fruit blender is not cheap)
- Then you go to the gym and have a gym fee and initial costs (clothes, running shoes, etc.)
- Someone you love gets sick and you have to unexpectedly fly to them
- That old laptop from college isn't cutting it anymore
- The minimum payment on student loans
- The amount of interest on student loans. (Average 4.75% for my loans on $30K is $1,425 a year)
- Theft (in my case it was my 1-speed bike I used for exercise)
- Paying for dinner when you go out with family as a display of gratitude and success
- Going out to socialize with new friends from work (do not underestimate how significant this is)
I could go on but I won't. $95K is good money and I would definitely recommend spending it a bit to enjoy yourself. But I would honestly tell you that taking your monthly expenses, adding a few hundred on top of that and then multiplying that sum by 3 would be a smart savings amount before picking up a car loan. Maybe that's an excessive savings but I've seen way too many people burn out over their cost-of-living and their failure to adjust appropriately when shit hits the fan. So instead of having to deal with the stab at your pride when having to lower the cost/quality of living that you'll probably grow accustomed to at a $95K salary, just prepare for the worst.
Oh, and did I mention...
A NEW JOB IS NOT A SECURE JOB
Consider yourself to likely be the first asset dropped from the company if even the tiniest thing goes wrong. I know way too many people who were fresh hires at Intel, Boeing, and a few other big tech companies that pay around what you make and, despite being bad asses in college, they were dropped like a bad habit when their employers hit rough patches.
To those even more experienced than me, please feel free to add to the list. I'd personally love to know them myself.
In a very similar situation as yours, I bought a used motorcycle for $3000. It was still reasonably new, very reliable, and with California weather, you can use it year-round. It reduced my time in traffic, and it had very low fuel and maintenance costs. The biggest expense was tires.
The biggest pitfall in buying a motorcycle is auto-insurance. Do your research and ask for quotes from your broker before even considering a particular model of bike. When I decided that my finances justified a new motorcycle, I was surprised that full collision coverage cost about $3000/year on a lower powered bike that had a bad accident record because it appealed to new riders. I got a much more powerful bike that appealed to more experienced riders and the premium was only $500/year.
Is this answer not what you were looking for? Spend as little as you can on a 4-6 year old car. Drive it until you can save enough cash to buy the one you really want. I'm currently driving a 2007 Corolla, and I'm waiting until I can get a new civic turbo with a manual transmission to replace it. (They currently only offer them with a CVT, but next fall they'll have them with the MT, so I'm probably 2 1/2 years out from buying one used.)
most of the people who lurk in money.se will probably tell you to spend as little as possible on a car, but that is a really personal decision. since you live with your parents, you can probably afford to waste a lot of money on a car. on the other hand, you already have a large income so you don't really have the normal graduate excuses for deferring student loans and retirement savings.
for the sake of other people in a less comfortable position, here is a more general algorithm for making the decision:
- estimate your income taxes (~23k$ between federal and CA for 95k$)
- decide how much to save for an "emergency fund". 3 month's expenses is a common recommendation. some people say 1 month others say 1 year. if you had low disposable income, you might pad this a bit for non-unemployment problems (e.g. car accident).
- decide how much to save for retirement. this is a personal choice, but you should at least save enough to get your 401k match. one way to decide is to pick a retirement date, and use one of the simple online calculators to estimate how much to save each year.
- figure out how much you need for basic necessities (e.g. food/clothing/shelter/insurance/job-related transport)
- decide how much to save for other large expenses (e.g. vacation, paying down your student loans, down payment on a house/apartment, buying your next car, funding your startup, getting married/divorced, having children). generally, this means picking a date (e.g. when you want to be debt free), then calculating how much you need to save each year to get there.
- see how much is left, this is your "disposable income". you need to carve your car payment out of this amount. odds are you won't be very happy if your car payment is more than 25% of this number. but who knows? maybe you are a status-oriented car fanatic who hates restaurants, travel, movies, gadgets and hobbies.
Money is a token that you can trade to other people for favors.
Debt is a tool that allows you to ask for favors earlier than you might otherwise.
What you have currently is:
- $7,000 favors you are owed
- $30,000 favors that you owe others
Your salary is meaningless in this context.
If the very worst were to happen, such as:
- you lost your ability to work
- you lost your family
- you lost every other financial support system that you would otherwise rely on
You would owe $23,000 favors, and your "salary" wouldn't make a difference.
What is a responsible amount to put toward a car?
This is a tricky question to answer. Statistically speaking the very worst isn't worth your consideration. Only the "very bad", or "kinda annoying" circumstances are worth worrying about. The things that have a >5% chance of actually happening to you.
Some of the "very bad" things that could happen (10k+ favors):
- you lose your job/sources of income for a typical unemployment period of one month to a year
- you are involved in an accident that leaves you unable to work for a period of 1 month to a year
- your house/apartment/abode burns down and you lose the majority of your possessions and need to replace them
Some of the "kinda annoying" things that could happen (~5k favors):
- you get sick/injured and have some moderately expensive medical bills
- something expensive that you need breaks and you have to replace it
- you get picked for jury duty and must serve for up to a month
So now that these issues are identified, we can settle on a time frame. This is very important. Your $30,000 in favors owed are not due in the next year. If your student loans have a typical 10-year payoff, then your risk management strategy only requires that you keep $3,000 in favors (approx) because that's how many are due in the next year.
Except you have more than student loans for favors owed to others. You have rent. You eat food. You need to socialize. You need to meet your various needs.
Each of these things will cost a certain number of favors in the next year. Add all of them up.
+ 3,000 student loans + 5,000 food + 12,000 rent + 5,000 socialization + 9,500 retirement savings ============================= $34,500 favors owed per year
Pretending that this data was correct (it obviously isn't) you'd owe $27,500 in favors if you made no money.
But you do make money.
Up until this point, I've been treating the data as though there's no income. So how does your income work with all of this?
Simple, until you've saved 6-12 months of your expenses (not salary) in an FDIC or NCUSIF insured savings account, you have no free income. If you don't have savings to save yourself when bad things happen, you will start having more stress (what if something breaks? how will I survive till my next paycheck? etc.). Stress reduces your life expectancy.
If you have no free income, and you need to buy a car, you need to buy the cheapest car that will meet your most basic needs. Consider carpooling. Consider walking or biking or public transit.
But what about when you have savings?
You listed your salary at "$95k", but that isn't really $95k. It's more like $63k after taxes have been taken out. If you only needed to save ~$35k in favors, and the previous data was accurate (it isn't, do your own math):
Per month you owe $2,875 in favors (34,500 / 12)
Per month you gain $5,250 in favors (63,000 / 12)
You have $7,000 in initial
You net $2,375 each month (5,250 - 2,875)
To get $34,500 in favors will take you 12 months ( ⌈(34,500 - 7,000) / 2,375⌉ )
After 12 months you will have $2,375 in free income each month. You no longer need to save all of it (Although you may still need to save some of it. Be sure recalculate your expenses regularly to reevaluate if you need additional savings).
What you do with your free income is up to you. You've got a safety net in saved earnings to get you through rough times, so if you want to buy a $100,000 sports car, all you have to do is account for it in your savings and expenses in all further calculations as you pay it off.
To come up with a reasonable number, decide on how much you want to spend per month on a car.
$500 is a nice round number that's less than $2,375.
How many years do you want to save for the car?
How many years do you want to pay off a car loan?
4 is a nice even number.
$500 * 12 * 4 = $24,000
Now reduce that number 10% for taxes and fees
$24,000 * 0.9 = $21,600
If you're getting a loan, deduct the cost of interest (using 5% as a ballpark here)
$21,600 * 0.95 = $20,520
So according to my
napkin math you can afford a car that costs ~$20k if you're willing to save/owe $500/month, but only after you've saved enough to be financially secure.
I have a slightly different take on this, compared to the other answers. In general, I think your emergency fund should always be at least 3K, especially if you own a used car that is out of warranty. Any number of unlucky auto repairs could easily cost over 2K. So, if you have 7K in savings, I would personally buy a car that is 4K or less or finance any amount of the car over 4K (if you can get a relatively low interest rate). Then I would pay down the financed portion of the car as quickly as possible while maintaining at least a 3K emergency fund.
That being said, notice I mentioned "In general". Your situation may actually be quite different. If you don't have much debt, with your income you might be able to build up a couple of thousand in savings in a single month, and if so the above doesn't really apply. Even if you spent the entire 7K on a car, you'd likely have at least 3K in your emergency fund within 60-90 days.
As for what's responsible, there are too many factors to dictate that. If you don't have many other expenses, you could possibly afford a $40K car, and I don't think anyone here could fairly call that "irresponsible" if you spent that much, though surely no one would call it "responsible" either. Perhaps the best advice is to buy the least expensive car you will be happy with. Many people regret overspending on a vehicle, but few regret underspending (unless they got a lemon that requires lots of repairs).
Finally, you could also consider another option. You could get a very cheap car for 1K or less and drive it for a year. By then you may have closer to 20K saved up for a much nicer car than you can afford today.
Regardless of your circumstances, the amount of money you should put into a car is about $6000-8000 or the amount of cash you actually have, whichever is less. You can get a very reliable gently-used car in that price range, and a car that's plenty good to drive for basically whatever your budget is, down to about $1500-2000 or so. Spending more is never a financially sound decision; it's purely a luxury expenditure. Buying a car with a loan is always a financially bad decision.
So many answers here are missing the mark. I have a $100k mortgage--because that isn't paid off, I can't buy a car? That's really misguided logic.
You have a reasonably large amount of college debt and didn't mention any other debt--
It's a really big deal what kind of debt this is. Is it unsecured debt through a private lender? Is it a federal loan from the Department of Education?
Let's assume the worst possible (reasonable) situation. You lose your job and spend the next year plus looking for work. This is the boat numerous people out of college are in (far far far FAR more than the unemployment rates indicate). Federal loans have somewhat reasonable (indentured servitude, but I digress) repayment strategies; you can base the payment on your current income through income-based and income-continent repayment plans. If you're through a private lender, they still expect payment. In both cases--because the US hit students with ridiculous lending practices, your interest rates are likely 5-10% or even higher.
Given your take-home income is quite large and I don't know exactly the cost of living where you live--you have to make some reasonable decisions. You can afford a car note for basically any car you want. What's the worst that happens if you can't afford the car? They take it back.
If you can afford to feed yourself, house yourself, pay your other monthly bills...you make so much more than the median income in the US that I really don't see any issues.
What you should do is write out all your monthly costs and figure out how much unallocated money you have, but I'd imagine you have enough money coming in to finance any reasonable new or used car. Keep in mind new will have much higher insurance and costs, but if you pick a good car your headaches besides that will be minimal.
I think the answer to how much you "should" spend depends on a few more questions:
- What are your short term (1-5 years) financial goals?
- What are your long term (5-20 years) financial goals?
- What kind of car will help you achieve these goals?
Once you answer these questions I think you'll have a better idea of what you should spend.
If you have no financial goals then what kind of car you buy doesn't really matter.
But if your goals are to build and accumulate wealth both in the short and long term then you should know that, by the numbers, a car is terrible financial investment. A new car loses thousands of dollars in value the moment you drive it off the lot. Buy the cheapest, reliable commuter you can ($5k or less) and use the extra money to pay off your debts. Then once your debts are paid off start investing that money. If you continue this frugal mindset with your other purchases (what house to buy, what food to eat, what indulgences to indulge in, etc...) and invest a bit, I think you'll find it pretty easy to create a giant amount of wealth.
Your financial situation is horrific. Actually, terrifying.
As an absolute basic in life you always need 1 month's salary free and clear sitting in the bank. You do not have this. You don't even get to count that. It's what Napoleon would refer to as an "iron reserve": you have to have this. You actually won't even have this for some two or three months.
Note that you have a staggering amount of debt.
You have absolutely no assets.
You own nothing.
You have no savings.
So at this point we can say "Could your situation be any worse?" and the answer is "It could not be any worse."
On the "good things in your outlook" side you have the idea that you probably have a job (it's unfortunate how you refer to it as "will pay" when you mean "might pay") but you're in perhaps the highest-expense, most-flakey economic zone on Earth. Recall that i) every company eventually closes and ii) every job eventually ends.
In your situation it is inconceivable you can spend more than $500 - $750 on a car.
The next incredible problem you face is that I'm guessing you just have no clue how expensive it is to insure and run a car. Any ideas of buying anything more than a junker is a non-starter, but on top of that you're not realizing how expensive it is going to be for you to run a car.
Disturbingly, you have a very poor idea of even how far it is you have to drive each day.
The only realistic solution for you is to bike each day to work (buy the cheapest possible bike); become the "eccentric guy" who really focusses on health. Bike in for an hour, shower at the office or a nearby gym, enjoy your day and bike home. You'll need a backpack to carry your pack lunch, buy the cheapest backpack.
Since it's LA, it may be impractical. You may literally need a car. In that case, your only solution is
Borrow a car.
That's the only thing you can do. Plain lean on your parents or relatives to borrow some old car and use that. (It will still cost you an awful lot of money to do so - repairs, tires, insurance, and everything else.)
You do not have your one-month "iron reserve".
You have a staggering amount of debt.
You have absolutely no assets.
You own nothing.
You have no savings.
Additionally you live with the parents; you have a dream of a job (in one the highest-priced, most flakey regions) and "job" is another word for no security - jobs evaporate all the time for many reasons. Please be careful. Regarding a car, find a way to borrow one; offer to make a repair on it, say. Don't spend one cent on anything your first six months at work, concentrate only on your job. See where you are after six months.
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protected by Chris W. Rea Nov 5 '17 at 22:09
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