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Is there a best practice or general rule when buying a new car (can be new as in new to the person - so a used car is new to the person) relative to one's income? In the past, I've tried to make sure my car cost less than 10-20% of my annual income, but I've learned that best practices or general rules exist for a reason and I'd like to know ahead of time and not find out later.

Thanks.

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If there is, I think you should ignore it. "Rules of thumb" are most often concocted by salespeople of the item in question as part of their sales tactics.

I cannot imagine a reasonable rule of thumb for cars that would work across many incomes. For a very poor person who needs a car, a high percentage of their income would be reasonable. For a richer person, the same rule would suggest buying outrageous luxury.

You should look at alternative uses of your money and your own desire for a nice car and weigh them against each other. Take into account how much you value having a nice car. I'm currently a high income person and still drive the same beat up car I drove a decade ago when I was unemployed and worried about how to make rent. I give more to charity every month than the car is worth total. The reason? I don't much care about my car as long as it gets me from point A to point B. If I was a person who cared about cars, I would get a new one. Nothing wrong with being a car person, nor with being the opposite. Rules of thumb don't take that into account.

The only thing that would be wrong, in my opinion, is to buy a car you can't reasonably afford. Look at the implied monthly payment and think carefully about how much financial distress that will or may cause you. Then decide if you can afford it and if it's a good use of your money. There's your rule of thumb.

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  • And also how you will be using the vehicle. For instance, my rather beat-up old Toyota pickup gets used to haul hay, firewood, rocks, & horse manure, and is driven on rutted tracks where the paint gets scratched - and unlike those folks with fancy new pickups, I don't care :-)
    – jamesqf
    Apr 2, 2017 at 4:41
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My rule of thumb is

1) Has a good reliability rating by consumer reports

2) Can pay cash for the car

3) Likely to last me at least 8 years

4) It's a used car at least 3 years old (The first two years have a pretty bad depreciation curve https://www.edmunds.com/car-buying/drive-a-nearly-new-car-for-almost-free.html).

Generally I look in the $10k-$12k range and there are plenty of nice cars in this price range.

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