Car buying is hard. Cars are expensive, and there are a bjillion options out there. Plus, most of us don’t have the full price of a car saved up when we need to buy. The whole thing can feel overwhelming. And you’re often rushed. I like to call it an adventure, but let’s be real. Adventure is just a nice way of saying big, complicated process.
Unfortunately, research shows that the more overwhelmed you feel, the more likely you are to make bad decisions. And bad decisions about car buying can have long-term consequences. So we’d really like to avoid that whenever possible.
Thankfully, there are quite a few tactics you can use to make your next car purchase a smart decision.
Think Ahead
Everyone should think ahead when they buy a car. The length of time that people own their cars has increased 60% in the last ten years, so that the average length of car ownership is up to eight years. Eight years is a long time and a lot can change in your life. You can get married, have babies, start a business, buy a house, kids can move out, you can start driving your parents more. Your needs will likely change during the time that you own your next car.
Our first joint car purchase was a great example of this. When we were expecting our first child, we shared a car, and it was getting to the point where it needed a little more maintenance. More maintenance is awfully inconvenient when you’re a one-car family, so we decided it was time to add a second car to the family. Being pregnant, I was firmly thinking “family car.” We looked at a few SUVs, but they seemed SO big and who needs all that space? So we bought a snazzy station wagon (remember those?) with a rear-facing third-row seat, figuring that would give us plenty of room even if this baby eventually had siblings.
Fast forward four years later, when we were expecting baby #4. We’d discovered that the rear-facing third-row seat was no longer considered safe for smaller kids, and we were already cramming three car seats across the second row. We needed an upgrade long before we’d planned it. For someone like me, who drives cars a long time, it was really frustrating to have to replace a perfectly good car with low mileage and no car payment. But that baby had to go somewhere!
But for military families, thinking ahead means more than just what you’ll want or need in the next 5-8 years. Your car buying decisions should also think about your upcoming moves. Might you go somewhere that won’t let you take your US spec cars? Or that the car you buy now isn’t appropriate (like my friend who drove a huge, lifted extended cab pickup and got stationed in a busy city with tough parking.) Will that adorable convertible be a good choice in northern New York or the Pacific Northwest?
Making smart car buying decisions as a military family is a little harder than it is for most folks. Plan ahead.
Rules of Thumb
Rules of thumb are great: they give you an idea where to start thinking. They’re not perfect; of course not. There are always exceptions and variables and special situations. But those are truly unique situations. For most people, rules of thumb are useful tools.
I know how hard it is to buy a car within your spending ability. I recently bought a (new-to-me) car. When I started shopping last month, I had a budget of $15,000. As I shopped and shopped, that budget kept going up and up. (Goodness, cars are expensive.) First, I nudged it up to $20,000, then $25,000. Next thing I know, I’m looking at $30,000 cars! Thankfully, I came to my senses and found something that will be quite suitable for our family, back very close to our original planned amount. Is it perfect? No. Is it affordable? Yes, and frankly, that’s a heck of a lot more important to me.
There are many, many rules of thumb about how much car you can afford. This is an area where it is useful to have some clear-cut guidance, because cars are one of the two places where people make their biggest financial mistakes. About 95% of the people I talk to who are in financial trouble are in a pickle because they bought a car they can’t afford or they bought a house they can’t afford.
Itt’s sad, because both can be avoided with some research and careful consideration. And sometimes that careful consideration includes checking your purchase against the various rules of thumb you’ll see discussed different places. If your car meets any of these guidelines, then it is probably a reasonable purchase. If it meets all of these guidelines, you can feel pretty confident that you’re not doing something dumb. Check out these options and see how they resonate with you:
My Friend Rob’s Five Months Pay Rule
My friend Rob is pretty smart, and he doesn’t mess around with nonsense. His car buying rule is your total loan amount must be less than five times your monthly base pay. That means if your monthly base pay is $3,126, then your car loan shouldn’t be more than $15,630. Want to buy a car more than the amount you can borrow? Save up a large enough amount that your loan comes down under that level. Can’t afford to save up that money? Then you can’t afford the car. Period.
As Rob says, “I’m sorry if that won’t let you buy a Mustang GT, but that’s what you can afford.”
I honestly think this is the best rule out there. It’s super-simple, it allows folks to buy whatever they want as long as they can save up enough money, and it makes sense.
The 10% Rule
A common rule of thumb is that the total of all your transportation costs should be less than 10% of your monthly income. Unfortunately, that’s a dream for many people, especially as the cost of insurance and gasoline continues to rise. My family barely meets this rule, and we have no car payments, and none of our teens have their driver’s licenses yet. As soon as one child gets her driver’s license, we’ll be over 10% of our budget on transportation.
That’s doesn’t mean it’s not a useful idea, though. If 10% is the dream, then we can all agree that 30% is unreasonable, right?
Dave Ramsey’s Half Your Income Rule
Dave Ramsey is good at making one-size-fits-all rules about all sorts of things. I don’t agree with all of them, but his rule on car buying is pretty good. Dave Ramsey says that the total value of everything you own with a motor should be less than half your annual income. This includes cars, trucks, motorcycles, RVs, ATVs, and anything else you can imagine.
Kate’s Rule #1
I actually have two rules of car buying. The first one is actually more about depreciation and down payments than the price of the car itself: Don’t borrow for a car if you couldn’t afford to turn around and sell it at any time and pay off the loan. In different words, don’t borrow in a way that you’re underwater when you buy the car, or that you’ll be underwater at any point through the loan.
This rule sounds more complicated than it is. Basically, I’m saying that the amount of your down payment needs to be as much as the loss of value that will happen as soon as you buy the car. Don’t have a very big down payment? Then you better buy a used car that is known to hold its value.
Being underwater on a car is a terrible situation. Somehow, we’ve come to find it normal when folks say, “I can’t sell it, I’m underwater.” This is not normal.
Once again, this rule isn’t about how much car you can buy. It’s about how much loan you can take. I’m sure you know that in a perfect world, I would rather than no one ever borrow money to buy a car. But if you are in a situation where you think you can justify a loan, be smart. Please be smart.
Kate’s Rule #2
If you’re planning ahead for your next car purchase, start making your estimated loan payment to yourself now. Put that money in a bank account designated for your car purchase. If you can make that “loan payment” to yourself every single month, on time, without a problem, for a full year, then you’re probably in a good place to afford that loan. If it gives you any trouble, or you ever have to dip into that money for anything, or you miss a month, then you can’t afford the loan.
The best thing about this plan is that you’ll also be building up money to put towards your next car purchase. We’ve been doing this for three years, and we had enough money to pay for our new car in cash – no loan necessary! (There was some insurance money, too, just so you don’t think I’m completely bragging.) That’s the ideal that we’re all working towards, and I was finally able to do it without having to raid other savings accounts.
As you can see, there are plenty of ways to evaluate whether you can afford to purchase a car. In a perfect world, we’d all be able to save up in advance and pay cash for modest, used cars. In reality, sometimes we are in accidents or have babies or move across continents. But just because you can’t pay cash doesn’t mean that you can’t be super-smart and buy a vehicle that will fit your family and your wallet. Use these rules of thumb to see what will, and will not, work for you!
Like my parents I never bought cars until I already had cash to pay for them. Even now, way past FI and not having to work since retiring slightly early, I buy used cars for cash. But your advice is sound and more practical. The way I do it is too extreme for most people so practical advice they will actually adopt is way more useful, great post.
Thanks, Steve. I would rather we all be able to buy cars in cash, too, but I recognize that sometimes that isn’t possible. If I can gently guide people to smarter choices now, maybe that will be possible in the future 🙂
Rule #1 would sound simpler if you called it the No GAP rule. Rob’s rule gives me permission to buy one of my two dream vehicles, all brandy new. Unfortunately, my budget doesn’t support due to other priorities. I think Rob’s rule has to be tied to the budget as well and the 10% rule.
Gerald, if you think about getting a 48-month loan, base pay X 5 should have your monthly payment under 10% of gross pay, including BAH and BAS.
The “rule” is not so much about giving permission to high-income people to buy nice wheels. The “rule” is about telling the petty officer that he really can’t afford that Camaro.
For example: E-5>4 = $2733; don’t borrow more than $13,655.
On the other hand, if you’re an O-6>28 and need to borrow money to buy a car, you have bigger problems.
It is? I see this rule slightly more leaning towards don’t get a big loan, not have a large down payment. If anything, I think maybe my rule #1 is a NO GAP rule. But if Rob’s rule works out that way, then I think it has accomplished its goal.
Ultimately, most rules of thumb are going to give people in higher income brackets permission to buy their dream car. Heck, that’s even Dave Ramsey approved 🙂 And some of them have figured out that’s not a good idea, and some of them haven’t. But I’m not so worried about those folks. They generally manage even with their poor decisions.