Almost everyone has a dream car. For some it’s a sporty coup, a luxury sedan or a sleek convertible. For others the ideal car might be a pickup or even a minivan (although less likely). While everyone is drawn to a particular vehicle, the question you have to ask yourself before walking into a showroom is: what can I afford? To be blunt: the car you want may not be the one you drive off the lot.
It’s a difficult question to answer. To complicate matters, there aren’t many guidelines on determining how much we can afford to spend on a vehicle. Manisha Thakor, a personal finance expert and author, attempts to fill the void. Thakor has devised a clever rule of thumb to figure out how much someone can spend on that new set of wheels.
According to Thakor, the average person can afford to spend about a third of their after-tax household income on a vehicle. This assumes you’re putting 20% down and plan to finance the car over a five-year period at a fixed rate (she assumes 6% in her models).
Some, of course, will choose to spend more than Thakor suggests with her rule of thumb, but doing so will mean cutting back in other areas—like housing and travel.
To learn more about buying an affordable set of wheels, watch Bruce Sellery as he gets in the drivers seat to take Thakor’s thesis out for a spin.