How many months/years of gross income?
01-13-2008, 09:59 AM
#1
Thread Starter
How many months/years of gross income?
Based on a few recent threads, it got me thinking. What is the appropriate number of months of your gross income should you spend on a car?
For example, if you make $50k, is spending six months gross income ($25k) appropriate? Gross income means income before any taxes, deductions, withholding, etc. Even if your salary is $3k a month and you only take home $2k, your gross is $3k just to keep things simple.
My personal opinion is if you making under $75k, you shouldn't ever spend more than six months gross wages on a car. If you make $100k plus, it shouldn't be more than 3-4 months ideally.
Meaning, if you make $200k, would spending $80k be okay? Even I think that is a bit much, but it's only 4 months, whereas it sounds more 'normal' to spend $25k on a car if you make $50k. It's obviously not a linear equation. The reason being is that an $80k car isn't even close to being twice as nice as a $40k car (generally speaking) and a $40k car is MAYBE twice as nice as a $20k car. Utility/value drops as a car gets more expensive.
All that said, some of us car nuts would spend probably a whole years of gross wages on a car if we could get away with it.
For example, if you make $50k, is spending six months gross income ($25k) appropriate? Gross income means income before any taxes, deductions, withholding, etc. Even if your salary is $3k a month and you only take home $2k, your gross is $3k just to keep things simple.
My personal opinion is if you making under $75k, you shouldn't ever spend more than six months gross wages on a car. If you make $100k plus, it shouldn't be more than 3-4 months ideally.
Meaning, if you make $200k, would spending $80k be okay? Even I think that is a bit much, but it's only 4 months, whereas it sounds more 'normal' to spend $25k on a car if you make $50k. It's obviously not a linear equation. The reason being is that an $80k car isn't even close to being twice as nice as a $40k car (generally speaking) and a $40k car is MAYBE twice as nice as a $20k car. Utility/value drops as a car gets more expensive.
All that said, some of us car nuts would spend probably a whole years of gross wages on a car if we could get away with it.
01-13-2008, 10:03 AM
#2
Registered User
Wasn't there a thread on this exact subject six months ago? Not criticizing, but digging that up would obviously be topical, and it's driving me crazy that I can't find it.
01-13-2008, 10:03 AM
#3
It depends on how long you plan to keep your car as well. You could buy a $70,000 Lexus and keep it 15 years.
Are you talking about how much you spend on cars per year? That might be a better question (when you take lease / car payment) into account... then you'd have to index that against how many years before flipping cars.
Are you talking about how much you spend on cars per year? That might be a better question (when you take lease / car payment) into account... then you'd have to index that against how many years before flipping cars.
01-13-2008, 10:04 AM
#4
Thread Starter
I started a thread quite a while ago on what % of your income is spent on your car payment, but it didn't account for people who paid cash or financed over 10 years, etc.
I don't think there is a thread on this specific question, but I could be wrong....
I don't think there is a thread on this specific question, but I could be wrong....
01-13-2008, 10:06 AM
#5
Thread Starter
Originally Posted by CKit,Jan 13 2008, 11:03 AM
It depends on how long you plan to keep your car as well. You could buy a $70,000 Lexus and keep it 15 years.
Are you talking about how much you spend on cars per year? That might be a better question (when you take lease / car payment) into account... then you'd have to index that against how many years before flipping cars.
Are you talking about how much you spend on cars per year? That might be a better question (when you take lease / car payment) into account... then you'd have to index that against how many years before flipping cars.
01-13-2008, 10:09 AM
#6
I'm not sure how much leases run these days.
But I saw Honda Pilot leases for $250 per month.
And the BMW 335 leases for ~$550 per month.
And I think 911 leases are around ~$1500-ish per month.
If you take someone who makes (net) $120,000 per year, that's $10,000 per month. You'd probably have to clear $170,000 gross to make that much net.
If you live someplace with a high cost of living, your mortgage might be $3000. If you live modestly, you might only spend $1500... leaving the extra $1500 for a Porsche.
Is that excessive? I don't know. But I know people with big fat mortgages on modest salaries. If that kind of thing isn't important to you, then I could see someone spending the difference on cars....
But I saw Honda Pilot leases for $250 per month.
And the BMW 335 leases for ~$550 per month.
And I think 911 leases are around ~$1500-ish per month.
If you take someone who makes (net) $120,000 per year, that's $10,000 per month. You'd probably have to clear $170,000 gross to make that much net.
If you live someplace with a high cost of living, your mortgage might be $3000. If you live modestly, you might only spend $1500... leaving the extra $1500 for a Porsche.
Is that excessive? I don't know. But I know people with big fat mortgages on modest salaries. If that kind of thing isn't important to you, then I could see someone spending the difference on cars....
01-13-2008, 10:15 AM
#7
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There are too many variables to simplify it this way. I make $50k, bought a $22k S2000. My wife makes $55k, and bought a $24k Jeep. Her payment is $60/mo less than mine, because she has 0% financing. I'd say a better approach is monthly payment as a percentage of net income, but even then you can get caught with stupid financing deals like 96-month terms and double-digit interest rates.
FWIW, my parents make over $300k, and both drive $23k Accords (though they are shopping for a $35k luxury car for mom; TL, G35, CTS, ES350.) My inlaws' passive income probably matches their salary income (both of which are higher than my parent's income) and they drive a free company car, a $30k minivan, and a T-bird bought with a windfall inheritance.
There are always two sides to the equation, what's coming in, and what's going out. If you are sufficiently into cars that you don't mind making some sacrifices in other areas (not going out to eat as often, not traveling, whatever) and can keep a reasonable in versus out ratio, you might be able to swing more car on less money. But if you are like my wife's parents or mine, you don't care much about your cars and instead buy things like nice real estate (wife's parents own three homes outright) or traveling (my parents cruise multiple times a year and just built a brand-new $500k+ house and then put in a $50k pool.)
For me, my car is part of my lifestyle, and it gets weighted as such in my financial priorities. For everyone else, a car is an appliance to get them places, and they weight it as such in their finances.
FWIW, my parents make over $300k, and both drive $23k Accords (though they are shopping for a $35k luxury car for mom; TL, G35, CTS, ES350.) My inlaws' passive income probably matches their salary income (both of which are higher than my parent's income) and they drive a free company car, a $30k minivan, and a T-bird bought with a windfall inheritance.
There are always two sides to the equation, what's coming in, and what's going out. If you are sufficiently into cars that you don't mind making some sacrifices in other areas (not going out to eat as often, not traveling, whatever) and can keep a reasonable in versus out ratio, you might be able to swing more car on less money. But if you are like my wife's parents or mine, you don't care much about your cars and instead buy things like nice real estate (wife's parents own three homes outright) or traveling (my parents cruise multiple times a year and just built a brand-new $500k+ house and then put in a $50k pool.)
For me, my car is part of my lifestyle, and it gets weighted as such in my financial priorities. For everyone else, a car is an appliance to get them places, and they weight it as such in their finances.
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01-13-2008, 10:17 AM
#8
Thread Starter
CKit,
You are taking this question from the perspective of how much cash flow you can have to finance a car. If you clear $5k/month and have $2k left over, you could buy a hell of a car for $2k/month, but I'm looking at this from the # of months of gross wages it would take to buy a car outright.
I think people look at their budget and see that they have $600 extra each month and figure they can finance a car over 60 or 72 months and buy a nice $40k car. But, if they only make $50k/year, do they realize they are working almost 10 months (more like a year after taxes and other deductions) to pay for that car?
You are taking this question from the perspective of how much cash flow you can have to finance a car. If you clear $5k/month and have $2k left over, you could buy a hell of a car for $2k/month, but I'm looking at this from the # of months of gross wages it would take to buy a car outright.
I think people look at their budget and see that they have $600 extra each month and figure they can finance a car over 60 or 72 months and buy a nice $40k car. But, if they only make $50k/year, do they realize they are working almost 10 months (more like a year after taxes and other deductions) to pay for that car?
01-13-2008, 10:21 AM
#9
Originally Posted by QUIKAG,Jan 13 2008, 11:17 AM
CKit,
You are taking this question from the perspective of how much cash flow you can have to finance a car. If you clear $5k/month and have $2k left over, you could buy a hell of a car for $2k/month, but I'm looking at this from the # of months of gross wages it would take to buy a car outright.
I think people look at their budget and see that they have $600 extra each month and figure they can finance a car over 60 or 72 months and buy a nice $40k car. But, if they only make $50k/year, do they realize they are working almost 10 months (more like a year after taxes and other deductions) to pay for that car?
You are taking this question from the perspective of how much cash flow you can have to finance a car. If you clear $5k/month and have $2k left over, you could buy a hell of a car for $2k/month, but I'm looking at this from the # of months of gross wages it would take to buy a car outright.
I think people look at their budget and see that they have $600 extra each month and figure they can finance a car over 60 or 72 months and buy a nice $40k car. But, if they only make $50k/year, do they realize they are working almost 10 months (more like a year after taxes and other deductions) to pay for that car?
Do people think of a house in that way? How much can I save up for and after 15-30 years it'll be mine?
I don't know. Because a lot of people on s2ki.com don't keep a car to the bitter end.
I know, I know. I'm derailing the thread. Sorry.
01-13-2008, 10:24 AM
#10
Thread Starter
Stack,
Welcome to the thread. I understand your point and it is definitely valid, but I also think that my question, realizing that it is only part of the total equation, is also valid.
When I got out of college about 7 years ago, I was making about $50k. I didn't blink for a second spending $45k on my new Vette. I had $15k to put down (from my lawn business) and could easily afford financing the remainder becuase I didn't have any debt. Now, I'm making much more, but I would be freaking nuts to spend a years worth of salary on a car like I did when I first graduated.
Priorities change, but if this thread helps people to see the huge financial decision they are making by comparing it to the number of months they have to work to gross the amount they need to buy a car, they might think a little bit harder about what they can truly afford.
Welcome to the thread. I understand your point and it is definitely valid, but I also think that my question, realizing that it is only part of the total equation, is also valid.
When I got out of college about 7 years ago, I was making about $50k. I didn't blink for a second spending $45k on my new Vette. I had $15k to put down (from my lawn business) and could easily afford financing the remainder becuase I didn't have any debt. Now, I'm making much more, but I would be freaking nuts to spend a years worth of salary on a car like I did when I first graduated.
Priorities change, but if this thread helps people to see the huge financial decision they are making by comparing it to the number of months they have to work to gross the amount they need to buy a car, they might think a little bit harder about what they can truly afford.