How Much New Car can You Really Afford?

According to’s 2014 Car Affordability Study new cars and trucks are out of reach for most American families.  The survey focused on median-income families in the 25 largest metropolitan areas and evaluated their ability to afford to purchase an average-priced new car or truck.

Based on local income statistics, as well as taxes and insurance costs, the survey found that a median-income family living in Washington, D.C. could afford the $32,086 price tag of average price of new vehicles sold in the U.S. in 2013 according to data compiled by Kelly Blue Book.

The obvious conclusion of the study is that the vast majority of consumers nationwide are spending more on new vehicle purchases than they can actually afford. managing editor Mike Sante says, “Just because you can manage the monthly payment doesn’t mean you should let a $30,000 or $40,000 ride gobble up such a huge share of your paycheck. You can get a great car for much less and use the savings to invest in yourself.  Here’s where the money for your retirement or kids’ college can come from.”

Libertas Wealth Management president Adam Koos says, “Many people spend all their money on a car,” and warns, “Spending too much can quickly limit your ability to save or invest in your future.”

Most experts agree that consumers should use the “20/4/10 rule” to determine how much they can afford to spend on a new vehicle.  The 20/4/10 rule stipulates the following:

– Make a down payment (including what you get from trading in your current vehicle) of at least 20 percent of the purchase price

– Finance for four years or less

– Cap payments at 10 percent of your gross monthly household income

When shopping for a new vehicle, you should pay attention to all three of these criteria, and avoid the temptation to juggle the numbers, for example financing for five years instead of four years to bring your monthly payments down to 10 percent of your gross income.

Kelley Blue Book senior analyst Karl Brauer says, “You need to have the discipline and be realistic about what you can buy versus what you want to buy.  Sometimes it can’t be both.”

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