How Much Should You Spend on a Car Based on Your Income: A Reality Check Worth Considering
After more than fifteen years working with people on their financial decisions, I have seen the same costly mistake play out far too often. A change in circumstances, like a promotion, a bonus, a little extra confidence, and suddenly a sensible individual finds themselves signing for a vehicle that will quietly put pressure on their finances for the next five years.
It happens at every level of the market. Whether someone is securing what appears to be a favourable deal on a used car or arranging finance online, even through services like HP car finance, the pattern is similar.
One recent case study involved a marketing professional earning around $52,000 a year. She purchased a Jeep Wrangler for $487 a month, a decision that felt entirely manageable at the time. Three months later, after accounting for fuel, insurance, and parking in the city, her monthly transport costs were approaching $800. The adjustment was made eventually, but it was a level of financial strain that could have been avoided.
What Owning a Car Really Costs
It is easy to view a vehicle in terms of its monthly repayment, yet that is only the starting point. Depreciation alone takes 15 to 20 per cent of the value in the first year, rising to 25 to 30 per cent over twelve months.
Insurance varies enormously. The same driver might pay $95 a month to insure a Honda Civic but $340 for a BMW 3 Series, simply because of the model chosen. Fuel, too, can escalate quickly. A 20-mile daily commute in a car achieving 25 mpg will cost around $2,400 per year; in an SUV at 18 mpg, closer to $3,300.
Maintenance is an unavoidable expense — tyres, servicing, brake pads, the occasional repair — and for most vehicles will average $1,000 annually, with more for older or high-end models. Registration and fees add a further $200 to $500 a year.
When all these are factored in, a $30,000 car with a $425 monthly repayment may actually cost $650 to $700 per month. That is perfectly acceptable if planned for, but an unwelcome surprise if not.
How Overspending on Cars Compromises Everything Else
Excessive spending on transport has a compounding effect on the rest of your finances. Emergency savings stall, debt repayments slow, investments are postponed, and career opportunities that require short-term flexibility become harder to seize.
Consider a couple in their forties, both teachers, paying $1,100 a month across two vehicles. They believed retirement contributions were out of reach. By replacing their cars with more modest options, they freed up $500 a month, which went directly into long-overdue savings.
The Rule That Works Today
The familiar 20/4/10 guideline — 20 per cent deposit, four-year maximum term, and 10 per cent of gross income on total car costs — still has merit but benefits from an update.
A more practical approach is:
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Aim for a 15 to 20 per cent deposit to avoid negative equity from the outset
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Keep the term to a maximum of 48 months to reduce interest costs and limit the period of depreciation risk
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Cap total car expenses, including repayments, insurance, fuel, and maintenance, at no more than 12 per cent of take-home pay
For someone bringing home $4,000 a month, that means no more than $480 on all motoring costs; for $6,000, the limit would be $720.
What This Means in Practice
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$45,000 annual income (~$2,900 take-home): $350 per month budget, a used car in the $12,000–$16,000 range such as a four-year-old Honda Civic or Toyota Corolla.
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$65,000 annual income (~$4,200 take-home): $500 per month budget, a certified pre-owned Accord or newer used SUV in the $18,000–$25,000 range.
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$85,000 annual income (~$5,500 take-home): $650 per month budget, a new but practical car or a two-to-three-year-old premium model in the $25,000–$35,000 range.
Lenders may approve more, but the discipline of staying within these limits provides a degree of financial security that higher repayments cannot match.
When to Spend Less, When to Spend More
Spend less if you have other significant debt, irregular income, high living expenses, or insufficient retirement savings.
Spend slightly more if your work requires extensive driving, your location demands certain features such as all-wheel drive, you have specific safety or space needs for a family, or your motoring costs can be offset for tax purposes.
For most people, the conservative choice proves the wiser one over time.
New, Used, or Lease — Making the Right Choice
Buying new makes sense if you plan to keep the vehicle for at least eight years, have excellent credit, and value the reassurance of full warranty coverage.
Buying used, especially two-to-four-year-old models, often represents the sweet spot — major depreciation is already absorbed, modern reliability is retained, and insurance is generally lower.
Leasing can appeal in specific cases, offering lower monthly costs and a regularly updated vehicle, but comes with mileage restrictions and ensures you always have a payment to make.
Mistakes to Avoid
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Extending finance beyond 72 months, which inflates interest paid and prolongs negative equity
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Accepting dealer add-ons at inflated prices rather than sourcing them directly from the manufacturer
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Trading in when still in negative equity, which compounds the debt
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Making emotionally driven purchases immediately after promotions or bonuses
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Entering a dealership without independent pre-approved finance
Your Game Plan Before You Buy
Work from your take-home pay, not what you believe you can “stretch” to. Check your credit rating, as it will directly affect interest rates. Research the true cost of ownership, including insurance, before committing to a model.
Secure pre-approval for finance before visiting a dealership. This strengthens your negotiating position and provides a benchmark for any offer they make.
Why This Matters Long-Term
Those who choose cars within their means and invest the difference steadily build wealth. Those who consistently stretch for the most they can finance often remain under financial pressure regardless of income.
One example involved a software engineer paying $850 a month for a BMW lease. Replacing it with a three-year-old Honda Civic reduced the monthly outlay to $320, with the $530 saved each month invested instead. Five years later, the investment was worth more than the BMW ever was, and the Civic was owned outright.
The Bottom Line
Cars are, undeniably, emotive purchases. They say something about who we are, or who we want to be. Yet the model on the driveway has little to no bearing on long-term financial success. The amount you commit to vehicles, however, has a profound impact.
Buy the most reliable and cost-effective car that meets your needs, and channel the rest into savings or investments. Do this consistently and you will build financial security. Stretch your budget for a car you can barely afford, and you may spend years wondering why you are not further ahead.
Your future self will be grateful for restraint today, and for an approach to motoring that keeps your ambitions — and your finances — firmly on track.
