How Much Car Can I Afford?

Maybe your Kia went kaput or your Toyota took a tumble. Or maybe you’re just tired of driving a car that’s older than a college student (hey, Rhonda the Honda has served you well all these years). Either way, you’re in the market for a new ride. But how much car can you afford to get?

Here’s the deal: The car you can afford is the car you can pay for in cash. And as a general rule, the total value of all your vehicles combined shouldn’t be more than half your annual income.

We’ll break down what that means and walk you through how much you should spend on a car. Because we want you to own your car—not have your car own you.

How to Figure Out How Much Car You Can Afford

When it comes to how much money you should spend on a car, there’s not really an exact number. Your price range depends on your income, how much money you have in savings, any trade-in value, and your overall budget. We’ve got some steps to help you narrow it down.

Here’s how to calculate how much car you can afford:

1. Know how much money you have to work with.

Before you can know what to spend on a car, you need to know exactly how much money you’re bringing to the table. And by money, we mean cold, hard cash—because a car you can afford is a car you can pay for in cash.

Yep, you read that right. You’ve got to take the idea of getting a car payment completely off the table. Not only do you end up forking over thousands more when you take out a car loan or lease a car, but do you really want a gigantic car payment weighing you down like a modern-day ball and chain for the next six years?

If you’re still not sure, use our auto loan calculator to see just how much more a car loan would cost you. (Spoiler alert: It’s enough to make you steer clear of a car payment.)

But do you actually know how much cash you have to spend on a car—and we mean in total, not just on a down payment? Here are a few factors to help you find out:

Add up how much cash you have on hand.

Look at your bank accounts and see what you’ve got in savings. You also need to ask yourself where buying a ride fits in with your other financial goals. Do you have debt you want to get rid of? Are you saving for a down payment on a house? You may need a new vehicle, but remember: Every extra dollar you put toward a car is one less dollar you could put toward something else.

Figure out your trade-in value.

If you’re planning on replacing your current car, check out Kelley Blue Book to get an estimate of how much it might be worth if you trade it in or sell it.

Stick to this income rule.

The total value of all your vehicles shouldn’t be more than half your annual income. Why? Well, you don’t want too much of your wealth tied up in things that depreciate (or go down in value). And things with motors depreciate big time. So, make sure the car you’re looking at won’t push you over that line.

Once you land on a number you can spend out of pocket, decide you’re not going above it—no matter what promises the dealer tries to throw your way. Having a firm budget and paying in cash are both powerful negotiating tools.

2. Know what kind of car you can afford.

The car you can afford . . . is most likely a used car. We know, we know. It seems like a better idea (and more fun) to get a shiny new car with that new-car smell. But you waste so much money when you do that! In fact, you shouldn’t even consider buying a brand-new car unless you’ve got at least a million-dollar net worth.

Dave's easiest money-saving tip: See if you're over paying for car insurance.

Like we said, cars depreciate fast. After one year, a car loses around 20% of its original value. (And if you’ve got kids, you know they’re just going to spill grape juice all over that brand-new car anyway.) Trust us, a used car is the way to go! And yes, there are still plenty of reliable used cars out there.

You should also consider how much your car will cost to maintain. Some cars, especially cars made outside the U.S., cost more to fix or have more expensive parts. Maybe you’ve got your eye on an SUV, but it’s a gas guzzler and you’ve got a long commute. And don’t assume a hybrid or electric car will save you money, even with the EV tax credit and other tax incentives. Just make sure you think through the total price of driving a car—not just how much you pay up front.

3. Know your time frame.

How soon are you planning on buying a new ride? If your car suddenly quit on you and you need a way to get around, like, yesterday, decide if you need to dip into your emergency fund or see if you’re better off repairing the car instead of replacing it.

Otherwise, you’ll have to settle for whatever you can buy right now (because we’re not messing with car payments, remember?). You may not be able to drive off in the exact car you want (at least not yet). But you’ll feel a lot better behind the wheel when you know your car is paid for in full.

On the other hand, if you’ve still got a working car, keep driving it while you save up for the next one—one dollar at a time.

Here’s how you start saving: Research the price of the car you want. Decide on a time frame you want to get the car by (six months, one year?). Then divide the total cost by the number of months to get your monthly savings goal. Unlike a car payment, this is you paying yourself . . . interest-free.

Your patience will pay off, and you’ll be paying cash for your next ride in no time!

Save Up for the Car You Want

It’s hard to save up for a car (or anything really) without knowing where your money is going. But that’s where a budget comes in! When you take the time to make a plan for your money, you’ll hit your goals faster.

The EveryDollar budgeting app makes it super easy to plug in your income and expenses—as well as any debt payments you have—so you can see exactly how much you can save each month toward a car.

It’ll also show you where you can cut back on your spending (ahem, eating out) to help you save even more money! Plus, you can create a car sinking fund to help you keep track of your specific savings goals and stay motivated.

So, what are you waiting for? Set up your monthly budget for free with EveryDollar and kick-start your savings! And the next time the dealer tries to hook you into an expensive car payment, you can flash those Benjamins and say, “No thanks, I’m paying with cash.”