How much should you spend on a car? This depends on your income. I would say, you should not spend more than a third of your annual income on your car. Some say only 10%, but I know sometimes that is just too little. You could get a moving thing for 10%, but it could be just a throw away car.
So use around a third of your annual income on it. Max. And you shouldn’t be buying a new one every year. Another thing to keep in mind is, if you can’t afford it right away, don’t buy it. The more extreme saying goes: if you can’t afford to buy it twice right away, you can’t afford it.
With car comes the other expenses
The initial cost of the car isn’t the only thing you have to worry about. There comes the insurance, fuel, taxes, and maintenance fees. Every now and then you need a new pair of tires and change oil filter.
All of these things will cost real money. That is why you should not spend everything you have in your bank account on your car. Even if you had a third of your annual income in your bank account, that doesn’t necessarily mean you could afford the car at that price.
Choose the cheaper one
If you look at 20-thousand-dollar car and compare it to 10-thousand-dollar car, most of the times, even if the price is doubled, the car still isn’t twice as good. Sure, it might be newer and have better equipment, but think about how long it will last. Both of them probably will need some kind of maintenance and both of them will lose their value over time. The expensive car will lose more of its value faster.
Let’s put it like this, if you buy car today and you plan on driving it for the next 10 years. You will really put all your savings on it and buy the most expensive you can afford. You will be driving that thing for the next 10 years if that’s how you budgeted it. After 7 to 10 years, the car will be old. Other option is to buy the car half of the price of the first option. Drive it for about 5 years, then buy another, newer car. By buying less expensive car, you can upgrade it more frequently. This way your standard of living will increase more steadily, than every 10 years.
Use investing to upgrade your car
One option to buy every car when ever you feel so, or have the money to do so, is to create another investing account just for buying new or newer cars every now and then. For example, if you were to buy a 20-thousand-dollar car today.
Instead, you buy a 10-thousand-dollar car and invest the other 10 grand. With the annual return of the stock market, when your equity doubles in around 7 to 8 years, you could buy a new, 10-thousand-dollar car and still have that other 10 thousand on your car investing account.
If you want to boost, what kind of car you can buy with this method, you can just manually add for like 50 dollars every month for your investing account. This way in the long run, you will be able to steadily upgrade your car and standard of living with it. This strategy doesn’t include taxes, insurance, fuel etc.
This will do two things. First, it will let you upgrade to a newer car every now and then without a big financial effort. Second, your standard of living will increase more often, than driving every car to their absolute limit, until they finally breaks down and it’s not worth it to repair.
Buying a new car with your investments
When the money you initially invested into your car investing account has grown enough for you to buy a new one, and you have been adding those 50’s every month to it, it might be the time to finally buy the newer car. There are two ways you can calculate how much you want to spend on it.
The first way, what will afford you a nicer car right away, is to just leave 10 thousand to your account, and buy the car with the rest. Another option is to add the 50’s you have added on top of that 10 grand and leave that amount. So, if you were to upgrade your car after, let’s say, 8 years, you would leave 14,8 thousand (10 000 + 50 x 12 x 8) to that account to grow. Then just continue the process until the car isn’t such a big deal anymore.
Below are some examples of this strategy, calculated that you buy a new car every 8 years with an initial investment of 10 000 dollars, with two different examples. Your old car probably will have some value as well, so that will be added on top of the amount taken from the investments, its not included in my calculations.
On this first one, we add 50 dollars per month. Both of these examples are calculated with a 7% return on your investment. Here is how I calculated the sheets below, year 8 as an example =( 19 600 + 600)*1,07-10000; it is not 100% accurate, but it is a directional calculation.
| Equity | Annual additions (50$ per month) | ||
| year 1 | 10 000 | 600 | |
| year 2 | 11 342 | 600 | |
| year 3 | 12 778 | 600 | |
| year 4 | 14 314 | 600 | |
| year 5 | 15 958 | 600 | |
| year 6 | 17 717 | 600 | |
| year 7 | 19 600 | 600 | |
| year 8 | 11 614 | 600 | new car -10 000 |
| year 9 | 13 069 | 600 | |
| year 10 | 14 625 | 600 | |
| year 11 | 16 291 | 600 | |
| year 12 | 18 074 | 600 | |
| year 13 | 19 981 | 600 | |
| year 14 | 22 021 | 600 | |
| year 15 | 24 205 | 600 | |
| year 16 | 13 541 | 600 | new car -13 000 |
| year 17 | 15 131 | 600 | |
| year 18 | 16 832 | 600 | |
| year 19 | 18 653 | 600 | |
| year 20 | 20 600 | 600 | |
| year 21 | 22 684 | 600 | |
| year 22 | 24 914 | 600 | |
| year 23 | 27 300 | 600 | |
| year 24 | 12 853 | 600 | new car -17000 |
| year 25 | 14 395 | 600 | |
| year 26 | 16 045 | 600 | |
| year 27 | 17 810 | 600 |
Here is the other one, if you were to add 100 dollars per month.
| Equity | Annual additions (100$ per month) | ||
| year 1 | 10 000 | 1200 | |
| year 2 | 11 984 | 1200 | |
| year 3 | 14 107 | 1200 | |
| year 4 | 16 378 | 1200 | |
| year 5 | 18 809 | 1200 | |
| year 6 | 21 409 | 1200 | |
| year 7 | 24 192 | 1200 | |
| year 8 | 14 170 | 1200 | new car -13 000 |
| year 9 | 16 445 | 1200 | |
| year 10 | 18 881 | 1200 | |
| year 11 | 21 486 | 1200 | |
| year 12 | 24 274 | 1200 | |
| year 13 | 27 258 | 1200 | |
| year 14 | 30 450 | 1200 | |
| year 15 | 33 865 | 1200 | |
| year 16 | 20 520 | 1200 | new car -17 000 |
| year 17 | 23 240 | 1200 | |
| year 18 | 26 151 | 1200 | |
| year 19 | 29 265 | 1200 | |
| year 20 | 32 598 | 1200 | |
| year 21 | 36 164 | 1200 | |
| year 22 | 39 979 | 1200 | |
| year 23 | 44 062 | 1200 | |
| year 24 | 28 430 | 1200 | new car -20000 |
| year 25 | 31 704 | 1200 | |
| year 26 | 35 207 | 1200 | |
| year 27 | 38 956 | 1200 |
When to buy the newer car
If you plan on using this strategy, remember a few things. First, there is no guarantee that the stock market will continue to give 7-8% annual returns. Second, even that you shouldn’t try to time the markets, it might not be the best option to sell your equities in the bigger dips, such as the 2008-2009 or 2020 march. So far, they have recovered eventually.
If you wanted to upgrade your car to a newer one with this strategy during 2020 march, chances are, even if you had steadily been waiting and adding to your account during past 8 years, you wouldn’t get much of an upgrade if you decided to sell the amount on top of your initial investments. But if you had enough for a car of your choice, why not?
Final words
There are a lot of different approaches to buying a car. For some people, the car is more than just a way of transportation. It could be their whole life. If this is the case, why not spend a little bit more on it. For me it isn’t. Even if it was or wasn’t, I hope you can somehow benefit from this text and my strategy for upgrading your car to a newer one. Thank you for reading and have a nice day.
Other saving-related posts can be found here
Other investing-related posts can be found here.
This is not investment advice. The calculations are directional based on historical return. There is no guarantee that returns will continue. Always do your research before risking your hard-earned money.