Tips, Tricks & Trends

Dave Ramsey Has an Easy Equation to Figure Out How Much Car You Can Afford

Purchasing a vehicle is a big investment. If you’re young or don’t have much experience with car buying, you could overextend yourself by getting that impressive new sports car. Or maybe you had your eye on a rugged truck you can take off-roading. 

Remember the old phrase “just because you can doesn’t mean you should”? According to financial strategist Dave Ramsey, you should think about how much you can actually afford to pay for a car.

Dave Ramsey says to invest wisely

Dave Ramsey has a YouTube channel called The Dave Ramsey Show. In the episode “How Much Car Is Too Much?” he tells a caller that while a car is an investment, it’s one you’ll almost always lose money on. 

The caller explains that he’s saving for a new vehicle. He asks Dave how much he should save in terms of the percentage of his salary. Dave’s quick answer: It shouldn’t be more than half of his annual salary. 

The long answer? On his website, Dave Ramsey explains that the total value of all your vehicles shouldn’t exceed half of your yearly income. For someone who makes $50,000 a year, all your vehicles’ value shouldn’t exceed $25,000.

Why? Vehicles as investments go down in value. It’s important not to set yourself up for a loss through depreciation that will hurt your finances.

Dave explains that vehicles lose as much as 70 percent of their value in the first four years. When a $30,000 SUV is worth only $10,000 a few years later, can you financially handle that loss? He says the wealthy invest in things that gain value, not lose it. That’s how they remain wealthy.

Cars as status symbols

RELATED: Dave Ramsey’s Best Car Buying Advice Is Surprisingly Simple

Why would someone want to spend so much on a car? Well, there are many reasons.

Some view an expensive vehicle as a status symbol. And some believe the nicer the car, the more authority they have on the road. Of course, that’s not true. Others may want more expensive vehicles to support a personal image or give others the impression of wealth.

According to Financial Samurai, spending money on a car that you can’t afford actually detracts from the enjoyment of owning the vehicle. If you fall on hard times and can’t keep up with payments, the car could be repossessed. And if you’re in an accident, repairs might be expensive. Plus, parts could be hard to find if you own an exotic car.

Consider a good used car

All isn’t lost if your dream car isn’t in your budget. You might be able to afford a good used version of the vehicle.

Shopping for a quality used car is a great way to keep yourself financially strong and still get the car you want, even if it’s not the latest version. With the help of consumer sites such as Consumer Reports and Edmunds, you can research used vehicles. You can discover which model years have the best overall ratings, features, and predicted reliability ratings.

If you can find a good used version of the vehicle you want, you might be able to get some of your preferred features. Late-model used vehicles often have recent enough tech and active safety features at a great price. It’s just important to do your homework, ask questions, and ensure that any vehicle you’re considering falls within your budget. 

With a little planning and research, you can find a car that meets your needs, fits your budget, and makes you happy.