Car Finance Based On Income Calculator
I created the following widget based on a recent Consumer Expenditure Survey from the US Bureau of Labor Statistics.
Select your household's annual before-tax salary/income, and the calculator will estimate what price car you can afford based on what other households in your income bracket spend on a car.
Of course, the price of the car you can afford depends on the difference between your income and expenses, not just on your income. After all, if your expenses exceed your income, then you can't afford any priced car no matter how much you make.
Are You Bungee Jumping With a Cord That's Too Long?
Imagine you are standing on the railing of a bridge and peering down at a rocky river bottom several hundred feet below.
Further, imagine that you just haven't had the time (too many good shows on TV?) to measure the length of the bungee cord that connects you to the bridge. Nor have you had the time to measure the distance from the bridge down to the rocky river bottom.
But, the commissioned salesperson you bought the bungee cord from told you not to worry about the length and instead go and have fun. And they of all people should know what's best for you, right?
So would you go ahead and jump? Of course not.
Comparatively speaking, this is how most people jump into financial obligations. And because they don't take the time to track and accurately forecast their income and expenses, they end up relying on commissioned salespeople to advise them on whether or not to jump. As a result, they don't have a clue as to whether or not the next jump will end up causing their financial lives to go "splat" on the "rocky bottom."
How to REALLY Know How Much Car You Can Afford
The only way you can accurately predict what price car you can afford is to know how much your life is costing you on a month to month basis. But the costs you need to be tracking don't all show up as monthly bills in your mailbox. Many of the costs you need to be tracking are accumulating behind the scenes.
Everything you own that can wear out IS wearing out at this very moment. These are all assets that will need to be re-purchased in the future. Therefore, when trying to determine how much you can afford to spend on something, it's not enough to track the obvious monthly cash inflows and outflows (most people don't even do that much). You also need to track the rate at which what you own is wearing out so you can be setting aside funds to replace all of those assets as they need replacing.
For example, if you own a home, you should be setting aside funds to replace all furniture, electronics, fixtures, appliances, roofing, flooring, paint, heating, and cooling equipment, lawn, and garden machines, and the list goes on.
How Do You Know How Much You Should Be Setting Aside?
Well, and I know this may sound ridiculous to you, but just like successful businesses do, you need to make a list of everything that will require replacement.
Then for each item listed you need to estimate how many months (years x 12) the asset will last and how much it will cost to replace the asset.
Next, divide the replacement cost of each asset by the number of months you estimate it will last.
Finally, total up all of the monthly replacement estimates to see how much you should be setting aside each month.
If you choose NOT to acknowledge or plan for these depreciation expenses, it doesn't change the fact that they are accumulating behind the scenes. And unless you are aware of how much these costs are every month, you will have no reliable basis for determining just what price car you can afford.
If you will need to borrow money to purchase a car, this tells me that you have not been setting aside your current car's monthly depreciation expense. Otherwise, you would be able to pay cash for the car you are purchasing -- which would likely put an extra $2,000 to 4,000 dollars in your pocket (or into your investments) from the interest cost savings.
But here's the real kicker. If you are borrowing money to purchase a car (an asset that wears out), then in order to get ahead you will need to set aside (deposit to "next car" savings account) the monthly depreciation expense of the car -- which is an amount roughly equal to the monthly car loan payment you will already be making.
In other words, if you are borrowing money to purchase a car, then whatever the size of the monthly car payment you think you can afford would need to be cut at least in half before you enter the amount into the car affordability calculator.
I say "at least in half" because this may still be more than you can afford if you are not setting aside the monthly depreciation expenses of all of your other depreciable assets.
