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How Much Of My Salary Should I Spend On Car Payments?

How Much Of My Salary Should I Spend On Car Payments?

The answer to that question really comes down to each individual buyer. Some people will gladly give up weekly take-out or an expensive vacation for the pleasure of driving a beautiful new or late model vehicle. Others see their cars as a way to get from point A to point B and spend the minimum amount of money possible. Of course, salary also plays a significant role in just how much someone should spend on their car payments each month.



What the Experts Say


Some experts recommend that car buyers follow the thirty-six percent rule when taking out a car loan (or actually any loan for that matter). The thirty-six percent rule states that all of someone's monthly debt payments combined - mortgages, car payments, credit cards, etc. - (A.K.A. their debt-to-Income ratio) should not total more than thirty-six percent of their total monthly income. Another rule of thumb says that drivers should limit their monthly car loan payments to fifteen percent of their monthly income. For example, if they make $3,000 each month, their car payment should be no more than $450 per month.


When to Ignore the Experts


Disposable income also plays a role in how much money a car buyer can afford. Relying on percentages might be a useful guide for people with average incomes but, those on the high or low end of the scale may find a percentage formula of no value. Someone who earns just enough money to cover their bills each month might have no room in the budget for car payments, no matter what the formula suggests. On the other hand, people who do financially well in life may have no intention of spending fifteen percent of their monthly income on a car payment.


How Much Of Their Salary Should Edmonton Buyers Spend On Car Payments?


Once again, the answer to that question comes down to the individual circumstances of each buyer. According to the 2015 census, the median total income of one-person households in Edmonton came in at $47,935 before tax and $41,497 after taxes. For two or more person households, the median income more than doubled to $106,260 pre-tax, and $91,076 after taxes. Using the thirty-six percent rule, a single person could safely afford monthly car payments of up to about $1,250, minus any mortgages, rent, or credit card payments they have. The fifteen percent rule dictates that their car payment should not exceed $600 per month. Two or more person households might also find the fifteen percent rule overly generous. An annual income of $106,260 would make their monthly income a tad more than $8,500 allowing them to finance as much as $1,275 a month.


On the other hand, the thirty-six percent rule might be a bit conservative, especially for homeowners. That rule limits their monthly financing power to about $3,060 in total. After mortgage payments (or rent) and other typical debt, most families might find $3,060 per month a bit of a squeeze, especially two or three-car households. In the end, however, the amount of salary someone should spend on car payments comes down to their individual lifestyles, how much they earn, and what they're willing to sacrifice to get into the car of their dreams.




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