The 20/4/10 Rule to Calculate How Much Car You Can Afford

Knowing if you can afford a car is the first step to buying one.

Also, the water is wet.

If you’re confused about how much you should spend, don’t worry. Just use this rule of thumb: Spend no more than 10% of your gross monthly income on your car expenses. That includes things like a car payment, interest, insurance, and even gas.

Of course, the 10% rule isn’t exactly a one-size-fits-all solution. That’s why I want to take a deeper look at buying a car — and show you tactics to get the most out of your car negotiations.

What is the 20/4/10 rule for car buying

I love financial back-of-the-napkin tricks. They can help you roughly answer hairy finance questions quickly so you don’t slave over calculations and waste time.

The 20/4/10 is a good example of one. It can help you get solid starting numbers to help determine whether or not you can afford a car.

Here’s how it works:

  • 20% down payment on the car.
  • 4-year car loan or less.
  • 10% or less of your gross monthly income goes towards car expenses including gas, insurance, DMV fees, repairs, parking/speeding tickets, and interest payments.

Imagine you want to purchase a new car for $30,000 and you earn roughly $50,000 a year. That means you need to put at most a down payment of $6,000 (20% of the cost) and spend no more than $417 a month (10% of your income) on expenses for it.

A different look at buying a car

It’s funny. People make a huge effort to save on things like clothes and eating out — but when it comes to BIG purchases like buying a house or a car, they make awful decisions and erase any savings they’ve made.

How many times have you seen someone sink a bunch of money into a flashy luxury car with a bunch of unnecessary additions … only for them to end up trying to sell it within a few years?

What they fail to take into consideration is TIME. More specifically, how long do you plan to keep the car before you sell it? It doesn’t matter how good of a deal you get on a new car. If you sell it after just a few years of owning it, you’ve lost money.

That’s why it’s important that you pick a reliable car, maintain it, and drive it for as long as humanly possible. It’s only when you finish paying off the car that the real savings start.

Also, by taking good care of your car over the long term, you save even MORE money on it — and you’ll have a great car. And there are a few solid indicators to what makes a good car:

  • Reliability. When I bought my car, above all, I wanted one that wouldn’t break down. I have enough stuff going on in my life, and I want to avoid repair issues that cost time and money as much as possible. Because this was a high priority, I was willing to pay more for it.
  • A car you love. Long time readers know I’m a big fan of conscious spending (more on this later). For me, I knew I’d be driving the car for a long time, so I wanted to pick one I really enjoyed driving.
  • Resale value. One of my friends bought a $20,000 luxury car, drove it for about seven years, and then sold it for 50% of the price. That means she got a fantastic deal.
  • Insurance. The insurance rates for a new and used car can be pretty different. Even if they’re only slightly different (say, $50/month), that can add up over the years.
  • Fuel efficiency. Gas prices seem to always be in a state of flux. Consider a fuel-efficient, or even hybrid, car. Gas mileage is an important factor in determining the long-term value of a car.

  • Down payment. This is crucial. If you don’t have much money for the down payment, look to getting a used car. If you put down $0, your interest rate will be much higher. Don’t do this.
  • Interest rate. The interest rate on your car loan depends on your credit score. That’s why you want to make sure your credit score is in top shape when you finally apply for the loan.

If you truly want to get the best deal out of your car purchase, you’re going to have to negotiate IWT style.

How to afford a car by negotiating the price

Negotiate mercilessly with dealers. And if you’re not willing to negotiate, learn how to.

I’ve never seen as many people make bad purchasing decisions as when they’re in a car dealer’s office. If you’re NOT there to play hardball, dealers are going to see that and take advantage of you. It’s their job to do that. And they have years of practice before you ever walk in the door.

Luckily, you have one powerful chip in your stack: the dealer’s quotas.

The best time to buy a car is in December. That’s the month when dealers all over the country are desperate to hit their annual quotas.

This gives you an advantage when you come in to negotiate a car in that month.

Here’s another tip: Have the dealers fight over you.

When I decided to get a car in my last year in college, I contacted over a dozen dealerships, told them exactly what kind of car I wanted, and said I’d go with the lowest price offered to me.

And guess what? The offers came in like an AVALANCHE. I remember brewing up a cup of tea, and watching my fax machine (Don’t make fun — this was a while ago!) light up as different car dealerships tried to convince me to buy from them. It resulted in a bidding war that led to me landing a car for $2,000 under invoice.

Try that technique out for yourself. Also, make sure you practice and study for the negotiation. Here are some of my best resources about that:

Also be sure to check out my video on buying a car below.

The dos and don’ts of buying a car

When you start your car buying journey, be sure to keep in mind my four dos and don’ts about buying a car:

DO buy for the long haul

A lot of people want to prioritize how a car looks over anything else. What color is it going to be? Two-door or four? Can a spoiler be too big?



But you should really prioritize getting a good, reliable car that you’ll be able to drive around for at least 10 years.

Why? Cars are a long-term investment. This isn’t like a pair of shoes you’re going to wear for a year or two before getting a new pair. A car costs a HUGE amount of money. You’re going to want to get one that lasts a while since it’s only going to get worse and less valuable over time.

Here’s a complicated graph explaining this.

Learn to take control of your finances and spend your money GUILT-FREE with our free Ultimate Guide To Personal Finance below:

DO find deals for graduates

Plenty of dealerships have great programs for recent grads looking for new cars. These often come in the form of rebates or specialty financing.

Two ways to find these deals:

  • Google it. This should really be the first step to anything. Do a simple Google search for recent-graduate car incentive program. Actually, I’ll just do it for you. You’ll also want to specify your city to see your local deals.
  • Ask the dealer. When you’re negotiating with your dealership, be sure to ask them what they offer in the way of new graduate car incentives.

DON’T think you need a used car

Buying used isn’t the only way to save money on a car. Over the long term, a new car might actually end up saving you money if you:

  1. Pick the right new car
  2. Negotiate a low price
  3. Drive it for a long time

I’d rather you get a new car that’s reliable than purchase a used car that’ll break down sooner.

DON’T break from your budget

Set a realistic goal budget for your car and don’t go over it. Other expenses will come up — maybe car related, maybe not. You don’t want to end up struggling because you can’t afford your monthly car payment.

You don’t have to worry about stretching, though, if you have one thing in place: A Conscious Spending Plan.

How to save money for a car

You can make sure you have even more money to get the car of your dreams by implementing a Conscious Spending Plan.

The typical way people look at saving money for a big purchase like a car typically goes like this:

  • Step 1: Stop purchasing the things we love like lattes to save money.
  • Step 2: Spend money anyway on other things.

  • Step 3: Go back to buying lattes.
  • Step 4: Feel bad. Repeat the first step.

That’s where the Conscious Spending Plan comes in. This is the exact same system my friend used to spend five grand a year on shoes.

I can feel your eye-rolling judgement through the computer screen now. How can anyone in their right mind spend so much on shoes each year?

Well consider this:

  1. She makes a healthy salary.
  2. She doesn’t spend much on other things.
  3. She has a system in place that allows her to know exactly how much she can spend each month.

But most importantly: She just LOVES shoes.

And her system allows her to buy 10 to 15 pairs of shoes each month — each of them costing around $300 – $500 a pair.

After investing in her 401k and paying off her fixed monthly payments like rent and utilities, why wouldn’t she use her money to buy the things she loves?

You can use the same system to buy a car. Imagine being able to walk into the dealer and driving off the lot in the car of your dreams, resting easy in the fact that you were able to pay for it.

That’s why I want to offer you a free chapter of my New York Times best-selling book “I Will Teach You To Be Rich.”

In it, you’ll find the exact system you can use that’ll help you both earn more money and start saving for an awesome car.

FAQs About How Much Car Can You Afford

How can I stick to my budget when buying a car?

When you’re buying a car, it’s important to stick to your budget. If you decide to use the 20/4/10 rule, get preapproved for a car loan that fits into that budget before you shop for a car. When you go shopping, be sure to let the seller know that you’ll be sticking to your budget, and only consider cars that fall into that price category. This way, you won’t waste time or money on vehicles that are outside of your price range.

How much car can I afford based on my salary?

One of the most common mistakes car buyers make is confusing gross income with net income, which can cause them to spend more than they can really afford.

If you’re looking to buy a new car, it’s best to keep your car payment under 10-15% of your take-home pay. To figure out how much you can spend on a car, look at your net income—not gross income.

Gross income is the amount you make before taxes or other deductions are taken out. Net income is what you actually have left over after all taxes have been paid and any other expenses have been taken care of.

How much should I budget for a car if I want to pay cash?

One thing that can be helpful is to follow the 35% rule. This rule says that you shouldn’t spend more than 35% of your yearly income on a car. So, if you make $100,000, you shouldn’t spend more than $35,000 on a car.

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  • Stacy

    I like the planning aspect of this but I wonder what changes, if anything, for someone who drives a lot. I drive over 20k miles a year, most of that for work. I'm currently driving a '14 Corolla bought new that now has over 75k miles on it. After coaxing used cars along for years (we retired our previous car at 10 years and 142k miles when it needed a major repair) we went new this past time figuring that we might as well get all of the"good" years out of the car and keep it as long as possible. After a few years, though, I'm not sure the price of new was worth it when the car will likely have 100k miles on it and starting to have issues at 5 years old.

    • Jacob M

      What do you consider a "major" repair? I've seen too many people throw away a good used car when it just needed some work, therefore spending $20,000 on a newer car instead of $700 to fix their current car. A Toyota Corolla is an excellent choice and should last a LOT longer than 100k miles as long as you maintain it. If you're mostly putting on highway miles, it should easily go for 300k unless you get very unlucky. But cars do need maintenance (oil changes, tires, timing belts, suspension, brakes, etc.) and driving 20k miles per year is going to cost you. A different thing to consider is how you can reduce the amount that you drive. 20k miles a year is a good chunk of money, but also quite a bit of time that you could be spending doing other things (41 eight-hour work days, assuming an average speed of 60 MPH!) How much is your time worth? Consider moving closer to work, if it's commuting mileage.

  • Felicia

    This is okay advise but not universal advise. My husband bought an 2003 Miata new. It's a 'flashy' car. He had it until last year (2017) and he was loath to get rid of it becasue he loved every minute he was in that car. LOVED it. We would have repaired it if we could but the frame was rusting out so it was time to let it go. Sometimes, when one can afford it, getting something one loves trumps getting something that is only practical. If one spends a lot of time in a car, then getting one that is a joy to drive is worth the extra price in sheer quality of life. Also, buying used in cash is almost always a better option than buying new when one is younger. I have had a LOT of cars over the years and always buy used in cash. I don't go into debt over a car if I can help it. And I don't get too attached. It's actually kind of fun to change cars every 5 years or so. Right now I have a Mini Cooper S and my husband has a Mini convertible. We are having a blast driving! Yes, we could have gotten a more 'practical' car for the same money, but we bought both used in cash, so no debt accrued and we both just love our cars. At our age (39) we have the money for something fun and yet still paid under 6k for each car with less than 85k miles on each. It's worth it.

    • Jacob M

      If you read the book, you're doing exactly what he suggests - spending money on what you love (assuming you also save elsewhere.) I've owned nine different cars in the past five years, including a Corvette and a Mustang Cobra. I buy them used near the bottom of their depreciation curve (paying cash), keep them until I get bored with them, and generally sell them for nearly as much as I paid. My 2000 Miata is my favorite, and I too will have a hard time letting go of it...

  • Flinch

    10% of gross... to cover everything? This is advice for people who already have money. For somebody pulling in near median income [say, $3k a month], and have the $300 figure cover all the incidentals on top of a note... they have no business whatsoever buying a car on credit.: Go buy a hoopty right now [cash only] that runs and doesn't burn a quart every other fill up, and start making payments to yourself [earning interest instead of paying it] and buy a new car when you are ready with zero financing. So let's cut to the chase: the real method of I'll Teach You to be Rich is... write a book and collect residuals, but do not under any circumstances follow the "advice" in print.. Just repackage it with a few tweaks so it doesn't look like a Suze Orman cut and paste job - she's half baked as well.

    • DB9

      I couldn't agree more!

    • Joe

      - A "hoopty" is GOING to burn oil....period. It is probably going to leak oil, power steering fluid, transmission fluid, and pretty much everything else. - A "hoopty" is not necessarily better at fuel mileage. - A "hoopty" is going to require constant maintenance -- if you don't have the ability to perform said maintenance, be prepared to shell out some serious $$$. - Buying an REASONABLY affordable and RELIABLE car right now is a good way to build credit, stay safe, and even save money in the long-run.

  • Michael

    Does she buy 10-15 pairs of shoes each YEAR? Or each month? Because to buy 10-15 pairs per month she'd have to have $5000 each MONTH to spend. I don't want to nitpick but this is a column about sound financial decisions...

  • Noah

    Another way to look at a car purchase is in terms of an estimated life cycle. If you are the type to keep a car until it is unusable and to be sold as parts/scrap calculate out the realistic estimated service life in terms of the total miles you will get out of it. Look at how much you pay of the car (after taxes, initial registration/title fee, and total interest) as see how much the purchase cost will be per mile of the estimated life. If this is a car that has a purpose of getting you to point A and B and is nothing special (i.e. not something collectable that is just an adult toy) why not consider the cost in terms of requisition/disposition as any manufacture would do for it's tooling/heavy-equipment. You can get more advanced and factor in gradually increasing estimated maintenance cost as the vehicle gets older as well for the vehicle over the total life-cycle. When comparing a new vehicle to a used one both being the same make/model with with the used vehicle having 30k miles on it. Lets say the total estimated life for the vehicle is 250K miles total, for the new car you are looking at the total cost over 250K miles, however for the used car it will be over a span of 220K miles as 30K of the estimated life cycle is gone. Or you could says the used car with 30K miles on it has already used up 12% of it's estimated total life-cycle. Anyways the point to all this is usually you find a used car with reasonable mileage tends to be the better deal. However there are exceptions, the most notable for a popular vehicle in the United States is a small Toyota 4x4 truck. This may seem odd but a used 1 or 2 year old excellent condition Toyota Tacoma 4x4 truck with low mileage and clean title usually has a higher per mile total life ownership cost than one purchased new.

  • Bob

    I think this is great advice, but you need to give appropriate examples. Your example of a 20/4/10 rule is way off base. $24,000 with a 4 year note is going to cost over $500 per month. Then you add in about $100 in gas a month and roughly another $100 in repairs you need to make about $86,000 not $50,000.

  • Machtyn

    On the Shoes anecdote, that's not $15,000 per year, that's $15,000 per MONTH. If she's buying 10 - 15 shoes a month at $300 - $500 a pair... that's an illness. That's wear-those-shoes-two-days-buy-a-new-set type of purchasing. But, whatever, her money.

    • Marina

      15 pairs of shoes at $500 each pair is $7,500, while 10 pairs at $300 each pair is $3,000. So yeah, buying that many pairs of shoes is going to run a bit more than $15,000 a year. And what exactly is meant by "she loves shoes"? Sounds like she simply loves BUYING shoes! I've got a pair of shoes I love (well, like a lot, anyway). Bought them for about $250 several years ago. Used them regularly, because, well, I like them a lot! Now they need new soles, so I'm going to take them to the best shoemaker I know of. Because I really, really like these shoes and I want to keep them for as long as possible. Also, fixing the shoes I already own and like saves me from having to buy new shoes (which will be more expensive than resoling the old ones) and I'd risk not finding any I really like much.

  • JH

    As the article mentions, you don't really need to negotiate anymore--you just need to get dealers to compete over you. This is extremely easy and can be done mostly over e-mail, especially if you're interested in a mass-market vehicle that isn't popular anymore (e.g. just about any 4 door full-size sedan). Set a timeframe and pick the lowest price. Also make sure to spend just as much time researching and selling your current car too. Unless it's an absolute clunker and near inoperable, you're leaving thousands of dollars on the table by trading it in to a dealer. Taking the time to make a decent advertisement and preparing all your records goes a long way and puts you way ahead of most sellers. If you have all the records and price it right, you can get people competing for your car and you might get offers above your list price if you tell people you have multiple people waiting to look at the car. Use Kelly Blue Book as a baseline, but spend some time looking at facebook marketplace and craigslist ads and recording the prices of comparable cars to set your own price. Most people have terrible ads, so post as many relevant pictures and provide as much information as possible. Sell it in a nice area too and you will have people flocking to you. If you set a good price, have all your records, clear headlight lenses, and it's in fully operable condition, you won't have a problem attracting buyers since information is the biggest question mark when it comes to used cars.

  • Frank Footer

    I eat a lot of frankfurters. that being said, how can I get a good new car on $500 a week gross? that's $2000 a month or so. I have to pay rent. I can't cheap out on food, cause then I'd be eating nothing.

  • fredjohnson

    Wow. Been 20 years since I've borrowed money to finance a car and spouse and I have owned 6 SUV's and cars in that time. All brand new. We just start saving for the next car right after we buy the last one. Interest on a car loan sucks.. Can't even deduct it on taxes. I don't drive cars till they die. Too much hassle with repairs, worry about breakdowns and outdated tech and safety on the car. New always gives you the latest safety tech and it's worth it to me. Reliability of new is worth it too.

  • AE

    The advice is good, but the number of variables involved probably make the analysis overly complex to serve as an effective basis to make an actionable decision to buy at a given level. Perhaps more useful is the old rule-of-thumb, which is basically equivalent to the full breakdown of costs, that the price of a car should not exceed about half of one's gross income. So, for example, if you make about $50,000, then a good maximum would be around $25,000, regardless of the financing applied. A similar old rule-of-thumb is still useful for houses bought with a mortgage, which is that the total price of a house should not exceed about three times income. For the $50,000 case, this would be around $150,000 (generally with a 30-year mortgage). Note that some financial planners, especially in the wake of the 2008 crash, now recommend trying to keep the ratio to under two times income (e.g., $100,000 with a 15-year term).

  • Tyler

    No, you should pay for your car with cash. If you are borrowing money, you cannot afford it by definition.

  • James

    I don't like the 4 year rule when I'm given the chance to pay 0% apr for 5 or 6 years. Yes, I know people will comeback and say "but to get the 0% you have to pay more for the car." No, you don't, not if you are a good negotiator and find a dealer desperate enough.

  • joeconn4

    What if you're paying cash for the vehicle? How does that affect the 20/4/10 rule? Any guidelines on what % of income one should spend if paying cash? I saw "50% of annual income" in the comments - why?

Comments are closed.