How Much Should I Spend On My First Car? [Rules To Follow]

How much should I spend on my first car, you ask? Not more than you can afford, of course.

Buying a car is a difficult process, especially if you’re a teen or young adult who has never purchased one before. There are just so many variables to consider that a seemingly inconsequential oversight can have costly repercussions.

As a general rule, your annual car payment shouldn’t be a substantial portion of your take-home pay. Simple, right? Not so fast!

Using your income as a guideline is a good start, but you need to factor in all the costs associated with buying and owning a vehicle to make sure you don’t end up spending more than you can manage. This guide painted the full picture.

Money Rules Of Buying A Car

The first step in buying any car is to assess your financial situation to see if you can even afford one in the first place. While it’s a good idea to set a budget based on your salary, not everyone has a steady stream of income or can plan ahead of time.

Fortunately, there are several budgeting rules that can help anyone in any financial situation estimate how much they should spend on the car.

The 1/10th Rule

According to the 1/10th rule, you should only spend 1/10th of your gross annual income on the purchase price of a car. For example, if your income is $50,000 per year, spend no more than $5,000 on buying the car. If $100,000, only put up to $10,000 towards it.

The vehicle can be new or used, gas or electric, just so long as your expenditure doesn’t exceed 10 percent of your annual gross income.

Making less than $25,000 a year and can’t put together enough money to buy a used car for under $3,000? You’re probably not ready to own a car. 

Don’t Miss: How To Buy A Good Used Car Like A Pro

Earning over $500,000 and don’t know what to do with your disposable income? Chances are you’re a baller who can afford most vehicles on the market today, including many luxury cars.

The 1/10th rule doesn’t provide a lot of wiggle room, but if you’re serious about your finances and can get by with little, it can work wonders for your bottom line.

The 36% Rule

The 36% rule is geared towards those who need a car but already have debt. It states that you shouldn’t spend more than 36 percent or roughly one-third of your gross income on all of your monthly loan payments.

Put another way, if you add your car loan payments to all your other debts (mortgage, credit card debt, student loans, etc.), the total shouldn’t constitute more than 36 percent of your monthly income.

By taking into account all your debts, you reduce the risk of stretching yourself too thin. It’s very unwise to even contemplate buying an expensive car if you’re already drowning in debt.

Have no other debts? Limit your car expense payments to just 15 percent of your monthly income.

The 20/4/10 Rule

The 20/4/10 Rule is a bit more sophisticated than the other rules and is only suitable for those who plan to finance the car rather than buy it outright. 

As it goes, you should make a down payment of around 20 percent of the vehicle’s purchase price, only finance for four years; and not have total monthly vehicle expenses exceed 10 percent of your income.

The idea behind this rule is to spare you the trouble of having to save up a large sum of money to buy the car fully, help you pay off the loan as soon as possible to reduce the amount of interest incurred, and restrain yourself from spending too much on car payments each month.

Rising car prices have made loan terms of four years increasingly uncommon (five- and six-year terms seem to be the new norm), but don’t make that stop you from striving for it.

Other Costs Of Owning A Car

First-time car buyers often make the mistake of thinking that the vehicle’s asking price is the only cost they will incur. They fail to realize the other costs that typically come with owning one.

Whether the vehicle is new or used, you also need to consider maintenance, insurance, the cost of fuel, and interest if you choose to finance when determining just how much you should spend:

  • Maintenance – Both scheduled maintenance and unscheduled repairs can sometimes be significant, and you will need to research the reliability of the vehicle and budget for these situations before even thinking about making a purchase. Some experts recommend putting aside between $800-$2,000 a year. 
  • Fuel – A major cost of operating a gas or diesel-powered car or truck is fuel. Refueling a hybrid and electric vehicle can be a lot cheaper, but you should nevertheless get an estimate of your monthly fuel cost.
  • Insurance Car insurance is required by law in most places and can be quite expensive. Costs can vary from a couple hundred to a few thousand dollars each year depending on your age, the kind of car you drive, your driving history, where you live, and several other factors.
  • Interest – If you choose to finance the vehicle instead of paying for it in full upfront, you will incur interest on the loan. The interest will make the car more expensive than otherwise suggested by its sticker price.
  • Warranty – Car warranty can either be very beneficial or a total waste of money. If you’re buying a used car that’s out of warranty or buying a new one that you plan to own for a very long time, you might want to consider getting some sort of warranty.

Saving Money On Your Car

If you’re short on money, you will need to do everything feasibly possible to reduce the amount of money you spend on your car each month. Here are some cost-saving measures you can adopt to reduce your overall expenses.

Reduce Purchase Price

There are several opportunities for saving money on the car’s purchase price. 

First, refrain from buying large vehicles like SUVs and pickup trucks. Smaller body styles such as hatchbacks and sedans are often cheaper, provide better gas mileage, and are usually less expensive to insure.

If you “must” have an SUV or truck, go small. Compact models usually offer sufficient room, performance, and capabilities for the needs of most people.

Second, try to purchase the car when prices are at the lowest, which you can learn more about in our detailed guide on the best time to buy a car.

Finally, avoid getting extras such as service contracts, add-on insurance, and extended warranties when buying from a dealer. Despite what the salesperson might tell you, they generally provide very limited coverage and cost a lot more than the policies you can directly get from a provider.

Perform Maintenance

All vehicles — no matter how reliable they are — require scheduled maintenance, and this is something you can’t ignore. 

Routine maintenance will help ensure the car runs smoothly and optimally and prevent unexpected breakdowns and accidents, reducing repair costs and keeping you safer behind the wheel.

Staying on top of all the maintenance the car needs is a must.

Save On Gas

On top of buying a fuel-efficient vehicle, you can reduce your fuel costs by driving gently, using the air conditioner as little as possible, always keeping the vehicle in optimal running condition, filling up when gas prices are low, and using a loyalty card to get discounts on fuel.

If you can’t be bothered with such minutia, consider getting a hybrid or electric vehicle. While they tend to carry a higher purchase price than comparable gas cars, EVs, in particular, enjoy government incentives and can pay off in a few years due to their better efficiency and lower maintenance costs.

Drive Less

You don’t always have to drive your car or truck, you know. Consider walking, sharing a ride with someone, or taking public transit once in a while.

Less driving means less mileage and strain on a vehicle. Not only can you save hundreds of dollars in fuel, maintenance, and potential repairs, but you will also prolong the life of your car or truck.

Related: Looking for a second-hand car? Learn what’s a good mileage for a used car.

Since driving less reduces the risk of traffic accidents, you might even be able to get your insurance company to reduce your insurance rate.


Here are answers to other popular questions that might interest you:

How Much Is Too Much For A First Car?

This will mostly depend on how much money you make, but experts generally advise that you spend no more than 10 to 15 percent of your monthly gross income on your car payments.

This includes fuel, maintenance, insurance, the loan principal and interest payments if you choose to finance, and all other costs of owning and operating the car or truck.

What Is A Good First Car For A 16 Year Old?

If you’re a teen and don’t have a lot of money to spend on a car, there are a variety of good used cars that cost $10,000 or less, vehicles that have good safety features, fuel efficiency, and reliability.

According to Car and Driver, solid options include the Honda Civic (2012-2016), Mazda3 (2011 or newer), Honda Accord (2013 or newer), Toyota Camry (2012 or newer), and Mazda6 (2009-2013).

If you need a crossover SUV, consider the Toyota RAV4 (2004-2012), Mazda CX-5 (2014 or newer), and Kia Soul (2010–2013).

The Toyota Prius (2011 or newer) is a great choice for exceptionally frugal drivers who want to do their part to help the environment.

Final Thoughts

How much should you spend on a car? Whether it’s your first, second, or third car, you should always shop within your means. This guide presented some of the most common rules for budgeting wisely. 

The 1/10 rule is for the frugal-minded and stipulates that you spend only 10 percent of your gross annual income on purchasing the car, while the 36% rule states that your monthly car loan payments plus all other existing debt payments should not exceed 36 percent of your gross income.

If you decide to take out a loan to buy the car and choose to follow the 20/4/10 Rule, you should ideally make a 20 percent down payment, finance for four years; and keep total monthly vehicle expenses within 10 percent of your income.

Don’t forget to include fuel, maintenance, insurance, interest, and other necessary costs of owning a car when calculating your monthly car expenses, and do whatever you can to feasibly reduce those expenses, as well as the purchase price of the vehicle.

How much should I spend on my first car? We hope you got your answer. If not, consider having a financial advisor help you develop a workable budget.