How Much of Monthly (After Tax) Income Should I Spend on Car
Discussion
I suppose this is maybe a silly question as everyone is different, but I wondered if there was a rough guide to what percentage of someone's 'after tax' monthly income was sensible to spend on a car?
When I was younger I used to tend to let my heart rule my head and choose the car I wanted first and then try to find the money to pay for it somehow.
As I've reached middle-age I prefer to take a more sensible approach and would like to work out a comfortable amount to spend on a car per month, and then find a car to suit that budget.
So, say someone earned £X.XX after tax per month, would we say that it is "normal / accepted" to spend 10%, 15%, 20% on paying for a car, whether that be servicing PCP payments or saving up for cash purchase or leasing etc.?
Also, in working out your monthly budget of how much you spend on a car, do you take into account all the necessary running costs such as servicing, consumables, etc. or do you class these as separate costs?
When I was younger I used to tend to let my heart rule my head and choose the car I wanted first and then try to find the money to pay for it somehow.
As I've reached middle-age I prefer to take a more sensible approach and would like to work out a comfortable amount to spend on a car per month, and then find a car to suit that budget.
So, say someone earned £X.XX after tax per month, would we say that it is "normal / accepted" to spend 10%, 15%, 20% on paying for a car, whether that be servicing PCP payments or saving up for cash purchase or leasing etc.?
Also, in working out your monthly budget of how much you spend on a car, do you take into account all the necessary running costs such as servicing, consumables, etc. or do you class these as separate costs?
I'd always include all the running costs in the monthly budget for the car, and if its not covered by a full warranty a reasonable sum put aside for repairs/parts each month.
I would not include depreciation in the costs unless you are treating the car as an asset that you will own outright, then it should be appropriately weighted as a car is always a high risk investment if you drive it. If leasing or using PCP you are renting the usage of the car, depreciation is the problem of the finance company, your only concern when renting a car is the cost to change when the agreement ends.
How much you spend is up to you, but I'd suggest spending less than your mortgage when you are still starting out and/or planning on trading up to a bigger/more expensive property, and more when you are nearing the end of the mortgage.
I would not include depreciation in the costs unless you are treating the car as an asset that you will own outright, then it should be appropriately weighted as a car is always a high risk investment if you drive it. If leasing or using PCP you are renting the usage of the car, depreciation is the problem of the finance company, your only concern when renting a car is the cost to change when the agreement ends.
How much you spend is up to you, but I'd suggest spending less than your mortgage when you are still starting out and/or planning on trading up to a bigger/more expensive property, and more when you are nearing the end of the mortgage.
Personally I save as much as I can each month, 25% of what I save goes on short term stuff, keeping current cars on the road, 50% on medium term, I basically treat this as a "new car fund" and the rest on longer term savings/emergency fund.
However, I like cars and prefer to buy them outright, so what works for me won't work for everyone.
However, I like cars and prefer to buy them outright, so what works for me won't work for everyone.
Same here I bought 3.5yr old used outright but funded with a loan which has a cheaper rate of interest than my equivalent funds are earning in interest/divs.
Works out around 25% of my mortgage payment and under 10% of net monthly.
Strangely I get less satisfaction with the newer car than the older banger which u enjoyed applying TLC. I may have to get an e39.
Works out around 25% of my mortgage payment and under 10% of net monthly.
Strangely I get less satisfaction with the newer car than the older banger which u enjoyed applying TLC. I may have to get an e39.
tankplanker said:
I'd always include all the running costs in the monthly budget for the car, and if its not covered by a full warranty a reasonable sum put aside for repairs/parts each month.
I would not include depreciation in the costs unless you are treating the car as an asset that you will own outright, then it should be appropriately weighted as a car is always a high risk investment if you drive it. If leasing or using PCP you are renting the usage of the car, depreciation is the problem of the finance company, your only concern when renting a car is the cost to change when the agreement ends.
How much you spend is up to you, but I'd suggest spending less than your mortgage when you are still starting out and/or planning on trading up to a bigger/more expensive property, and more when you are nearing the end of the mortgage.
Doesn't matter if you own or rent a car, you are still funding the depreciation, either directly or indirectly!I would not include depreciation in the costs unless you are treating the car as an asset that you will own outright, then it should be appropriately weighted as a car is always a high risk investment if you drive it. If leasing or using PCP you are renting the usage of the car, depreciation is the problem of the finance company, your only concern when renting a car is the cost to change when the agreement ends.
How much you spend is up to you, but I'd suggest spending less than your mortgage when you are still starting out and/or planning on trading up to a bigger/more expensive property, and more when you are nearing the end of the mortgage.
Dr Jekyll said:
I saw an estimate somewhere that a car costing about 20% of your gross yearly income strikes the right balance, and this sounds about right to me.
yeah, thats in the sensible world where has some common sense based financial education 
...back in the real world in the UK, there are more luxury cars sold each year than there are people in the top tax bracket ....kind of makes you realise, just how many must be living a debt fuelled lifestyle
sidicks said:
Doesn't matter if you own or rent a car, you are still funding the depreciation, either directly or indirectly!
Obviously! If you own the car you have to allow for the depreciation in your lifetime/annual/monthly costs, if its rented it is already counted in the rental cost of the car, you shouldn't be counting it twice.
Assuming a £20k that'll be worth £10k after three years of driving (I've assumed running costs are the same for both example) when I want to change it:
if I put down £20k in cash I'd have to allow for the £10k in depreciation by saving up £10k to buy another car at the end (assuming I'm spending the same amount again) to cover the depreciation.
if I put down a £2k deposit and have the rest via PCP, assuming the final payment is £8.5k with the same resale of £10k I get most of my deposit back, I've only had to pay the cost of the finance.
Plugging the numbers into Skoda's finance calculator I can get £20k of Skoda for £2k down, for £260 per month @ 2.8% APR, contrast that to saving £10k over 36 months, which is £277, plus I'd need the full £20k upfront to spend on a car, not many people do.
Obviously most people who advocate spending cash don't buy new cars, they also rarely spend £20k of cash on a single car.
tankplanker said:
bviously!
If you own the car you have to allow for the depreciation in your lifetime/annual/monthly costs, if its rented it is already counted in the rental cost of the car, you shouldn't be counting it twice.
Assuming a £20k that'll be worth £10k after three years of driving (I've assumed running costs are the same for both example) when I want to change it:
if I put down £20k in cash I'd have to allow for the £10k in depreciation by saving up £10k to buy another car at the end (assuming I'm spending the same amount again) to cover the depreciation.
if I put down a £2k deposit and have the rest via PCP, assuming the final payment is £8.5k with the same resale of £10k I get most of my deposit back, I've only had to pay the cost of the finance.
Plugging the numbers into Skoda's finance calculator I can get £20k of Skoda for £2k down, for £260 per month @ 2.8% APR, contrast that to saving £10k over 36 months, which is £277, plus I'd need the full £20k upfront to spend on a car, not many people do.
Obviously most people who advocate spending cash don't buy new cars, they also rarely spend £20k of cash on a single car.
You're not really comparing like with like as:If you own the car you have to allow for the depreciation in your lifetime/annual/monthly costs, if its rented it is already counted in the rental cost of the car, you shouldn't be counting it twice.
Assuming a £20k that'll be worth £10k after three years of driving (I've assumed running costs are the same for both example) when I want to change it:
if I put down £20k in cash I'd have to allow for the £10k in depreciation by saving up £10k to buy another car at the end (assuming I'm spending the same amount again) to cover the depreciation.
if I put down a £2k deposit and have the rest via PCP, assuming the final payment is £8.5k with the same resale of £10k I get most of my deposit back, I've only had to pay the cost of the finance.
Plugging the numbers into Skoda's finance calculator I can get £20k of Skoda for £2k down, for £260 per month @ 2.8% APR, contrast that to saving £10k over 36 months, which is £277, plus I'd need the full £20k upfront to spend on a car, not many people do.
Obviously most people who advocate spending cash don't buy new cars, they also rarely spend £20k of cash on a single car.
1) You'd actually need to save less than £277 per month to achieve £10k once interest is taken into account
2) you still need to find the £2k upfront for the else scheme
All other things being equal, borrowing money to fund a car is more expensive as the cost of finance is normally greater than the net of tax return that can be achieved.
Of course there are exceptions, if the interest rate is heavily subsidised and or the car is only discounted if you take the finance package.
sidicks said:
You're not really comparing like with like as:
1) You'd actually need to save less than £277 per month to achieve £10k once interest is taken into account
2) you still need to find the £2k upfront for the else scheme
All other things being equal, borrowing money to fund a car is more expensive as the cost of finance is normally greater than the net of tax return that can be achieved.
Of course there are exceptions, if the interest rate is heavily subsidised and or the car is only discounted if you take the finance package.
As the interest rate is so low PCP is at present going to be highly competitive with spending cash, if we ever get to 4% or higher base rate I suspect the number of more expensive cars sold on new PCP deals to decrease rapidly. 1) You'd actually need to save less than £277 per month to achieve £10k once interest is taken into account
2) you still need to find the £2k upfront for the else scheme
All other things being equal, borrowing money to fund a car is more expensive as the cost of finance is normally greater than the net of tax return that can be achieved.
Of course there are exceptions, if the interest rate is heavily subsidised and or the car is only discounted if you take the finance package.
You're right on the interest for the savings, so assuming you can get 4% tax free on that sort of monthly amount you'll only need ~£262 a month, a whopping £4 a month cheaper. However if I went for the PCP deal and stuck the £20k in the same 4% tax free account I'd have £22.5k, or an extra £69 a month saved off the PCP price, just by putting the cash in the bank, meaning the PCP cost is ~£65 a month cheaper.
You are also right about the £2k deposit, lets assume that was the value of the trade in vehicle, and also apply the £2k trade in to the £20k of cash spent. This means you only have to find £18k upfront, but you still have to save £10k over 3 years assuming you want to spend £20k next time as the new car is still only worth £10k at the end.
Its moot though, the majority of people do not have £20k/18k cash on hand to spend on a car every few years.
tankplanker said:
s the interest rate is so low PCP is at present going to be highly competitive with spending cash, if we ever get to 4% or higher base rate I suspect the number of more expensive cars sold on new PCP deals to decrease rapidly.
You're right on the interest for the savings, so assuming you can get 4% tax free on that sort of monthly amount you'll only need ~£262 a month, a whopping £4 a month cheaper. However if I went for the PCP deal and stuck the £20k in the same 4% tax free account I'd have £22.5k, or an extra £69 a month saved off the PCP price, just by putting the cash in the bank, meaning the PCP cost is ~£65 a month cheaper.
You are also right about the £2k deposit, lets assume that was the value of the trade in vehicle, and also apply the £2k trade in to the £20k of cash spent. This means you only have to find £18k upfront, but you still have to save £10k over 3 years assuming you want to spend £20k next time as the new car is still only worth £10k at the end.
Its moot though, the majority of people do not have £20k/18k cash on hand to spend on a car every few years.
This just emphasises my point - buying a car with finance only makes pure economic sense if you can earn more on your savings than the cost of finance.You're right on the interest for the savings, so assuming you can get 4% tax free on that sort of monthly amount you'll only need ~£262 a month, a whopping £4 a month cheaper. However if I went for the PCP deal and stuck the £20k in the same 4% tax free account I'd have £22.5k, or an extra £69 a month saved off the PCP price, just by putting the cash in the bank, meaning the PCP cost is ~£65 a month cheaper.
You are also right about the £2k deposit, lets assume that was the value of the trade in vehicle, and also apply the £2k trade in to the £20k of cash spent. This means you only have to find £18k upfront, but you still have to save £10k over 3 years assuming you want to spend £20k next time as the new car is still only worth £10k at the end.
Its moot though, the majority of people do not have £20k/18k cash on hand to spend on a car every few years.
As you say, if you don't have the assets up front to fund the purchase then it's academic.
sidicks said:
This just emphasises my point - buying a car with finance only makes pure economic sense if you can earn more on your savings than the cost of finance.
I was more responding to this statement:sidicks said:
All other things being equal, borrowing money to fund a car is more expensive as the cost of finance is normally greater than the net of tax return that can be achieved.
You should nearly always be able to make more money sticking the cash in the bank instead using finance/leasing if you aren't picky over the car as you can normally find some cracking deals. There will always be periods where it makes no sense with new car sales, but those are usually short in duration, the manufacturers can't sit on production forever without going bust.The problem comes when you want something in particular, something desirable like a Porsche that overrules common sense, as the finance company has more demand than it needs to supply then the finance costs far more than you'll earn in interest on your savings.
tankplanker said:
ou should nearly always be able to make more money sticking the cash in the bank instead using finance/leasing if you aren't picky over the car as you can normally find some cracking deals. There will always be periods where it makes no sense with new car sales, but those are usually short in duration, the manufacturers can't sit on production forever without going bust.
The problem comes when you want something in particular, something desirable like a Porsche that overrules common sense, as the finance company has more demand than it needs to supply then the finance costs far more than you'll earn in interest on your savings.
And yet those cars which have low demand offer significant discounts to compensate, so taking finance is unlikely to be the most efficient option. Basic economics confirms that, all other things being equal.The problem comes when you want something in particular, something desirable like a Porsche that overrules common sense, as the finance company has more demand than it needs to supply then the finance costs far more than you'll earn in interest on your savings.
sidicks said:
And yet those cars which have low demand offer significant discounts to compensate, so taking finance is unlikely to be the most efficient option. Basic economics confirms that, all other things being equal.
That depends, typically negotiating the cash purchase of one car from a dealer is unlikely to realise anywhere near the same level of discount offered to a leasing company looking to buy hundreds (or even more) of the same car at once, so in that situation I'd argue leasing over PCP and cash. Especially as the dealer makes most of their money off the finance and assorted other insurance products (GAP, etc.), which by paying cash you'll be denying them that income, removing their margin for discount. Assuming an instance for PCP rather than leasing then denying yourself the extra discount of finance company contribution if you pay cash, an extra 5% off list typically? Its enough to swing the saving back the other way as the percentages are going to be fairly close between cash and finance.
Finance isn't the best option every time, but it is far from the worst option every time when buying new.
tankplanker said:
hat depends, typically negotiating the cash purchase of one car from a dealer is unlikely to realise anywhere near the same level of discount offered to a leasing company looking to buy hundreds (or even more) of the same car at once, so in that situation I'd argue leasing over PCP and cash. Especially as the dealer makes most of their money off the finance and assorted other insurance products (GAP, etc.), which by paying cash you'll be denying them that income, removing their margin for discount.
Assuming an instance for PCP rather than leasing then denying yourself the extra discount of finance company contribution if you pay cash, an extra 5% off list typically? Its enough to swing the saving back the other way as the percentages are going to be fairly close between cash and finance.
Finance isn't the best option every time, but it is far from the worst option every time when buying new.
Assuming an instance for PCP rather than leasing then denying yourself the extra discount of finance company contribution if you pay cash, an extra 5% off list typically? Its enough to swing the saving back the other way as the percentages are going to be fairly close between cash and finance.
Finance isn't the best option every time, but it is far from the worst option every time when buying new.
Interesting arguments
I couldn't afford the repayments on a new f10 so bought one at 3.5 years old with 3.5k down and 15k personal loan at 3.6%
Repayments 270pm vs. 4-500 odd. I'd still have put the 3.5k "deposit" if buying pcp but as I see it I own the car at the end of the loan. I just didn't have the privilege of being 1st owner, but that wasn't worth 200 quid per month to me.
Horses for courses...
I couldn't afford the repayments on a new f10 so bought one at 3.5 years old with 3.5k down and 15k personal loan at 3.6%
Repayments 270pm vs. 4-500 odd. I'd still have put the 3.5k "deposit" if buying pcp but as I see it I own the car at the end of the loan. I just didn't have the privilege of being 1st owner, but that wasn't worth 200 quid per month to me.
Horses for courses...
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