How much to spend on a car? Instead of spending a certain percentage of your salary on a car, it makes more sense to define a percentage of your saving capacity (Income – Expenditure). If the car is an absolute necessity: max. 80%. If it is a taste: 10%. Average: 45%. A car is a liability: try to spend as little as possible.
Remember to take into account not only the initial value of the car but the entire annual expense. A good approximation is to calculate 30% of the initial value of the car as the yearly expense.
How much do we spend on cars these days?
According to “Statista“, the following statistics show how much we spend:
The average expenditure to purchase a car in 2020 was USD 17,778, 2% more than in 2019.
According to autocosts.info, the total annual cost of maintaining a car is equivalent to USD 4,926, or almost 28% of the initial value of the vehicle each year.
In other words, every 3.6 years you will be spending the total value of your car.
Ownership costs are not very different in other countries.
A car is a liability, not an asset
The question of how much to spend on a car is very important because it is one of the three purchases that can change the course of a person’s or a family’s finances: housing, car, and higher education for children.
As you can see, the costs associated with owning a car are very relevant and it is not surprising to recognize that the more expensive the car, the higher the costs associated with ownership.
The analysis is totally different if you are acquiring an apartment or a house, which becomes an asset when leased: you earn from the lease, and (usually) you earn from the appreciation.
A car loses everywhere: depreciation (unless you’re in Venezuela: it’s the only place where cars appreciate in value), fuel, taxes, insurance, parking, maintenance, etc.
So: the less you spend on your car, the smaller the impact on your finances.
How much to spend on a car
In asking this question, we may be neglecting the impact of recurring expenses associated with vehicle ownership and only focusing on the initial cost.
To avoid this bias, remember that you will spend about one-third of the initial value each year.
For example, if you buy a car worth 18,000 USD, you will be spending another 6,000 USD per year, i.e. about 500 USD per month. The question is: how does this new expense compare to your monthly income?
The first step is to know if you can afford it.
To make good decisions we must have good information. If you are going to pay 500 USD more per month to have your car, it means that you earn more than 500 USD than you spend each month. In other words, your saving capacity is higher than 500 USD.
I want to ask you a question: Is your need for a car SO great that you run out of the ability to save?
The second step is to assess whether it is a good decision.
You may need the car to get to work every day (if there is no way to telecommute) or to carry goods and there is no other way to transport you.
I have some friends who live in one town and work in another. Others live in the periphery and work in the center of the city and there is no reliable public transportation. In these cases, it is imperative that you buy a car.
However, if you live in a city with good public transportation systems, such as New York, Barcelona, Buenos Aires, or Madrid, buying a car may not be the best option.
List the alternatives to buying a car
There are more and more alternatives to owning a car. I am convinced that within a decade or two car ownership will be a totally obsolete and disused practice. Remember that most of us use our vehicle between 3 and 8% of the time.
The following are alternatives, many of them obvious, others not so obvious…
- Rent a car for days: If you are going on vacation with your family and your in-laws you don’t need to buy a huge car with 7 seats. Just take a van with all the space you need for the 3 or 4 days and then … return it.
- Rent a car by the hour: If your motivation for buying a car is to have a trunk or trunk big enough to pick up your partner when he or she arrives from a trip with luggage, or when they make the big purchase of the month, just rent a car by the hour. You can get them from 6 or 7 USD per hour and up on services like ubeeqo.com or wible.es.
- Carpooling: To make trips from one city to another there are services like blablacar.com. If you are going from Barcelona to Valencia next Thursday, you can see all those who will make that trip on that date and reserve your spot.
You can also share the car with your work or study partners to divide the cost among several of them.
- Cabs: There are cities like Bogota where a 5 km cab ride costs the equivalent of 1 USD. They pick you up at home, drop you off at your destination, and you don’t even have to drive. Doesn’t that sound better than owning your own car?
- Uber: In cities where this service works it is a good alternative: Usually new cars, the app allows you to see where your driver is going and how far he/she has to go to get there.
- Motorcycle: It has the obvious disadvantages of safety, weathering, and low load capacity, however, from the point of view of fuel efficiency, parking area, maintenance costs and speed in traffic, it is a great alternative.
- Public transportation: Each city has its own level. In the United States, public transportation (subways, buses, streetcars, etc.) is often inadequate. Generally, European cities have excellent public transportation systems.
- Bicycle: The bicycle has a privileged place on our list, especially now in the post-pandemic era. Unlike a bus, subway, plane, streetcar, or even a cab, on a bicycle, you do not share the same volume with other people. You are out in the open, which reduces the likelihood of contagion.
Cities know the advantages of cycling, which is why they have rushed to build dozens of kilometers of dedicated bicycle lanes.
Distance of cycle routes and cycle paths in several cities in Europe and the USA:
| City | Km of bicycle routes |
| London | 350 |
| Madrid | 130 |
| Barcelona | 200 |
| New York | 2100 |
| Chicago | 123 |
Other advantages of bicycle transportation:
- Fewer traffic jams
- No contamination
- Exercise while travelling
- The initial purchase and maintenance cost is only a small fraction of that of a car or motorcycle.
- Mechanical and electric bicycle rental services are available in many cities.
- The use of electric bicycles is widespread so physical fitness is not an obstacle.
- Walking: Finally, walking is still an option. Today, with the offshoring of work, millions of people can move to smaller cities with lower rental values and cost of living. Walking and biking are two wonderful alternatives for this situation.
- Skateboards /Scooters
- Rickshaws/bicycle cabs
- Motorcycle cabs
- Skates, skateboards, and skateboards
Finally, I would like to mention another very viable, though certainly controversial, option: Tele/videoconferencing. Millions of us used to travel tens of kilometers every day to go to offices to meet with other people.
Today with the ubiquity of videoconferencing services we can meet without having to physically travel anywhere, so the need for transportation is drastically reduced; likewise, the need to buy a car is reduced.
Conclusion on “how much to spend on a car”.
Instead of spending a certain percentage of your salary on a car, it makes more sense to define a percentage of your saving capacity (Income – Expenditure). If it is an absolute necessity: max. 80%. If it is a taste: 10%. Average: 45%. A car is a liability: try to spend as little as possible.
Remember to take into account not only the initial value of the car but the entire annual expense. A good approximation is to calculate 30% of the initial value of the car as the yearly expense.
The average expenditure to purchase a car in 2020 was USD 17,778
According to autocosts.info, the total annual cost of maintaining a car is equivalent to USD 4,926, or almost 28% of the initial value of the vehicle each year.
The less you spend on your car, the smaller the impact on your finances.
When you must move around please try to walk or use a bicycle.