How Much of Your Salary Should You Spend on a New Car?

key in new car
Work out a budget based on your salary before you go car shopping to avoid overspending.

Your choice of car can have a huge effect on both your personal freedom and your finances. Since your car is likely the second most expensive thing you’ll buy, after your home, it’s important to budget carefully to make sure it stays affordable.

There are several rules of thumb for working out how much to spend on a new car, many of which are extremely helpful. In this guide, we’ll explain how much you can afford to spend on a new car, compared to the amount you earn every year.

Whether you’re shopping for a car you’re passionate about or just need a simple and effective car to get to and from work every day, read on to work out how much your next new car should cost.

How much do you care about your new car?

Are you a car person? While some people buy cars in order to get to and from their workplace, other people buy cars because they’re passionate about driving or like a certain make and model.

The amount you should spend on a car as a percentage of your salary really depends on how much you care about cars. Are you buying a car just to get to and from work or are you buying a vehicle you’ll use for road trips and weekend drives?

MoneyUnder30 recommends using one of three percentages to work out how much you can afford to spend on a new car based on your needs:

  • If you’d like a cheap, affordable and simple vehicle that’s good enough to get to and from work, budget about 10 to 15 per cent of your annual income.
  • If you’d like a safer, more reliable and more comfortable car for travelling to and from work and on using on weekends, budget about 20 to 25 per cent of your income.
  • If you’re a car person and you view a car not just as a means of getting to and from places, but as a lifestyle item, budget about 50 per cent of your annual income.

Sound a little too simple? Don’t know which category you fall into? These “rule” are designed to make budgeting for a car easier, but they’re not set in stone. Read on to work out how much you should spend on your next new car.

You need a simple, functional car for 10-15% of what you earn

If you view a car as more of a functional tool than a lifestyle item or a status symbol, it’s best to budget about 10 to 15 per cent of your annual income. Using the average UK salary of £26,000 this gives you a budget of £3,900 to spend on a car.

Since most new cars exceed this budget, it’s best to look at the used car market. For less than £3,900, you will be able to find a range of high quality used cars less than eight years old with reasonable mileages and in good condition.

While it can be tempting to go over your budget in order to get a higher quality car for your money, or alternatively to buy a brand new car, it’s important to remember that the cost of buying a car isn’t the only cost of owning a car.

From repairs and maintenance to registration fees and insurance, you’ll also need to pay a range of other costs in order to own and operate your car. This makes it worth sticking within your budget, even if it means buying a used car.

You need a car that’s comfortable, functional and brand new

You’re in the market for a new car that’s comfortable, built to a high standard and affordable. You don’t want something that’s already been used – instead, you want your car to be completely new.

If this sounds like you, it’s best to spend about 20 to 25 per cent of your total annual income on a new car. Using the average UK salary of £26,000 per year, this gives you about £6,500 to spend on a new car.

Around this budget, you’ll be able to afford some small city cars such as the Suzuki Alto or the Kia Picanto, both of which are available for under £8,000. If your budget extends slightly beyond this limit, the Citroen C1 is available from £8,245.

If you need a larger or more powerful car, it’s worth looking at the used market. A wide range of cars are available for 20-30% off their new price after just one or two years of light use, making them great low-cost comfortable choices.

You want a car that’s powerful, luxurious or fun to drive

You’re a car person, and your car says more about you than anything you own. If you love cars and want to buy a car that offers more than just the bare essentials, budget around 50% of your income for your vehicle.

While spending half of your annual income on a car might seem like a lot, it’s not a bad decision if you enjoy driving and view your car as both a functional item that’s helpful for your professional life and an enjoyable item that you like owning.

At the average UK salary of £26,000 per year, you can afford a wide range of new or used cars for £13,000. Good cars in this price range include the Ford Focus, which is available from £13,785, and the Peugeot 308, which is available from £13,779.

Ford Focus Ice WhiteSource / CC 2.0

If you earn £50,000 per year, you have an even wide range of choices. The Mercedes Benz C-Class starts from £26,185 and offers greater luxury and comfort. The BMW 3 Series, a comfortable and reliable car, is also available from £22,280.

If you’re interested in a sports car and can’t afford new prices, the used car market is always worth a look. Many one to two year old cars available at 70% of their new price, expanding the selection of cars you can choose from.

How much can you afford to spend on a car?

It’s easy to overspend when you’re car shopping. From stylish sports cars to extras that seem so affordable in the showroom, many car shoppers end up spending more than they expected to once they see a model they’re interested in.

Plan your budget carefully based on your income and avoid overspending when you go car shopping to make sure you buy a car that gives you personal freedom and not financial difficulties.

Thanks for reading. Make sure to stay tuned to the Warrantywise blog, Facebook and Twitter for more great content throughout 2015!