Can I Afford a Car? What the Calculators Won’t Tell You

You’re eyeing a new car, but just one question: how much car can you afford? You might be trying to hang on to your current car as long as possible, because you aren’t totally sure if you can afford that new car payment.

That’s the agonizing question, isn’t it? How much car can you really afford? The answer isn’t actually about your monthly take-home pay, nor is it about your credit score and how great of a rate you can get from your credit union. It’s about your priorities, and here’s how to totally nail it down.

Run an Affordability Experiment

If your car is not dead yet, you’ve got some time for a very cool little experiment. This is the best kind of experiment because there is literally no downside. None. And it will give you all the information about that monthly payment to satiate your appetite for accurate numbers and soothe your emotions too. This is not a quick car affordability calculator, but run this experiment and you’ll make your purchase with total confidence.

Let’s say you think the car payment will be about $400 a month for 60 months (another way to say it—that’s a five-year loan term ). That gets you a loan amount of around $22,000 if you have a decent credit score.

Each month for the next three months, I want you to take out $400 and set it aside for a hypothetical monthly car payment. You’re going to experiment with this monthly loan payment and see how it fits in your life. Maybe you take this out in cash, or move money to a separate savings account. If you use YNAB, it’s as easy as creating a category in your budget for the new car payment and adding a monthly funding target for $400.

Add a hypothetical car loan to your budget (shown here in YNAB's budgeting software)
Add a hypothetical car loan to your budget (shown here in YNAB’s budgeting software)

Don’t Forget the Details

If your auto insurance will go up as a result of this purchase, apply this experiment to that category too. Get some insurance quotes and start budgeting for the new insurance amount. Same goes for if your gas consumption will sky rocket, for anyone going from Prius to Hummer or similar you’ll want a few extra dollars tucked away for gas.

Budget to this car loan category for three months. Here’s the key part:

Do not buy the car.

Not yet…

That means you won’t be spending any money from that category. Do not move the money out of there! Hands off! No spending or moving for three months! Pretend these are real car payment dollars going out the door.

Just keep on budgeting! Add $400 to that category for three months. At the end of the three months, you’ll have $1,200.

At the end of three months, you'll have saved a decent chunk of money for a down payment (shown here in YNAB).
At the end of three months, you’ll have saved a decent chunk of money for a down payment (shown here in YNAB).

Now ask yourself the million dollar question:  Do you want to keep doing that for the next five years?

Do You Want to Keep Doing That for Five Years?

You’ve lived with the car payment for three months. You’ve dedicated real dollars to this category that you could not use anywhere else in your budget.  You know what it feels like to live with this car payment.

So ask yourself this question: “Do I want to keep doing this for five years or more?” There are a few possible ways you’ll answer this:

  • “Heck yeah! I barely felt that increase at all. Sign me up!  Remote start, leather seats, sunroom for days, I’m all in!”
  • “Hmm, I can afford it just fine, but I ‘d rather have those dollars going in my ‘Trip to the Bahamas’ category instead.”
  • “Nope.  We flat out cannot afford this and I don’t like feeling this pinch.  Now we know.”

And the best part is, you are not committed to the loan…not yet.

You can still decide not to do this.

“Woah, that was painful, I don’t think I can afford that for the next five years.”

The Information You Need to Afford a Car

Now you have information, and information is power. Maybe you adjust the target price for your new car, or you decide to forgo auto loans altogether and save up in cash. By artificially creating some scarcity, you have clarity.  It’ll be super clear at this point whether or not you can afford the total loan long term.

But here’s something else you have:  $1200.

Budgeting $400/month for your pretend car loan nets you $1,200 after just three months.
Budgeting $400/month for your pretend car loan nets you $1,200 after just three months.

Even if you decide that payment amount is too high, you now have a down payment and can revisit your options.  Maybe you’ll look at used cars more closely. Or, maybe you try budgeting $300 for the another three months. Give it a try and see how that feels.  By then you’d have $2,100, and that gives you options.

There’s no wrong answer here, no car that you “should” or “shouldn’t” buy according to financial experts. This is just a great little exercise in gut checking your priorities and gaining clarity on that all-important question that pops up in all our lives regularly:  Can I Afford This?

Want a fresh take on how much car you should afford from the founder of a budgeting company? His answer will surprise you!

Try this exercise and you’ll know the answer with confidence when it comes to your car. You can buy your car without the shame, without the guilt, and without the added stress.

Good luck and enjoy the ride!

Want to add more clarity to every purchase—from cars to vacations to groceries? Try a free trial of the award-winning budgeting software YNAB. No credit card required!

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Can I Afford a Car? What the Calculators Won’t Tell You