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How much should you spend to purchase your next car

It is disturbing to see that Americans are spending much more than they can afford on cars and trucks. More often than not, their monthly payments look manageable which makes owning a shiny new car or truck an attractive option. However, this doesn’t mean that it is a good idea to take a $30,000 or $40,000 loan that eats a large chunk from your pay-check every month.


Purchasing a car is one of the biggest expenditures made in a person’s life. This is why car companies around the world devote millions of dollars to marketing campaigns to make buying a car an emotional choice. Should you avoid financing like the plague and purchase a car outright? Let’s have a look at the 20/4/10 rule:


The 20/4/10 rule

The 20/4/10 rule is quite easy to understand. In simple terms, you should:

  • Make a down payment of at least 20%.

  • Finance a car for 4 years or less and no more.

  • Don’t let your total monthly vehicle expenses (which include the principal, interest, and insurance) exceed more than 10% of your gross income.

Your car expectations

If you’re buying a car to make it your primary mode of transport, you’ll need to think about the following things:

  • Make sure it fits your needs – The size of your family as well as the age of your kids (if any) should be factored into your buying decision. If you have small children, you might want a minivan or an easily-accessible vehicle. If you’re a single male or female, you might want something a little flashier and faster. Think about safety, your current needs, as well as your requirements for the near future.

  • Make sure it fits your lifestyle – Do you travel a lot? You might want a car which can fit a lot of luggage into it. Think about the conditions you’ll drive in every day. Ask yourself if you’d be willing to carpool.

Spending money on a car is dead-simple with the 20/4/10 rule. Make sure you buy a car by basing it around your needs as well as your lifestyle so that you get the most mileage out of it.

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