The Car Price to Gross Income Ratio
I had to sum up a lot of courage to come to terms with writing this post, and I am still fighting an internal battle to accept it. If you recall from a previous post of mine, cars are one of my top 3 most cherished material items, and you’ll soon understand why this is hard for me.
Have you ever wondered how much you should be spending on a car given your current income? Spend too little on a car and you end up getting a piece of crap; spend too much and you won’t be able to afford anything else on your paycheck. I have certainly seen some people buying cars that cost almost as much as they earn in gross income!
There has got to be an ideal car price-to-owner income ratio that can help you see if the purchase you’re about to make is a good idea.
What is this magic number? Unfortunately, there is none. Different people have different tastes and thresholds. What I can provide you with is a range of what is reasonable. This relatively old but very interesting website compares owner incomes to car prices, with car prices ranging from less than $10,000 to over $200,000. Here are the highlights:
- Nobody on this list had a car that was worth more than their gross income. The closest were owners of Ferrari 456 GTs, who has a car price-to-income ratio of 1.
- The most frugal people on the list had a ratio of 6.1 . This means that their gross income is 6.1 times more than the car they drive.
- The average ratio of people on this list was approximately 2.5.
There have also been several opinions about deciding on a good ratio, but again, it is highly subjective. So I’ll leave it to you to determine a good number for yourself, but I’d try to keep a ratio above 2.0 at the absolute lowest (i.e. if you make $50,000, the most expensive car you should buy would cost $25,000), and around 2.5 for a comfortable ratio.
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