The Proper Role of Cars in Our Spending

Now that you've digested all that, you can better understand why it's so difficult to answer the following question:

“I recently graduated from college and want to set up a budget. I'm trying to decide how much I can afford to buy a car. Do you have any rules of thumb?”

Well, no, unfortunately. There's really no good guideline for auto purchases, as there is for housing costs, which generally shouldn't exceed 25% of your gross income.

Some debt counselors suggest that you keep your total debt load to 35% to 40% of your gross income. (Most include housing costs in that figure, even if you're renting rather than paying a mortgage.)

The problem with that advice is that it focuses too much on monthly payments rather than on the overall cost of your debts. Someone who was paying the minimums on her credit cards, or who compressed her auto payments by taking out a seven-year loan, might be within the guidelines, while someone who pays off credit cards in full or who took a shorter-term loan might not be.

You can pretty much assume that if you're paying only the minimums on your cards, have a car loan that's longer than four years, and have a debt total still exceeding the 40% mark, you've taken on too much. But beyond that, how much of your income you choose to spend on a car is a very personal choice.

If you're a car buff, you might be more than willing to shoulder the extra costs of buying the cars you want and/or trading them in as frequently as you can.

I just ask that you look at the total amount you're shelling out for your wheels and see how that compares to your other spending and your goals.

If you're saving prodigiously for retirement, have all your other important financial bases covered, and still have big bucks to spend on cars, more power to you. The point of earning and having money is to spend it on the things that are most important to us. You might well decide you'd rather own a great car than spend your money on vacations or nicer clothes or whatever.

But if you're shortchanging other areas of your financial life or you're going deep into debt to fuel your car obsession, think seriously about the long-term costs you're incurring. As one of my finance professors once said, “Is it worth it to drive a Mercedes now if you have to take a bus when you're 70?”

You should be asking similar questions if you're considering leasing a car rather than buying.

The lease-versus-buy choice is one of those things that financially-minded types love to debate. I'll cut to the chase: If you trade in your cars every two or three years, leasing can make sense—particularly if you invest the money you save on your monthly payments.

But again, I'd recast the whole discussion. Look at the total amount you're spending on cars over your lifetime. Now compare that amount with what you're spending on other important areas of your life, including housing, vacations, education, and retirement savings.

I think most people are better off buying moderately-priced cars, preferably used, and driving them until the wheels fall off. Having a new car every few years is quite a luxury, and one that shouldn't be purchased at the expense of everything else.