Some financial decisions impact us significantly. I guess the biggest ones are choosing who to spend the rest of your life with and choosing your primary home. I can imagine another decision that requires careful consideration of your budget would be buying a car. We’re always tying things back to how much we earn. That is human nature 101. A question that you, me and many Canadians have in these trying times is “How Much Car Can I Afford Based on My Salary in Canada? ” The answer is a balance between your financial health and your desires on what to buy.
Understanding Your Budget
Budgeting is a key step that many households miss while deciding to buy a car. Buying a car can be a long term commitment and so car ownership should not be straining your finances or taking away from your other financial goals. Here’s how you can break down your budget:
- Monthly Income: Establish how much take home on a month basis (post-tax)
- Essential Expenses: List your essential monthly expenses (rent/mortgage, utilities, groceries, insurance, etc.). Subtract these from Monthly Income
- Savings and Debt Repayment: Paying off high consumer debt is critical to one’s financial health. No point in paying 20% plus interest rates. Once this is done, think of maintaining (or building) your emergency fund and then retirement investing.
- Discretionary Spending: What you are left with now is how much you spend guilt free.
The 20/4/10 Rule
A common rule of thumb for determining how much car you can afford is the 20/4/10 rule. This guideline suggests:
- 20% Down Payment: Aim to make a down payment of at least 20% of the car’s purchase price. This helps reduce your monthly payments and overall interest.
- 4-Year Loan Term: Opt for a loan term of no more than four years. Shorter loan terms often come with lower interest rates, saving you money in the long run.
- 10% of Monthly Income: Keep your total car expenses (including loan payments, insurance, and maintenance) under 10% of your monthly income.
There are multiple car payment calculators that you can use online. One of the ones that we use is this one from TD.
Practical Example
Let’s say you earn $5,000 per month after taxes. Following the 20/4/10 rule, your car expenses should be no more than $500 per month. Here’s a breakdown:
- Down Payment: If you plan to buy a car for $30,000, a 20% down payment would be $6,000.
- Monthly Payments: With a $24,000 loan over four years at an interest rate of 3%, your monthly payment would be approximately $531. Including insurance and maintenance, ensure the total doesn’t exceed 10% of your monthly income.
Additional Financial Practices
- Consider Total Cost of Ownership: Beyond the purchase price, consider fuel costs, insurance, maintenance, and potential repairs. Research the reliability and fuel efficiency of the car you’re interested in. Understanding what you’re getting into is important.
- Emergency Fund: Before you finance a car, make sure you have a fully stocked Emergency. This would mean 3 months to a year’s worth of expenses stashed away in a Savings account. With a car, your chances of using that Emergency Fund might actually increase.
- Avoid Overextending: Prioritize financial stability over luxury. Remember that investing can bring you longer term gains while driving a car off the car lot actually reduces the value of the car right-away.
- Shop Around for Financing: Compare loan offers from different lenders to secure the best interest rate. Pre-approved financing can also give you more negotiating power at the dealership.
- Buy Used or Certified Pre-Owned: Consider purchasing a used or certified pre-owned vehicle. These options often provide better value and reduce the impact of depreciation.
Conclusion
Figuring out how much car you can afford based on your salary in Canada involves a mix of practicality and financial planning. We prefer that we buy our vehicles used and in Cash to avoid any additional financial strain on our monthly budget. But this would require that you build out a Sinking Fund for your vehicle purchase. This would mean that you would have to save the amount over many months. Not everyone would do this but not having to make a payment to debt feels amazing. If you do have to finance a car, the 20/4/10 rule can give you a great guideline on making a decision that supports your financial health and goals. Remember, a car should enhance your life, not tangle your finances. Happy car shopping !!!