My Car Payment is 10% of My Income! (What Should I Do?)

August 26, 2023

In this highlight, we discuss what you need to do in order to get your car payment under control. We created our 20/3/8 rule to help people buy a reliable car, while making smart financial decisions. Check out the Car Buying Checklist here!


The next question is from E. Littles: “I have a 72-month auto loan at a 4.9 percent rate. The monthly payment is about 10 percent of my monthly income. Should I place this in step three of the financial order of operations or step nine, or should I do something else? You know, this is slightly outside of our 20/3/8 car rule. So what do you think? How should you think about this as he works through the steps?”

“Well, okay. It’s a 72-month car loan. I don’t love that 4.9 percent interest rate, which is not high, but it’s an auto loan. It’s not great, and it’s 10 percent of monthly… Like, this is like, ‘Hey, here’s an option I didn’t hear.’ So I know that… Get the heck out of this, get rid of this car. Because if you have a 72-month loan, it is this far out… I mean, how expensive this was… a bad decision. That’s why we have rules like 20/3/8. And look, we’re the nice guys. We don’t yell at you about stuff typically, but this is one that, if you had to finance a car for 72 months and it’s squeezing you down to where you’re trying to figure out how it fits into this, I think you bit off more than you could chew. Because think about this: If you’re going to try to shrink this down to 36, try to get it inside that three years, well now instead of it being 10 percent—I’m doing public math here, so this may not hold—but then it’s gonna be like 20 percent of your tone. If you’re going to try to compress that timeline in half. If you have 20 percent of your monthly income going towards a car payment, even if you’re trying to get it inside of three years, that’s awful. Like, this car, unfortunately, you couldn’t afford it. It’s too expensive. You can’t afford it. So I would seriously, seriously, seriously consider getting rid of this car, finding a way to get out of it, and getting something that’s more affordable.”

“We actually have on our website right now, if we go to moneyguy.com/resources, a car buying checklist that shows at different monthly income amounts how much you can afford to borrow. If you’ve not seen this deliverable, it’s one that we’ve been working on for a while. You can go see, ‘If I make this much per month, then my auto loan can be this much per month.’ Go check that out and figure out the car that you’re in should not be the car that you stay in. My advice, not knowing anything more about your situation, would be seriously consider getting rid of this car, selling it, doing away with it, and trying to go buy something that does fall into that 20/3/8 range.”

“Yeah, this is a humble pie moment. You’re trying to figure out, do you want to look rich, or do you actually want to be wealthy? Because there’s a big difference here. And I know in this new modern world, because I deal with this when I talk to a lot of my neighbors about vehicles and they’re buying vehicles for their children and stuff, is that people have forgotten that you can still get really good transportation for ten, fifteen, twenty thousand dollars. It might not have the latest and greatest tech, but cars are built so well now that they last a long time. And I’m normally—I mean, we came up with 20/3/8 to give you grace so you could have reliable transportation to get to your job, which is your foundational thing to build wealth. But I feel like if this is greater than 10 percent of your income, you did 72 months and it’s still that high of a threshold, you made an oopsie. So you’ve got to make some big decisions to get it back on track.”



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