How much car can you afford? The 20/4/10 rule

What does a car really cost each month?

More than the payment. Count all of it:

Cost	Often forgotten because
Payment	it is the only one advertised
Fuel or charging	it is paid in small amounts
Insurance	it is paid once or twice a year
Service and repairs	they come irregularly
Tyres	they come every few years
Registration and tax	they are yearly
Parking and tolls	they are daily and small

Divide the yearly ones by twelve and add them to the monthly ones. For many cars, the running costs come close to the payment itself.

What is the 15% line?

A simple check: all car costs together, divided by your income after tax.

On an income of 3,000, the line is 450 a month.

Payment	Running costs	Total	Share of income
200	200	400	13%: within the line
300	250	550	18%: 100 over

The second car costs only 100 more to finance, and it is the one that does not fit. Looked at through the payment alone, both seem fine.

What is the 20/4/10 rule?

A stricter version, for cars bought on finance:

• 20% of the price paid up front
• 4 years at most to pay the rest
• 10% of your income, at most, for all car costs

Few people meet all three. It is still a useful test: if a car only fits with nothing paid up front and seven years of payments, it is too much car for the income.

Why does the length of the payments matter?

A longer plan lowers the monthly amount and raises the total. It also keeps you paying for a car that is losing value the whole time.

After several years you can owe more than the car is worth. Selling it then does not clear what you owe. A shorter plan on a cheaper car avoids this.

How interest adds up month by month is explained in how credit card interest works. Car finance follows the same math, usually at a lower rate.

New or used?

A new car loses a large part of its value in its first years, whoever drives it. A car that is two to four years old has already lost that part, and still has most of its life left.

Used cars need more care when buying: a service history, an independent check, and some money kept back for the first repairs. That is still usually less than the value a new car loses.

Should I save up or pay monthly?

Paying in full costs no interest and leaves you free of a monthly bill. Saving for it works like any goal with a price and a date, as shown in how long it takes to save for a goal.

If you do finance, pay as much as you can up front and keep the plan short. A good habit is to start setting aside the future payment a few months before buying. It builds the first payment, and it tests whether your budget can carry it.

What about the costs that come later?

Tyres, a service and the yearly insurance are certain. Give them a monthly amount in a separate pot, so they do not arrive as a shock. The method is in what a sinking fund is.

How does a car fit with rent and the rest?

Home and car are the two largest fixed costs for most people. With rent near 30% of income and a car near 15%, almost half is spent before food.

If your rent is already high, the car has to be smaller, and the other way round. Check the home side in how much rent you can afford.

What if I already have a car that costs too much?

• Compare insurance every year. The same cover often costs less elsewhere.
• Pay extra on the finance when you can, to shorten it.
• Ask whether you need it daily. A car used twice a week may cost more than the alternatives.
• Sell and buy cheaper if the gap is large. Losing a little now can be better than paying too much for years.