How Much Car Can You Actually Afford? The 20/4/10 Rule
The 20/4/10 rule prevents you from becoming car-poor. Here is how it works.
The 20/4/10 rule: 20% down payment, finance for no more than 4 years, and total vehicle expenses (payment + insurance + gas + maintenance) under 10% of gross income. This keeps car costs manageable and prevents negative equity.
Why 4 Years Maximum
Cars depreciate fastest in years 1-3. A 72-month loan means you owe more than the car is worth for most of the loan (negative equity). If you need to sell or the car is totaled, you write a check instead of receiving one. A 48-month loan builds equity faster and saves thousands in interest.
Example: $60,000 Income
10% for all car costs = $500/month total. Insurance: $150. Gas: $120. Maintenance: $50. That leaves $180/month for the car payment. At 48 months with 20% down: you can afford approximately a $10,000-12,000 car. That feels low — but it is what a $60,000 income can comfortably support without sacrificing other financial goals.