Calculating Your Car Budget: A Simple 20-4-10 Rule

Financial personality Humphrey Yang recommends using the 20-4-10 rule to determine how much car you can afford. The rule suggests putting 20% down, financing a car for no more than four years, and ensuring monthly car payments don't exceed 10% of gross monthly income. Yang also includes insurance and maintenance in monthly payments to calculate a more accurate gross monthly income. Following this framework can help avoid financial hardship caused by an expensive vehicle.

Financial personality Humphrey Yang has outlined a practical framework, the 20-4-10 rule, to determine how much car you can afford. This rule aims to help individuals avoid financial hardship by ensuring they do not overspend on their vehicle.

The 20-4-10 Rule

The 20-4-10 rule comprises three key components:

1. 20% Down Payment: Yang recommends putting at least 20% of the car's value down to avoid being upside down on your loan. This also helps in reducing the total interest paid over the life of the loan [3].

2. 4-Year Loan Term: Financing a car for no more than four years minimizes interest charges and ensures that the car is paid off relatively quickly.

3. Monthly Payments at 10% of Gross Income: Monthly car payments should not exceed 10% of your gross monthly income. This includes insurance and maintenance costs. For instance, if your monthly auto loan payment is $750 and you spend $200 on insurance and maintenance, your total monthly car payment is $950, which should not exceed 10% of your gross monthly income [3].

Benefits of the 20-4-10 Rule

Following this rule helps in making a more informed decision about car affordability. It ensures that:

- You do not overspend on a car that eats up too much of your budget.
- You avoid long-term financial commitments that could strain your finances.
- You maintain a healthy balance between your car expenses and other financial obligations.

Conclusion

The 20-4-10 rule provides a simple yet effective framework for determining how much car you can afford. By adhering to this rule, individuals can avoid common financial pitfalls and make more informed decisions about their car purchases. This rule is particularly useful in today's uncertain economy, where financial stability is crucial.

References

[1] https://www.bearsavings.com/tools/car-affordability-calculator/
[2] https://www.aol.com/never-3-things-money-says-160115852.html
[3] https://finance.yahoo.com/news/humphrey-yang-reveals-calculate-much-193113765.html