How much should I spend on my car? It’s an essential question, as the average Canadian household spent about 17% of their after-tax income on transportation in 2015. After housing, it is the second-largest household expenditure for families.

Cars can be awesome and fun to drive. But unfortunately, they are huge money pits as well. From the purchase price, maintenance, insurance, license registration, speeding tickets, and parking tickets.

Here’s a widespread real-life case study: My friend just graduated from law school in Toronto and bought himself a brand new 3 Series BMW. I get it: he was a student who has worked and sweated through years of school.
He’s worked hard for a long time, and wants to get a sweet ride where you can feel like you’ve finally ARRIVED! But was this a smart decision? Let’s take a look at the numbers:

All-in cost of 2019 330 BMW $52,000
Average Gross Income of a first-year lawyer $66,000
% of Gross Income used on Vehicle 79%
Average Student loans $120,000
Black Book Value of 2014 330 BMW $18,710
Depreciation amount 64%

From looking at the numbers, this is insane. He spent almost 80% of his gross income on a vehicle and would likely go into debt for several years. I don’t know his loan situation, but law school is costly, and that should be a factor too if you have debt.

A better rule of thumb is to spend between 10% to no more than 20% of your gross income for your vehicle purchase price. On average, after five years, a car depreciates 63% of the purchase price value. If you’re willing to put in a little bit of time, you can buy a nice used car.

I recommend targeting 5-year-old vehicles, as you are getting the best bang for your buck. A lot of 4-year-old leases are over and into the market. Five years isn’t too old of a vehicle where the technology or look is too outdated.

Ranges of your budget given your Salary:

Salary Lower End Higher End
$50,000 $5,000 $10,000
$60,000 $6,000 $12,000
$70,000 $7,000 $14,000
$80,000 $8,000 $16,000
$90,000 $9,000 $18,000
$100,000 $10,000 $20,000
$110,000 $11,000 $22,000
$120,000 $12,000 $24,000

Here’s an example of some types of used vehicles:

$20,000 2014 BMW Xi 2014 G37xi
$15,000 2015 Honda CRV 2015 Acura ILX
$10,000 2016 Hyundai elantra 2015 Nissan Altima
$5,000 2012 Nisan Versa 2014 Ford Fiesta

Used car buying tips:

  1. Target 5-year-old vehicles.  Look at the top 2 or 3 sources of listings in your region (Autotrader, Craigslist, Kijiji) and put in a price filter for your budget range
  2. Most extra features in vehicles are useless these days.  Smartphones replace lots of it, like GPS and satellite radios.  Backup cameras are good for safety though. 
  3. Test drive the vehicle for at least 10 minutes, and visually inspect it
  4. Get a Carfax report first. Even if a car looks great, it could be a rebuilt from a previous accident which lowers the value if you want to sell it in the future.
  5. Always get it inspected.  Don’t trust any one’s word, especially dealership used car salesmen.  Find a private mechanic with good reviews, they charge way less than dealerships for inspections about half. 
  6. People hate selling cars, so you can get a great deal if you look around and are a savvy negotiator.  Buying a car is fun, selling it is not. 
  7. Research vehicle reliability.  German cars cost more to maintain as the parts are more expensive, Asian cars and domestics not as much. 

A lot of people are not into buying used cars, they come up with things like you don’t get to pick the color, or I don’t like it when someone else has owned it. 

But after looking at the numbers, it’s hard to argue with the extreme depreciation in the first few years of a vehicle to justify the cost here. You are setting yourself back several years from your retirement goals, just so you can drive a brand new car which will have little to no marginal difference in performance from a vehicle that’s a few years old. 

Do you even need a car?

Today I live in Vancouver, and I don’t even own a car.  I’m lucky that the transit system is great here, the weather is moderate so I can walk year-round, and they have great car share programs here. 

If I ever need a car for a whole day I just rent one with the car share program for $50 which is way cheaper than maintenance and gas and insurance. I’ve been walking and biking to get around more than I ever have before and my health has been improved because of it.   

This has given me longer-lasting mental and physical benefits than any car ever has.  I know this isn’t a great option in a place like Edmonton or Winnipeg, where you can literally die in the winter if you are out for too long.  If I were to move to a place where I needed a car again, I would buy in the lower range of the 10% I recommended.