If your car is starting to break down frequently or accumulating repair costs, it may be time to consider getting a new one. But before making a decision, it’s important to determine how much you can afford to spend on a car.
According to financial expert Dave Ramsey, the best approach is to only purchase a car that you can pay for in cash. This principle can save you thousands of dollars and prevent you from falling into long-term debt. While financing may seem like an easy solution, it can end up costing you significantly more in the long term. As of late 2024, the average interest rates for new and used car loans were 6.6% and 10.8%, respectively.
To avoid unnecessary costs, Ramsey advises against taking on debt and recommends sticking to what you can afford upfront. Assess your savings to determine a realistic budget that won’t impact your other financial goals, such as paying off debt or saving for a home. Tools like Kelley Blue Book can help you estimate the value of your current car, which can be factored into your budget.
Ramsey also suggests a rule of thumb where the total value of all your vehicles should not exceed half of your annual income. This guideline can help prevent overcommitting your wealth to assets that depreciate over time. Additionally, it’s important to consider the total cost of owning a car beyond the purchase price, including fuel, maintenance, and insurance.
Depreciation is another factor to consider when buying a car, as new cars can lose up to 20% of their value in the first year and nearly 50% within three years. Ramsey recommends avoiding new cars unless you have a net worth of at least one million dollars, as opting for a reliable used car can provide substantial savings while still offering a dependable ride.
When saving for your next car, Ramsey advises setting a goal based on the desired cost of the vehicle and dividing that amount by the number of months you plan to save. By following this approach, you can avoid the need for a loan and build up savings for your next car purchase.
Retire stress-free with $1.2 million at age 62? Suze Orman advises a 67-year-old on the optimal sequence for dipping into retirement funds. Discover Benzinga Pro, the ultimate tool for active investors, to elevate your stock market strategy. For the latest stock insights on Apple (AAPL) and Tesla (TSLA), access free analysis reports. Dave Ramsey cautions against focusing solely on monthly costs when purchasing a car, as it could lead to unnecessary expenses. This article originally appeared on Benzinga.com in 2025. Benzinga reminds readers that it does not offer investment advice, and all rights are reserved.
