Summary of "How Much Car Can You Really Afford (By Income!)"
The Personal Finance Podcast
Host: Andrew Giancola
Release Date: February 12, 2025

In this insightful episode of The Personal Finance Podcast, host Andrew Giancola delves deep into the crucial topic of determining how much car one can genuinely afford based on their income. The discussion is structured around practical rules, financial strategies, and tailored advice for various income brackets, aiming to help listeners make informed and financially sound car-buying decisions.

1. Importance of Affordable Car Buying

Andrew emphasizes the widespread issue of individuals overstretching financially when purchasing vehicles. He highlights that the average monthly car payment in the U.S. is significantly high—$734 for new cars and $525 for used ones—which often exceeds what most people can comfortably afford based on their income.

Notable Quote:
"The average monthly car payment is $734 and the average used monthly car payment is $525. Based on the average income in the US right now, that is way too high for most people."
— Andrew Giancola [02:20]

2. The 24-12-10 Car Buying Rule

Andrew introduces a simple yet effective framework called the 24-12-10 rule to guide listeners in making responsible car purchases without jeopardizing their financial stability.

• 24: 20% Down Payment

  • Purpose: Avoid being upside down on the loan due to rapid depreciation of new cars (20-30% in the first year).
  • Benefits: Reduces loan amount, minimizes interest payments, and fosters financial discipline.

  Notable Quote:
  "20% down is what I want you to do so that you're not upside down on your loan and it can reduce the cost of your loan as well."
  — Andrew Giancola [03:43]

• 12: 12% of Gross Income on Car Expenses

  • Breakdown:
    • 7% on Car Payment: Ensures affordability of monthly payments relative to income.
    • 5% on Other Expenses: Covers insurance, gas, and maintenance.

  Notable Quote:
  "12% or less is the key here. And then lastly is the 10. The 10 stands for your goal every time you buy a car is to try to drive this thing for 10 years or longer if you can."
  — Andrew Giancola [11:43]

• 10: Drive the Car for 10 Years or More

  • Objective: Maximize the lifespan of the vehicle to spread out costs and enhance financial efficiency.
  • Outcome: Reduces total expenditure on car payments and frees up funds for investments or other financial goals.

  Notable Quote:
  "The longer you drive that vehicle, the less you were paying over time. Now, guess what else you're not missing out on? Opportunity cost as well, which is a million dollar opportunity cost."
  — Andrew Giancola [13:34]

3. Gap Insurance Considerations

Andrew discusses Gap Insurance, an optional coverage that fills the financial gap between the car's actual cash value and the amount owed on the loan if the car is totaled or stolen.

• When to Consider Gap Insurance:

  • Low-Interest Loans: If you're securing a loan with exceptionally low interest rates (e.g., 0-2%), gap insurance might be more beneficial than a hefty down payment.
  • High Resale Value Vehicles: Vehicles that retain their value well over time may reduce the necessity for gap insurance.

• Cautions:

  • Additional Costs: Gap insurance can add $300-$600 upfront and $20-$40 monthly, impacting the 12% car expense rule.
  • Situational Use: Not recommended if it disrupts your emergency fund or significantly increases your monthly expenses.

  Notable Quote:
  "The problem with gap insurance is it's going to increase that 12% much more. So it's going to be harder to fit into these parameters."
  — Andrew Giancola [16:00]

4. Affordability by Income Bracket

Andrew provides a comprehensive breakdown of car affordability across different income levels, offering tailored advice for each bracket.

a. $40,000 Annual Salary

• Affordable Car Price Range: $12,000 to $16,000 (primarily used vehicles).
• Down Payment: $2,400 to $3,200 (20%).
• Monthly Payment: Approximately $215 to $285 over four years.
• Total Car Expenses: $4,800 annually ($400/month).

Notable Quote:
"Finding a used car that is a couple of years old, a reliable brand, is going to be really, really important for folks in the $40,000 range."
— Andrew Giancola [23:12]

b. $75,000 Annual Salary

• Affordable Car Price Range: $22,000 to $32,000 (new or slightly used vehicles).
• Down Payment: $4,400 to $6,400 (20%).
• Monthly Payment: Approximately $375 to $540 over four years.
• Total Car Expenses: $9,000 annually ($750/month).

Notable Quote:
"What you're looking at is you want to spend about $233 on average on your loan because we are looking at 7% of this payment needs to be spent on the car payment every single year."
— Andrew Giancola [24:50]

c. $100,000 Annual Salary

• Affordable Car Price Range: $30,000 to $42,000.
• Down Payment: $6,000 to $8,400 (20%).
• Monthly Payment: Approximately $500 to $700 over four years.
• Total Car Expenses: $12,000 annually ($1,000/month).

Notable Quote:
"At $100,000 per year, you have a lot more cushion and a lot more options when you start to buy cars."
— Andrew Giancola [28:48]

d. $150,000 Annual Salary

• Affordable Car Price Range: $45,000 to $60,000.
• Down Payment: $9,000 to $12,000 (20%).
• Monthly Payment: Approximately $750 to $1,000 over four years.
• Total Car Expenses: $18,000 annually ($1,500/month).

Notable Quote:
"Thousand dollars a month car payments are just absolutely crazy. I would always try to keep mine as low as I possibly could."
— Andrew Giancola [33:13]

e. $200,000 Annual Salary

• Affordable Car Price Range: $60,000 to $80,000.
• Down Payment: $12,000 to $16,000 (20%).
• Monthly Payment: Approximately $1,167 to $1,330 over four years.
• Total Car Expenses: $24,000 annually ($2,000/month).

Notable Quote:
"This is what it looks like and how much car you can afford by income if you go outside of these parameters."
— Andrew Giancola [28:48]

5. Key Takeaways and Financial Implications

• Avoid Overstretching: Exceeding the recommended percentage of income on car expenses can lead to significant financial strain and missed investment opportunities.
• Long-Term Ownership: Driving a car for ten years or more maximizes return on investment by minimizing total costs.
• Financial Flexibility: Proper car budgeting frees up resources for investments, retirement savings, and achieving financial independence.
• Income Growth Strategy: As income increases, so does the capacity for more substantial and potentially newer vehicle purchases without compromising financial goals.

Notable Quote:
"Opportunity cost as well, which is a million dollar opportunity cost, meaning the dollars that you could be spending towards investments."
— Andrew Giancola [13:34]

6. Resources for Listeners

Andrew provides a free car buying spreadsheet available at MasterMoney.co/resources. This tool allows listeners to input their financial information and determine the optimal car purchase strategy based on their income and expenses.

Closing Remarks:
Andrew encourages listeners to adopt disciplined car buying practices to foster financial health and achieve long-term wealth. By adhering to the 24-12-10 rule and tailoring car purchases to individual income levels, one can enjoy the benefits of reliable transportation without compromising financial stability.

Final Quote:
"I want you to spend more on the things that you value and I want you to put more dollars towards your financial freedom so that you can break free from that job and you can get out of the rat race."
— Andrew Giancola [33:13]

This episode serves as a comprehensive guide for anyone looking to purchase a vehicle without derailing their financial plans. By following Andrew's structured approach, listeners can make informed decisions that align with their financial goals and pave the way toward greater financial independence.