How Much Car Can You Actually Afford?

The car you can afford and the car the dealer says you can afford are often very different numbers. Here's a realistic framework for working out what you should actually spend.

The Simple Rule: 20-25% of Take-Home Pay

A widely used guideline: the total purchase price of your car should be no more than 20-25% of your annual take-home pay. If you earn $85,000 gross (about $67,000 after tax), that puts your budget at $13,400–$16,750. On a $100,000 salary (about $77,000 take-home), it's $15,400–$19,250.

This feels low to most people — and that's the point. Cars are depreciating assets. A new $45,000 car will be worth $25,000 in 5 years. That $20,000 in lost value is money that could have been invested, earning compound returns for decades.

The 20/4/10 Rule

A more detailed framework: put down at least 20% as a deposit, finance for no more than 4 years, and keep total transport costs (loan payment + insurance + rego + fuel + servicing) under 10% of gross income.

On an $85,000 salary, 10% is $8,500/year or roughly $708/month for all transport costs. After subtracting running costs of about $5,000–$7,000/year ($400–$580/month), you have $130–$310/month available for a car loan — which supports a car purchase of roughly $7,000–$15,000 financed.

The Real Cost of Owning a Car

The purchase price is just the beginning. Annual running costs in Australia typically include: registration ($700–$1,200 depending on state), insurance ($1,000–$2,500 depending on car value and your age/history), fuel ($2,000–$4,000 depending on driving distance and fuel efficiency), servicing ($500–$1,500), and tyres/miscellaneous ($300–$800). That's $4,500–$10,000/year before you've made a single loan payment.

If you're financing a car, our Loan Repayment Calculator shows exactly what your monthly payments will be and how much extra repayments save you. And if a car purchase means less money for a house deposit, check the First Home Buyer Calculator to weigh the trade-off.