How much should you spend on a car?

Row of cars on dealer lot.

Here's a quick and easy way to figure out how much you can afford to spend on a new car or truck.

Start by applying the 20/4/10 rule.

It says you should put down at least 20% on a vehicle, finance it for no more than four years and not let your total monthly vehicle expense (including principal, interest and insurance) exceed 10% of your gross income.

So grab your pay stubs and determine your household's monthly gross income — that's how much you and your spouse make before any taxes or expenses are deducted.

Then find your most recent auto insurance bills, and figure out how much you're spending per month on premiums.

Take 10% of your gross monthly income, and subtract the monthly insurance premiums.

That is the monthly car payment you can afford to make.

Let's say, for example, you earn the national median income of $51,371 and spend $76 a month for auto insurance, which is the average nationwide cost for one vehicle, according to the National Association of Insurance Commissioners.

Your monthly gross income would be $4,281, one-tenth of that would be $428 and the monthly car payment you could afford would be $352.

Now go to our auto loan calculator.

Click the circle at the top that says you want to calculate the "Total purchase price."

Enter the monthly payment you can afford, and choose to finance the balance over 48 months, as the 20/4/10 rule suggests.

Use 4.16% for the interest rate. That was the average cost of 4-year, new-car loans, in our Jan. 29 survey of major lenders

Under Down payment, enter how much cash you'll be devoting to the purchase and the trade-in value of your existing car or truck.

Under Taxes and fees, enter the sales tax rate for where you live and license your vehicles. Remember that the sales tax rate on vehicles may be different than it is for everyday expenses such as food and clothes.

Hit the "Calculate" button, and the "Total purchase price" will appear at the top of the calculator. That's how much you can afford to spend.

Using our example, with a $352 monthly payment, $3,000 down payment, a sales tax rate of 7% and no other fees, this family could afford to spend $17,327 (see the red arrow below).


Are there situations where you could responsibly spend more?


Let's say the new car or truck you're buying offers a $1,500 rebate that you used to boost your down payment.

If you have decent credit, you might qualify for discount financing from the automaker or a regular loan that costs less than the 4.16% average.

The more you put down, and the lower the interest rate, the more you'll be able to afford to spend.

How much can median-income famillies in the nation's 25 largest cities afford to spend on a new car or truck? Check the results of our 2014 Car Affordability Study .