How much should you spend on your car?

Deciding on what car to choose based on the budget you can afford can be an extremely tricky task. Weighing up the cost of your utility bills, mortgage payments and general monthly expenses can be a drawn out process but it doesn’t have to be, and that’s why we felt it was important to tackle this one head on. 

In this guide, we’ll give you some tips on car budgeting when it comes to all the ways you can get a car. Then we’ll finish with some tools that you can use right now to help you work it all out. 

Please note we are a non-advisory service, and are only providing tips and information which could be beneficial to you.

How much of your salary should you spend on a car?

If you were to ask a financial adviser ‘how much should I spend on a car?’ The first step would be to learn more about you. 

So here’s 5 questions to kickstart the process: 

1. What is your monthly or yearly income? 

Deduct your outgoings from your total household income to work out how much you can realistically afford. Remember to include your taxation rate here. 

2. What are your yearly or monthly outgoings? 

What are you currently spending every month on average? Look at the last 12 months of your bank statements and work out an average monthly spend from there. Divide your total expenses in the last year by 12 to calculate your monthly expenses.

However, if we really wanted to get to the truth. It’s important to ask yourself if the last 12 months has been how you expect to live for the next few years?

Did you not go on that family holiday but actually wish you did? It’s important to think about the life you want when making financial decisions.

This all helps narrow your focus on what’s really important to you so you can decide on the wiggle room you have. 

3. Do you have a car to sell? 

If you wanted to get a new car, having one to sell would have to be factored into your decision.

It’s pretty simple to get an accurate quote for your car. Do this with Motorway right now. 

4. What car type do you need? 

Do you want a family car or something to whip around town? Do you need a car to fit baby seats? 

Write down the vehicle type that would fit your lifestyle, then look at what’s available and create a shortlist of cars that would work for you. We’ll come back to this shortlist later on.

5. How do you prefer to get a car? 

What’s your preferred method to get a car? Buying, leasing, subscribing?

This will make the picture all the more clear. We’ll go into the different options later on.

So now you have how much money you have to spend from calculating your annual income minus expenses to find how much spare cash you have each month. If you have a car to sell, simply add that to your budget.

How to budget for different types of ownership

Need help deciding on what type of car ownership you want? We have guides comparing car subscription with all of them, you can find them below: 

• Car Subscription compared with leasing a car
• Car Subscription compared with renting a car
• Car Subscription compared with buying a car 
• Car Subscription compared with PCP

Buying a car outright

The most important thing to remember is that a brand new car depreciates rapidly. In fact, it depreciates at a rate of 40% in a year. That’s a £30,000 purchase that will be £18,000 after one year of use. 

Unlike a house or another ‘asset’ that you would spend a lump sum on, it will lose value because it’s an item that deteriorates as you use it.

Would buying a car be best for you? If not, keep reading. 

Car lease

A car lease is for those that don’t want to pay out a big lump sum, but would prefer to pay a lump sum upfront and then spread the rest over monthly payments.  

This way you can use any equity from the last car you sold and use it to lower your monthly bills by paying more upfront. You’ll pay more per month if you only pay a small amount upfront. 

Ultimately, this allows you to get a more expensive car with a more affordable payment structure because you don’t need to buy it upfront. If you have just sold a car to get a new one you might want to pay a large amount upfront to lower your monthly payments, and if you don’t have a car to sell then you might prefer paying a smaller amount upfront with a higher monthly payment. 

When it comes to how you budget for this there are some key differences: 

1. If you already lease a car, decide if the amount you pay each month is too much, or could you afford more? 
   
   
2. If you don’t currently have a car, look at your monthly income - expenses to see what money you have left over.
   Depending on if you want a nice looking car or a car that’s fit for purpose, decide how much your expenses can increase each month to afford that car, then ask yourself if you would be happy to pay that each month for the length of your contract.
   
   
3. Take a look at your shortlist of cars and find the perfect car that fits into that price range.

Personal Contract Purchase (PCP)? 

PCP is similar to leasing in that you pay an upfront fee, or part-exchange your car and then pay the rest over monthly payments. The difference here is that It’s a credit product, so once the deposit is paid the credit agreement can be signed off. 

At the end of the agreement you can agree to pay for the car with the final balloon payment.

You should take note that the APR rate advertised online can be different to what you actually pay. If you have a good credit score then you can pay less in interest by lowering the APR. 

Car Subscription? 

Car subscription is a different way to get a car. With Wagonex you pay a refundable deposit, then you pay for the car in monthly payments. 

Different to leasing or PCP you can stay with the same car for as short as a month, to as long as 24 months. This could be extremely useful to you if you want more flexibility about the exact car you drive each year, or each season. You could go from a BMW 1 series in the winter months and upgrade to a 3 series once it’s time to show off (just a little) in the sun. It’s really up to how you use a car subscription. 

The interesting bit about car subscriptions is, you only have to add fuel and insurance, because subscriptions include: 

• Road tax 
• MOTs and servicing 
• Roadside Assistance

All of these items add to your total expenses, so you can’t ignore them. If you want to know how these costs add up, read our guide on the running costs of car ownership. 

Working out what car subscription you can afford is a walk in the park compared to the others. All you have to do is look at the budget you set for yourself earlier in the article and work out which car subscriptions you can afford.

Expect a slightly higher fee because of the extra benefits you get, and remember the refundable deposit and any potential admin or delivery fees.

It’s also important to note that except for insurance that can go up and down in price based on the car or your driving history, the price of the car will be exactly as you see it on site, in other words, it’s transparent. 

You might be able to drive all the cars in your shortlist after a few years if you used a car subscription, but if you wanted to subscribe to one car for the long term, just choose the cars that you can afford from your shortlist. We’ll go through what makes up subscription’s all inclusive package in the next section.

What costs should you factor in that are outside the car itself?

• Car Insurance 
• Fuel or charging costs
• Road Tax 
• Breakdown cover
• MOTs and Servicing 
• Repairs

Car Insurance

Car insurance can be up to 40% of your monthly car bills. If you don’t factor the price into your budget, you’ll be left with a nasty surprise. If you want to get to see how much your insurance will cost for a specific vehicle, use this car insurance tool by Confused.com

Road Tax

Road tax can be high as £150 a year, use this tool to check how much you’ll pay in road tax.

Breakdown cover 

Breakdown cover is a smaller fee compared to the rest but prices start at around £5 a month. 

MOTs and Servicing

MOTs cost around £50 a year but servicing can cost around £150 a year. 

Potential Repairs

According to Kwik Fit the average driver spends around £13 a month, or £156 a year in repairs. So always keep some room in your budget for when that day comes.

Fuel or charging costs

The best guess-timate for your fuel costs is £100 for a full tank of 400 miles and £10-12 for a full charge of 200 miles. You probably already have a general idea of your mileage every month from your expenses, so remember to either factor these in, or if you have already, that’s great.  

If you use your car more it might be a good reason to go electric but if not, you can save more by sticking with a petrol car. 

Budgeting Help:

Looking after your finances is everyone’s responsibility and this tool will help you get to grips with where you can save money to make that easier. Use this budget planner from Money Helper. 

Car Running Cost Calculator: 

Another tool from Money Helper is this running cost calculator. Essentially just input the model you like and it will tell you how much it costs to run. You may find that cars that are better for your budget might cost a lot more in running costs, so keep this close if you want to make a smart car decision.

Did this clear your mind on how to budget for your car?

We hope we did our job. 

Take a look at Wagonex's range of car subscriptions