How much should you spend on your new car? 20/4/10 Rule vs. 50% Rule

How much should you spend on your new car? 20/4/10 Rule vs. 50% Rule | Vrid

Are you dreaming of hitting the Indian roads on your very own set of wheels? We get it – buying a car can be a thrilling experience, but it’s also a major financial decision. 

So, how do you determine the magic number that you should spend on your dream set of wheels? Fear not, for we have two handy thumb rules to help you navigate this road. 

Let’s dive into the 20/4/10 and 50% rule to determine how much you can spend on a car.

Estimated read time: 2 minutes and 54 seconds

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Buckle up. Here we go!

The 20/4/10 Rule

Let’s start with the 20/4/10 rule. This rule is designed to ensure that you don’t end up financially strained because of your car purchase. Here’s how it works:

The first part of the rule suggests putting down at least 20% of the car’s purchase price as a down payment. This helps reduce the loan amount, which means lower monthly instalments and less interest paid over the life of the loan.

So, if you’re eyeing a car that costs ₹8 lakh, aim to put down ₹1.6 lakh upfront.

Next, limit your car loan term to four years or less. This ensures you pay off the loan relatively quickly and don’t end up paying excessive interest. Shorter loan terms also mean you’ll own the car outright sooner.

Finally, your monthly car-related expenses, including EMI, insurance, maintenance, fuel, and parking fees, should not exceed 10% of your monthly income.

This prevents car expenses from gobbling up your budget, leaving room for other essential expenses and savings.

The 20/4/10 rule is an excellent guideline for beginners, and you can use it when you want to buy a car while keeping your overall financial health intact.

It ensures you strike a balance between enjoying your new ride and maintaining your financial stability.

While the 20/4/10 rule is generally a good starting point, there are situations where it might not be the best fit:

  • Different Financial Goals: If you have unique financial goals or are willing to allocate more resources to your car purchase, you may want to consider other options.
  • Changing Income: If your income fluctuates significantly, it may not always be practical to stick to the spending limits of this thumb rule.
  • Car Enthusiasts: If you’re an avid car enthusiast and are willing to allocate more of your budget to your dream car, you might need to adjust the rule accordingly.

The 50% Rule

Now, let’s dive into the 50% rule. This rule helps you decide how much of your annual income you should allocate to your car.

The 50% rule suggests that you can spend up to 50% of your annual income on a car. For instance, if your annual income is ₹10 lakhs, you could theoretically spend ₹5 lakhs on a car. This rule is easier to follow as it doesn’t involve complex calculations like the 20/4/10 rule.

Use the 50% rule if you want a straightforward way to determine a car budget based on your income. It can provide a rough estimate to guide your purchase decision.

While the 50% rule may seem enticing, it has its downsides:

  • Limited Savings: If you follow the 50% rule without proper financial planning, you might compromise your ability to save for emergencies, investments, or other financial goals.
  • Variable Expenses: If your car expenses (including EMI, maintenance, insurance, and fuel) significantly exceed the remaining 50% of your income, you risk financial instability.
  • High-Interest Rates: The 50% rule can lead to substantial interest payments if you opt for a more extended loan tenure.

It’s essential to consider your complete financial picture, including savings and future expenses, before allocating a significant portion of your income to a car.

Our thoughts

In the quest to buy your dream car, it’s essential to strike a balance between affordability and aspiration. The 20/4/10 and 50% rules serve as useful guides, but we should not follow them blindly. Tailor them according to your unique financial situation, goals, and priorities.

Remember that a car is a depreciating asset, and prioritizing long-term financial stability is essential. But also, think about the memories you will make with your friends and family on your new ride.

Whichever rule you choose to follow – or adapt – ensure that your car purchase aligns with your overall life and financial plan. By doing so, you can ensure that your new ride enhances your life without jeopardizing your financial well-being. Happy car hunting!

If you like to know more about other useful thumb rules read here.

Share these insights with your buddies. Until next time!

Still Curious?

If you are like us, who likes to analyse a little more or check out content in different formats, well you are in luck. Below you can find some suitable content we found.

CA Rachana Ranade – When Should You Buy Your First Car?

Cars24 – What Is the 20/4/10/Rule for Car Buying?

Mint – Two easy ways to decide on a budget for a new car

Note: We don’t have any affiliation with them. We are sharing links only for educational purposes. The opinions expressed by them belong solely to them and do not reflect the views of Vrid.

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DISCLAIMER: This newsletter is strictly educational and is not an investment advice or a proposal to buy or sell any assets. Please be careful and do your own research.

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