Question: How much should you spend on a car.
Answer: As little as possible.
One of the worst car decisions to make is calculating that you can afford the monthly payment, which will be low enough if spread out until the end of time.
Financial advisor Sam Dogen says that is the wrong way to buy a car. He says a smarter way to decide what you actually can spend on a car is to adopt the 1/10th rule.
Dogen's idea is to spend as little as possible on an item that loses value and he recommends spending no more than 10 percent of your gross annual income. So if you make $42,000, you can spend $4,200. If you make $60,000, spend $6,000.
Writing for CNBC's Make It, Dogen says that by limiting the purchase to 10 percent of annual income, you account for the totality of car costs including insurance, maintenance and fuel, leaving yourself a comfortable cushion. Best yet, the money you would otherwise spend can be funneled into genuinely useful things like savings or investments to improve your financial life.
Dogen says your life will be less stressful. You won't be constantly worrying about a ding in the car that you are struggling to pay for and you will be giving yourself financial freedom.
Of course, if you have shopped for cars recently, you might discover that 10 percent won't buy much car. In March of this year, dealers had a 33-day supply of older, high mileage cars priced below $15,000, so a deal might be hard to come by. In the same month, the average used car was listed at $25,540, according to Kelley Blue Book. Today a 2016 to 2017 minivan with 80,000 miles costs about $15,000 to $16,000.
If it is impossible to find a car in the 10 percent range, you could consider the 20/4/10 rule: Put down 20 percent, finance for no longer than 4 years, and make sure your total car expenses (loan payment, insurance, fuel) do not exceed 10 percent of your gross income.