How much is to spend on your next car?

Often it was an long-awaited answer for poor souls or car nuts who have spent too much on cars. I think I sought a good answer the other day from a book called "Living Rich by Spending Smart" by Gregory Karp. So what is all about?

First of all we have already spent way too much on cars that we pay monthly car loan for. The book is written for Americans but I think it has all the sense to apply the same in Hong Kong. Anyway one shall not spend more than 7% (10% for some special reason of yours) of one's disposable household income (that means after-tax monthly salary) on a monthly installment of the car one owns. If one needs to stretch the period of installment from 3 to 4 year or more to lower the amount of monthly installment to meet the 7% or even 10% ceiling, obviously one cannot readily afford and has already overspent.

What happens if one has already paying installments on a car one shouldn't have owned, meaning too expensive based on the above rule? Well, then keep with the installments until they are all paid for, if it is already a dream car and one can keep up with the monthly payment without much financial strain. After the car is paid off, one can either keep the car or sell the car and get one with a price tag that meets the above 7% rule.

What happens if one just pays of all the installments? Well, one should continue to pay the installments, no more than 7% or 10% of the disposable income (after-tax), not to the car loan, but to a one's saving account towards the next car. Do this for three years. Use the money in the car fund and trade in the existing car for a better ride. In principle, one should be able to get a much better new car than the one you have owned for 6 years. And one doesn't need a car loan this time or any other time. And if one keeps doing that, one can trade in to another yet much better car, not in six years, but in three!

I think, one should be allow to use a 3-year car loan, to get one's dream car. However there are two conditions. Do it only once or twice at most in one's lifetime, and do it when one is young and passionate. For me I have done it too often myself when I was younger. Lesson learned.

Based on the rule of 7% (or 10%), I can afford, without trading in my existing car, a brand new Honda Civic, Toyota Corolla, or something similar, by a 36-month car loan. Anything above that would be a stretch. I felt horrible initially about the fact but slowly settled on that idea. Anyway my 13-year old C36 isn't all bad, and the price of it well fits within the 7% rule, as there is no car loan on it.