Liz Weston

Today for public radio’s Marketplace Money we talked to a guy who has a $600 a month car payment. It turns out he bought a car worth more than half his annual pay, and financed it over six years. (The segment airs this weekend, if you want to listen in.)

I no longer try to talk car guys out of their love affairs with wheels. But too often they’re prioritizing car payments over retirement savings and other more important goals.

So here, in my continuing “Rules of thumb” series, are three guidelines regarding cars:

Cars, Part I: “Buy used and drive it for at least 10 years.” I run through the numbers in my book “Deal with Your Debt”—you can save a quarter million dollars over your driving lifetime by holding on to cars for 10 years instead of trading them in every five years, assuming the cars cost about $20,000 each in today’s dollars and you finance them for five years. If you buy used and/or pay cash, you’ll save even more. Not only will you buy half as many cars, but you’ll avoid the 20% or so loss to depreciation that happens as soon as you get the keys. Today’s cars are better built and will last longer than ever before, so buying used isn’t the gamble it used to be.

Cars, Part II: “If you have to borrow, follow the 20/4/10 rule.” Make a 20% down payment so you’re not upside down as soon as you drive off the lot. Limit loans to four years and payments to no more than 10% of your income—less if you have other big debts or a fat house payment.

Cars, Part III: “The real cost to own is about twice the monthly payment.” If you’re trying to decide whether you can really afford the car the salesman is pitching, double the payment, since that’s roughly what you’ll pay for insurance, maintenance, repairs, depreciation and other costs averaged over five years. Some cars are much cheaper to own than others, obviously, but keeping the true cost in mind can help cool your ardor for a too-expensive ride. You can get more precise figures about how much a car will cost over five years by using Edmunds.com’s “True Cost to Own” calculators.