Tips for Affording a Car on Minimum Wage

FT Contributor  | 

Having a car isn’t merely a convenience, but a necessity for many people. However, it comes at a significant expense — in 2019, the average cost of a new car was $37,285 and the average cost of a used car was $20,200. For someone who earns or plans on earning minimum wage, this can create a financial hardship. Here are some specific, actionable tips on how to get a car on minimum wage.

Set a Budget

To begin, you’ll want to know exactly how much money you can realistically put toward a car. It’s in your best interest to set a practical budget that you can stick to, and there are three key strategies to help you streamline this process.

Assess Your Income and Expenses

In 2019, the federal minimum wage was $7.25 per hour. If you work 40 hours a week, this would equal $290 per week and around $1,160 per month. So that’s roughly what you can expect to earn if you work full-time hours. You’ll also need to account for the cost of health insurance and taxes your employer withholds from each paycheck.

Next, figure out what your short- and long-term expenses are. These could include rent or mortgage payments, utilities, credit cards, student loans, and groceries. Subtract your expenses from your projected earnings to find out how much you’ll have leftover to put toward a car.

Know How Much to Spend on a Car

Advice will vary depending on who you ask, but there are a few formulas for determining what you can afford to spend each month. One rule of thumb is the 36% rule, under which you shouldn’t spend any more than 36% on total debt, including housing and other major debt, such as car payments. In other words, after you add up all of your monthly debt payments, they shouldn’t exceed 36% of your monthly income.

Another rule specifically pertains to car expenses and suggests that you should spend no more than 15% of your monthly take-home pay on car costs. So if you made $1,160 per month, you wouldn’t want to spend any more than $174 on a car. There’s also the 20/4/10 rule that recommends you make a minimum down payment of 20%, finance a car for a maximum of four years, and ensure your total monthly car expenses don’t exceed 10% of your gross income.

Use your best judgment, but when it comes to total monthly car costs, you’ll probably want to stick within the 10% to 15% range. Keep in mind that in addition to car payments this should include car insurance, interest, gasoline, and unexpected expenses, such as car maintenance.

Crunching the numbers will help you get a good idea as to which car you should choose. On average, new cars cost nearly double what used cars cost. However, they’re often more fuel-efficient and tend to be more reliable, meaning you’ll likely spend less on maintenance. On the other hand, used cars are usually much more affordable to buy, but you can expect to encounter maintenance costs earlier on.

Set Reasonable Goals

It’s important that your goals are reasonable and not over-optimistic. For example, buying a brand new car for nearly $40,000 probably isn’t in the cards if you’re earning minimum wage. But buying a used car with some slight wear and tear for $7,500 might realistic. In this case, your goal may be to save 20% of $7,500 in order to pay $1,875 down and set aside at least 10% of your monthly earnings for car expenses. Taking this type of approach is necessary for you to afford a car on minimum wage.

Build a Good Credit Score

To get a low-interest auto loan, you’ll ideally want a higher credit score, and there are two main ways to raise it.

Address Existing Debts

First, get in touch with creditors, and do your best to pay off existing debts. A popular strategy for doing this, even if you’re on a tight budget, is the snowball method. This is where you tackle your smallest debts and work your way up until everything is paid off.

If you had three debts at $500, $1,000, and $2,000, you would start with the $500 debt, then move to the $1,000, and finally the $2,000. This is beneficial because the “small wins” should provide you with motivation to keep going.

Make Debt Payments on Time

The punctuality of payments accounts for 35% of your credit score. So it’s vital that you’re always on time when paying down debts moving forward. This not only helps improve your credit score, but it also shows that you’re responsible and trustworthy, which makes you more appealing to lenders.

Shop Around for Auto Loans

Even if you buy a used car, it will likely cost more than you’re able to pay outright. Therefore, an auto loan is often necessary, as it will allow you to purchase a car that costs more than you would be able to afford with cash. As long as you’re prompt with your payments, most financial experts consider an auto loan to be a healthy type of debt that can raise your credit score.

There are a lot of different lenders with a wide variety of offers. To ensure you find the best one, you’ll want to shop around to find agreeable terms and the lowest possible interest rate. You’ll usually want to start with an internet search of “auto loans near me” to see what’s available in your area.

You may also want to call local banks and credit unions and write down their rates, which you can compare with other offers to find a good deal that meets your needs. If you’ve ever served in the military or have a family member who has, you may be eligible for a USAA auto loan, which often has favorable rates and is something to look into.

Shop Around for Car Insurance

Car insurance factors into your overall cost, and finding a reasonable policy is important for affording a car on minimum wage. When it comes to buying car insurance, you’ll also want to shop around and assess different offers to get a great deal. Using an online comparison tool is a good starting point and should give you a broad overview of the policies different companies are offering.

Once you have it narrowed down, it’s smart to check out an insurer’s website to learn more about individual policies. Reach out to providers with any questions you have, and get at least three quotes for your specific situation.


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This post was updated January 14, 2020. It was originally published January 14, 2020.