10 Rule

Nov 18, 2020

Coins stacked next to each other

Tips for Determining Your Budget on a Vehicle

Aren’t sure whether you can afford a certain vehicle? Don’trnknow if your loan offer is good for your financial situation? With the 20/4/10rnrule, budgeting for a car will feel easy. Here’s how you can use this popular rule.

[ SavingrnMoney with the 50/30/20 Budget Rule ]

What the 20/4/10 Rule Means

Person calculating a budget on a calculator with a laptop and piggy bank nearby

To apply the 20/4/10 rule, you will need to know what thesernnumbers mean and how to put it in practice. First, the 20 in the 20/4/10 rule equatesrnto a 20{e443ec709150c73baf180d3d8e0a41d703fa022f47b2bb5516b57735b7c7f19e} down payment. It’s highly recommended that you save enough money tornput down at least 20{e443ec709150c73baf180d3d8e0a41d703fa022f47b2bb5516b57735b7c7f19e} to reduce the amount of interest you pay as well as thernamount of money you owe every month.

Next, the 4 in the 20/4/10 rule means 4 years. When shoppingrnfor a car loan, it’s a good idea to keep the length of the loan to 4 years orrnless. This will help you save money on interest in the long run, reduce yourrnmonthly payments, and help you own the vehicle quicker.

Finally, the 10 refers to the percentage you can afford withrnyour monthly income. When calculating affordability, it’s recommended that yourndo not exceed 10{e443ec709150c73baf180d3d8e0a41d703fa022f47b2bb5516b57735b7c7f19e} of your monthly gross income on your car. This includes thernprincipal, interest, and insurance you pay on the vehicle. When you go overrn10{e443ec709150c73baf180d3d8e0a41d703fa022f47b2bb5516b57735b7c7f19e}, you may risk not having enough cash to make payments.

How Much Can I Afford?

Understanding the 20/4/10 rule is helpful, but not if yourndon’t know how to calculate your budget with it. Here’s an example calculationrnfor a person making $45,000 a year.

$45,000 / 12 months = $3,750 monthly gross income
$3,750 * 0.10 = $375 (this is 10{e443ec709150c73baf180d3d8e0a41d703fa022f47b2bb5516b57735b7c7f19e} of your monthly gross income)
Subtract insurance costs from $375 to determine the amount you can afford to pay each month
- For example, let’s say your monthly car insurance costs $75. You will then have $300 leftover to make car payments with.

Of course, the 20/4/10 rule is only a recommendation. Forrninstance, you may be in a situation where you must purchase the vehicle but can’trnput down the full 20{e443ec709150c73baf180d3d8e0a41d703fa022f47b2bb5516b57735b7c7f19e}. In this case, put down less if you are able.

[ HowrnCredit will Affect Your Car Loan ]

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