The 20/4/10 rule is a simple guide for buying a car without letting it squeeze the rest of the budget:
- 20% down,
- a loan of no more than 4 years,
- total car costs (payment plus insurance) under 10% of gross monthly income.
What it allows at different incomes
Assumptions: 7% loan rate, 48 months, $150 a month for insurance.
| Gross yearly income | 10% a month | Left for the payment | Loan it supports | Car price with 20% down |
|---|---|---|---|---|
| $50,000 | $417 | $267 | about $11,100 | about $13,900 |
| $60,000 | $500 | $350 | about $14,600 | about $18,300 |
| $80,000 | $667 | $517 | about $21,600 | about $27,000 |
| $100,000 | $833 | $683 | about $28,500 | about $35,700 |
Why it feels strict
Average new-car prices are far above these numbers, which is why longer loans of 72 or 84 months are common. Longer terms lower the payment but add interest and raise the chance of owing more than the car is worth.
Ways to fit the rule
- Look at reliable used cars 2-4 years old.
- Save the down payment first in a car fund.
- Get insurance quotes before choosing the model, since insurance can change the math a lot.
- Keep the current car longer and put the would-be payment into savings.
Free tools
- Car affordability calculator: https://smartbudgetsheets.surge.sh/calculators/car-affordability-calculator/?utm_source=mataroa
- Auto loan calculator: https://smartbudgetsheets.surge.sh/calculators/auto-loan-calculator/?utm_source=mataroa
- Car depreciation calculator: https://smartbudgetsheets.surge.sh/calculators/car-depreciation-calculator/?utm_source=mataroa
- Debt Payoff Planner, up to 8 debts (Payhip): https://payhip.com/b/PtBLU?utm_source=mataroa
- 42 free budget templates, pay what you want ($0 is fine): https://smartbudgetsheet.gumroad.com/l/ngpkrb?utm_source=mataroa
General information, not financial advice. Figures are rounded examples.