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How Much Money Should I Be Making

How Much Money Should I Be Making

To afford the Model 3, how much money (in your opinion) should a family of four (two kids) be making? I relies that every situation is different. I'm looking more for comments like, "If you don't make at least $100,000, don't even bother" or "I make $30,000 a year and I have a reservation". Thank you.

EaglesPDX | 10 december 2016

There are some good online calculators for how much car you can afford, how much of your budget to spend on a car.

"Another rule of thumb says that drivers should spend no more than 15% of their monthly take-home pay on car expenses."

This depends on ones other debts.

"According to the 36% rule, it isn't wise to spend more than 36% of your income on loan payments, including car payments."

If no other loans, house paid off, you can go higher.

https://www.moneyunder30.com/how-much-car-can-you-afford

dyefrog | 10 december 2016

The better question might be, "what percentage of my income should I spend on transportation, specifically an EV? Way too many variables to consider to expect a simple answer. The answer to the above question is around 18% for the national average IIRC.

tedirelan | 10 december 2016

That helps a lot Eagles. Thank you.

EaglesPDX | 10 december 2016

One of the issues that comes up is having a Federal tax bill after all deductions of $7,500 so one can take advantage of the Federal Tax credit.

greg | 10 december 2016

@eagles
For folks with a low Federal Tax bill, I recently read suggestions that you can increase your Federal Taxable income to ensure you use all the credit this way:

"...take steps to create taxable income in the year you want to get the credit. For example, you could move money from a Traditional IRA into a Roth IRA (a Roth IRA Conversion, a taxable event)"

This comment was posted on the comments to the blog post www dot mrmoneymustache dot com/2016/10/04/so-i-bought-an-electric-car/

Of course you'd need to have funds in one or more IRAs to do that.

Another commentator there suggested if its a future purchase that you "plan ahead and contribute to Roth accounts that year so you have a bit more tax liability. Works well for the solar tax credit too."

That advice might help someone.

SUN 2 DRV | 10 december 2016

It really DOES depend on many factors, especially your long term priorities. But people of very modest means have saved up and bought even the Model S, so of course a Model 3 will be within reach of many more families.

I'd suggest you decide what a comfortable monthly payment is based on your typical monthly car payment and then save enough to make a cash downpayment for the rest.

carlk | 10 december 2016

My rule has always been no more than 3 months of income on a new car and then comes the model S and then the model X all rules are thrown out of the window.

@greg Very good suggestion there. Another thing one could do is to pay mortgage and property tax before Jan 1 (or after Dec 31 if possible) so deduction will not occur in the year you need to have more tax liability.

tigardspaz | 10 december 2016

Dave Ramsey says that if you have to go into debt for a car, you can't afford it. I don't think that is necessarily true for the Tesla since you will have less fuel and maintenance costs. Also the vehicle is likely to last longer than a routine ICE car.

I think it's really a question of how you want to spend your money. My wife and I have vehicles approaching 200,000 miles. We hate car payments, and we hate going to car dealerships. If you buy a $40,000 car on a 5 year note, your payments will be north of $700 a month. For five years.

bmalloy0 | 10 december 2016

So, I only make about $25k a year. I have very few bills though (still living with my parents >.> ), and have been able to save a decent chunk of money, and saving more every month. With my current income/expenditure levels I was able to determine that I can afford around a $15k loan over 5 years at most (payments around $250-260/m). As it stands, I will be able to afford the base model without any options. I'm hoping to be able to save enough to afford Dual Motors at the least, but I don't expect to be able to afford (m)any options.

Everyone will be different though.

tstolz | 10 december 2016

Tough question since Tesla EVs are so much different vs ICE age cars. Not only are monthly costs and long-term maintenance less, they are predicted to last longer too! I'm willing to bet they will last 1.5 to 2 x longer!

If this proves accurate, the real depreciation of these cars ... which is among your biggest costs ... will make Tesla's financially viable to people at lower income levels than ICE. This would in turn make traditional car calculators obsolete!

SamO | 11 december 2016

Even Dave Ramsey bought a Tesla. OP, which state/country do you live in?

Move to CA or Colorado. Big state tax breaks (4,500 and 6,000 respectively) which reduces the price

To answer the OP'S question:

Average Sale Price for Model 3 - $42,000
-$7,500 Federal Tax Credit
-$6,000 State Credit
$28,500 net cost
Lease payment of $360
Loan Payment of $420

Anyone can afford. YMMV.

SUN 2 DRV | 11 december 2016

SamO's numbers are quite optimistic.

The tax credits don't decrease the original purchase price, so a $42k car with a 5 year loan at 2% saddles you with a $736 monthly car payment, for five years.

My suggestion is to decide on what monthly car payment you want and start saving that amount monthly NOW. This lets you "try on" that monthly cash flow and see how it fits your budget before committing yourself to that level for 5 years. If it's a comfortable monthly payment and you've saved up enough cash for the rest of the purchase price THEN buy the car.

tstolz | 11 december 2016

Ideally you would also calculate in fuel and maintenance into your monthly cash flow and long-term depreciation into your total cost of ownership. Then .. if you really want to get in to it .. you would calculate other things that enter the value equation of owning a Tesla EV ... like reducing carbon, mindbending performance, driving experience, style, ...

jamilworm | 11 december 2016

@SUN 2 DRV I think that is great advice.

tedirelan | 11 december 2016

I didn't expect this much good advice. Saving what I plan on spending (somewhere in the $700/month range) is a great idea. That is a great way to "try it on". I live in Texas by the way. I was hoping to put $5,000 down plus the $1,000 already deposited. I figure $42,000 sticker price minus the $6,000 would land me at $36,000. When I orginionaly heard the $35,000 starter price, that is all I was planing on spending, buy wow, the provable options are unbelievable! Again, thank you all for you contribution on this post.

tedirelan | 11 december 2016

That was supposed to read, "...but wow, the probable options..."

greg | 11 december 2016

Don't forget to use another Tesla owners referral code to save you another $1000 - its only good if you order before the end of this month.

andy.connor.e | 12 december 2016

I make ~$50k, and i could easily afford a $35,000 car. But as of right now you have alot of time before the car is released. So save up as much as you can and put the largest down payment you can possibly put so that the financing is as low as possible.

Red Sage ca us | 12 december 2016

tedirelan: If you live in Texas, you might choose to 'buy' your Tesla in Louisiana. They have a VERY generous EV Rebate for the Model S, and it will likely be pretty good for the Model ☰ too. Most

Texas does not allow their $2,500 EV Rebate unless a vehicle is purchased through an 'independent franchised dealership' of new cars. Those are the only retail locations that are allowed to submit the paperwork to the State. And Tesla is not allowed a dealership license in Texas -- yet.

You might also consider lobbying your local State Representative to support Tesla's direct sales method against dealership organizations, as their Legislative Session in early 2017 will be the last opportunity prior to 2019, and ahead of the Model ☰ launch. Somehow, efforts waged in 2013 and 2015 within the Lone Star State have always managed to not make it to the floor for a proper vote as everyone 'ran out of time' discussing things that were suddenly more important... I figure that Texas would be a great place for GIGAFACTORY #002, especially if Tesla introduces a full-sized pickup truck series to be built at the same location.

Red Sage ca us | 12 december 2016

Make that... 'Most people I know in Texas also have relatives with property in Louisiana.'

andy.connor.e | 12 december 2016

~$35,000 6 year financing is around $550 (correct me if im wrong). This is with no down payment, and no FED/State rebate. Remember you will not get the tax credit until the end of the current fiscal year, so you'll be paying full price until then. Plan accordingly.

bmalloy0 | 12 december 2016

If GF002 ends up in Texas (or at least the second American GF), the B3 are goners.

High Plains Drifter | 12 december 2016

The car you can afford should based on your pre-existing debts (which should be no more than 1/3 of your pre-tax income). So if you make $75K a year and have $20K of pre-existing debt. Then you should restrict your annual auto allowance to no more than $5K ($415 monthly). If you already have more than $25K of annual debt then you can not afford any car.

Red Sage ca us | 12 december 2016

I figure I would be in pretty good shape if I made in the general neighborhood of $86,400,000 per year.

andy.connor.e | 13 december 2016

If i made $86.4 million i dont think i'd be waiting for the M3.

FactDoc | 13 december 2016

lilbean post is good:

The 20/4/10 rule
It all starts with what we call the 20/4/10 rule, which says you should:
Make a down payment of at least 20%.
Finance a car for no more than four years.
And not let your total monthly vehicle expense, including principal, interest and insurance, exceed 10% of your gross income.
So grab your pay stubs and determine your household's monthly gross income — that's how much you and your spouse make before any taxes or expenses are deducted.
Then find your most recent auto insurance bills, and figure out how much you're spending per month on premiums.
Take 10% of your gross monthly income, and subtract the monthly insurance premiums.
That is the monthly car payment you can afford to make.
Let's say, for example, you earn $53,000 and spend $80 a month for insurance — right around national median household income and average premium for a single car.
Your monthly gross income would be $4,416, one-tenth of that would be $441 and the monthly car payment you could afford would be $365.
Now go to our auto loan calculator.
Click the circle at the top that says you want to calculate the "Total purchase price."
Enter the monthly payment you can afford, and choose to finance the balance over 48 months, as the 20/4/10 rule suggests.
Use 4.14% for the interest rate, which is right at the average cost of a 4-year new-car loan.
Or search Bankrate's database of the best car loans in your area, and use that rate instead.

What you'll pay
Most buyers with reasonable credit will pay less than average for financing.
Under Down payment, on our auto calculator, enter how much cash you'll be devoting to the purchase and the trade-in value of your existing car or truck.
Under Taxes and fees, enter the sales tax rate for where you live and license your vehicles. Remember that the sales tax rate on vehicles may be different than it is for everyday expenses such as food and clothes.
Hit the "Calculate" button, and the "Total purchase price" will appear at the top of the calculator. That's how much you can afford to spend.
Using our example, with a $365 monthly payment, $3,000 down payment, a sales tax rate of 7% and no other fees, this family could afford to spend $17,870.

Are there situations where you could responsibly spend more?
Absolutely.
Let's say the new car or truck you're buying offers a $1,500 rebate that you used to boost your down payment.
If you have decent credit, you might qualify for discount financing from the automaker or a regular loan that costs less than the 4.14% average.
The more you put down, and the lower the interest rate, the more you'll be able to afford to spend.
But be careful.
Longer loans are one of the auto industry's favorite tricks to lower monthly payments and help customers buy more expensive cars than they can really afford.
The 48-month loans we recommend are bad enough, siphoning thousands of dollars in interest from your savings to pay for something that's losing value every day you own it.
Longer loans are just bigger wealth killers. If you need to finance a vehicle for six years, it's a sign you can't afford it.

andy.connor.e | 13 december 2016

@EVolution.

Thats an excellent example.

But really what you can "afford" is dependent on how much you spend. You can say that if you're spending more than 10% of your gross income on car payments that is too much. BUT, if you're monthly expenses are say 25% of your income, and you have 75% available, why exactly would you be selling yourself short of suggesting that more than 10% is too much. The long-term investment in the electric car i think is better to get it as soon as possible (without going check-to-check), because of the maintenance and the potential breakdown of your current gasoline car.

At the same time, your expenses are less in areas such as oil changes, overall engine fluid levels, less break jobs (regenerative breaking), and of course no gasoline. So compare and contrast the extra interest on a 6 year finance, vs the maintenance savings over 6 years on that electric vehicle compared to your current gasoline car.

Frenchy | 13 december 2016

I can't imply how much one should make, due to what most others mentioned as well(too many variables). However, if your overall down payment isn't more than half(car trade/grant/savings) and you can't currently comfortably save at least 15-20k a year before purchase. Than I wouldn't bother. In that circumstance, unless other debts are paid off, more income accumulated, and/or tighter budgeting occurred, I wouldn't take the risk of more debt. @andy.connor.e mentions reduced expenses which should ultimately lead to savings. I'm not sure of the numbers, and unless I see them, I wouldn't recommend purchasing in a situation that isn't better than the one I previously stated above.

I am in a completely different situation and could potentially pay off this vehicle in an relatively short period of time compared to others. But I don't like debt. Unless it's going to make or save me more money than my current situation. I imagine having a family of four that is a main contemplation when it comes to making investments.

Red Sage ca us | 13 december 2016

When I first entered the working world, I made a habit of not buying anything unless I had twice the funds on hand. The idea was to not 'feel broke' after a retail purchase. I quickly increased that ratio to 3:1. As I got older I made it 4:1. These days I think a comfortable margin for most people would be 8:1. I am currently striving to reach and maintain a 12:1 ratio. So, if you can buy one for yourself, give two of them away, and still have enough dough on hand to get another nine on a whim? You are in GREAT shape!

To put it another way? If you currently have $1,800,000 in assets, you can definitely afford a $150,000 car. And... If you have $105,000 in assets, you can certainly afford a $35,000 car. At the same time, I don't subscribe to the 'make the payments' principle of leveraging credit as if it is a true asset. Because currently, having 'good credit' basically means you have proven to powers that be your willingness to remain in debt without end. Interest is bad, no matter how low.

SoFlaModel3 | 20 december 2016

I think these generic rules are nice, but at the end of the day this is something you need to figure out for yourself (not saying that in a harsh way at all).

Say the car is $42,000 (Elon's projected average selling price).
Say the destination fee is $1,000
Say the tax is (6% in my area) is $2,580
The final sale price is $45,580

I don't subscribe to the "you must put down 20% or more or you cannot afford the car"...

Let's say you put down $5,580 (works nicely anyway for the sake of even numbers).

You finance $40,000.

Typical financing is 5 years (60 payments) and assuming good credit your rate should be in the 1.99 - 2.49% range.

At 1.99% you will pay $700.94/month for 60 months ($42,056.40). Over 5 years you have paid $2,056.40 in interest.
At 2.49% you will pay $709.72/month for 60 months ($42,583.20). Over 5 years you have paid $2,583.20 in interest.

If I hold a basic low cost index fund for that same 5 year period with an initial deposit of $40,000, it is highly likely that it far surpasses my interest expense on the car for those 5 years.

So back to the initial question what can you afford....

I started with my current spend and compared against Elon's projected average selling price. As you can see in my case the difference is peanuts. That's not even including a possible $7,500, $3,750, or $1,750 tax credit which is icing on the cake (I'm a 3/31 reservation, so fingers crossed for $7.500).

My current payment is $550.00/month
My current gas spend is $150/00/month
My total car spend is $700.00/month (I left out insurance as it's too hard/early to figure right now)

If my Tesla is $42,000 and we follow my example above.
My payment will be $700.94/month
My electric bill increase will be $29/month
My total car spend will be $729.94/month

Now last step -- can I afford more?

I also have a young family with 2 little kids. The wife is on board with Tesla (most important step). Can I afford more?.... Sure. How much more? Well that's where using a personal finance budgeting tools such as Mint comes in handy. We set budgets for ourselves and generally stick to it.

My budget accounts for how much money we take in (no assumption on bonuses or investments) against known spends and projected spends. It accounts for how much money we like to put away and then you have "what's left over". It's pretty easy to think through how much less I would like to have in the "what's left over" category if any. From there I'm set.

So in that light, I say start backward....

1) Measure your current budget
2) Determine your "what's left"
3) Determine if you're willing to reduce that "what's left" and if so by how much
4) Calculate your current car + gas spend
5) Confirm your acceptable future car + electricity spend
6) Back the monthly payment spend into a loan amount
7) Confirm your acceptable down payment
8) YOU HAVE A STICKER PRICE!

tedirelan | 20 december 2016

@SoFlaModel3 - Holly molley! Thank you very much. Months of reading these forums and that may be the most useful advice I've ever seen.

Haggy | 20 december 2016

First figure out your current expenses such as gasoline. Then figure out what you'd be paying per month on a car loan for a car you could afford. Add the monthly payment to the monthly gasoline costs and you'd get a more realistic idea of what a different car might cost. Subtract from that what it might cost per month for electricity and you'd get an idea of a realistic monthly payment for an EV.

Suppose for example I knew I could reserve a Model 3 and get it in November 2018. I plan to get it then or possibly December, so I adjust my tax withholding allowance so $7500 less gets taken out over the course of a year so I can use that for a down payment. In my state I might factor in a $2500 state rebate. If I currently spent $50/week on gasoline, and might have gotten a $20,000 car instead, then I'd figure $559 per month for that other car with gasoline, since there would be no tax credit. If I assume I might spend $240/year on electricity for an EV, that would mean I'd be able to afford payments of $539 to break even. Assuming a 3% interest rate, my monthly payment on a $40,000 Tesla with $10,000 down would be $539.06. So if I planned ahead so I could use my tax credits and rebates toward the car, (If you plan wrong and won't get the tax credit, you might pay a penalty if it spills over to the next year) I could get a $40,000 Tesla for the same monthly cost as a $20,000 ICE. After five years, the ICE could still cost $2400 every year, which would be $12,000 more over the next five years, minus $1200 for electricity, meaning another $10,800 saved. So I might prefer a Model 3 to a new car for $10,000.

If you are considering a Model 3, chances are you might get a different car for more than $10,000 or even $20,000 and a Model S with options bringing it to $45,000 might still be a better deal than getting a different car for $30,000. Or you might spend far less on gasoline right now, in which case the two would end up closer in price. It all depends on your usage and expenses.

These are merely examples and don't factor in taxes or license fees. They don't factor in the cost of oil changes, more frequent brake jobs, or any other maintenance either. They are meant as a ballpark idea. When I got my Model S a few years ago, my prior car might have been more competitive with a Model 3 and I was spending more like $75/week for gasoline. Had the Model 3 been out and had gasoline prices stayed the same, I might have been better off getting a Model 3 than getting a new ICE for free if I factor in keeping the car at least five years once the loan is paid off.

If you trade in for new cars more than the US average of every six years, your numbers will differ. If you tend to keep cars longer, there's more reason to get a Model 3, which will likely be a better car years after you get it than it was when new.

Mapowing | 21 december 2016

This is about finances, not directly related to Tesla. Second, $7500 federal tax credit applies on your tax bill, NOT on the day of purchase.

Mapowing | 21 december 2016

With that said, if you can afford a payment north of $500 monthly for 5 years, then do it. Mind you that this figure is only car payments only...insurance? $2100 4 year maintenance plan? Auto loan interest rate? I'd say you need minimum $30,000 income before federal and state taxes in order to call this an "affordable" purchase.

Samta09 | 26 december 2016

Just because you can afford the monthly payment doesn't mean you can afford to finance the car. Remember, there are other obligations outside the typical ones like saving for retirement, emergency, and if applicable, your children's education, that you must also consider. I wouldn't want to drive around a nice car while struggling to meet everything else.

tedirelan | 27 december 2016

@Samta09 - That's a really good point. What's the point of driving a few hours a day in a nice car if you're stuck eating only rice for dinner? I agree.

Justincoleman | 27 december 2016

As a UK citizen I can't pass comment of the point of tax relief etc but I'd like to support the idea that it's almost impossible to state a figure that makes sense as time changes your circumstances. Maybe you set a figure then move jobs, move home, meet a new partner, start a new business etc etc I would just suggest that whatever finance you enter into, you fully understand the implications of getting out early as well as what it means to your lifestyle to stay in it for years after the initial excitement has long gone.
As an aside, if you are someone who loves cars and is motivated to work harder to buy them then you'll very likely spend much more that the average person anyway.

thedrisin | 7 november 2017

I am always amazed how much people are willing to pay for an automobile that they really can't afford. Sure, it is attractive when you are looking through the store window. But @Samta09 is right on. Putting money in a 529 for education is more important. Personally, if I cannot afford to purchase a car for cash, I should not be buying it. The only reason I may take a loan is that the interest rate is less than I would earn keeping the equivalent sum in an index fund. In this bull market, the more money you are putting in a depreciating asset like a car, the more money you are losing that could be potentially growing.

thedrisin | 7 november 2017

Also, you should not be buying a car on loan if you are not paying off your credit cards every month. If you are not and are paying the high interest on your credit cards, look for a less expensive car.

andy.connor.e | 7 november 2017

Not the best place to come for financial assistance.

dave.m.mcdonough | 8 november 2017

If everyone had to pay cash for a car, there would hardly be any new cars sold at all. But I agree with the sentiment that you should figure out what the monthly payment would be, and be saving that.

Steam613 | 8 november 2017

If everyone paid cash for new cars there would be a transient slump in new car buying. Like maybe 6-8 years transient. But then people would accumulate cash by not paying interest and reach a point they can pay cash for a new car. Then save for the next cash car. No one would be paying big money to huge bank cartels. Then those banks would lose their power and influence over our political reps. We wouldn't have need for legal spying agencies a.k.a. credit bureaus....I'll stop now before this goes too far down the path of rant. :)

Rocky_H | 8 november 2017

@Steam613, +1 Yep, people putting that "car payment" into a cookie jar or savings account every month will then lead to...(wait for it)...being able to buy the car. The difference is that then it can't be repo'd.

SamO | 8 november 2017

People should pay all cash for houses too. And companies should pay all cash for infrastructure. And unicorns should charge for their healing tears.

andy.connor.e | 8 november 2017

This is when you realize everything is too expensive to buy.

thedrisin | 8 november 2017

@SamO

Apples and oranges. A car is a depreciating asset. Value will typically go down. A house is hopefully an asset and will go up in price over time and retain value, albeit some better than others. Companies invest in infrastructure to grow and increase inn size and earnings. When you take a mortgage or business loan it is with the hope that it is an investment for something that will increase in value.

Steam613 | 9 november 2017

@Sam0
No one is telling people what to do. The above comments are merely pointing out the benefits of a particular course of action.

dave.m.mcdonough | 9 november 2017

Yeah people get too hung up on resale value, even some threads on here about how possible future sell might affect purchase decisions. It's expensive but it's not an investment, it's a transportation tool. In my opinion the possible resale value is irrelevant.

@andy yeah, reading that article all I could think was.. damn. Apparently I need a job that pays 2x as much! Wouldn't that be nice? lol.. Yes everything is too expensive.

This car is what I've been waiting for ever since I started tinkering with carsover 20 years ago, and it will outlast others 2:1 easy.. and I have 50% saved already. That's how I twist things around in my head to justify spending 110% on this car compared to what I make in a year. It will be my first and probably only NEW car purchase.

Shock | 9 november 2017

"Dave Ramsey says that if you have to go into debt for a car, you can't afford it."

DR says a lot of things. He's wrong on this. I've never in my life bought a car with cash. I finance 100% of them. I've done this for almost two decades now, so I suspect if it was true I couldn't afford it this would have caught up with me by now. My first moderately expensive car I financed exactly 15 years ago at $315/month payment. My current car is now financed at $399/month even though household income in several times higher. As long as lenders are happy giving me a car at a couple % interest rate I have no interest in putting money into it that I'd rather dump into the stock market.

The problem with golden rules is they are too general. If I ignore some rule of thumb calculator on what I can spend on a car and let's say it tells me I could spend $500 but I spend $900. Is that stupid? I just spent $400 more than it said. And yet on the same website maybe it has a calculator for what I can spend on a house and when I compare what I am paying to what I am okay to pay the difference is $700. So the website claims I can spend $700 more on a house than I do, but I decide to instead spend less on the house and overspend on the car. I'm still ahead $300/month.

The model 3 is a frivolous purchase (all cars in this price range are) that should never be considered until you are:

1) Putting good money into retirement
2) Never have credit card debt
3) Have enough spare money each month to cover all the typical crap from home repairs to kids' activities, etc.

If at the end of each month you have some extra money burning a hole, then treat yourself to a nicer car. Or a vacation, or more rifles or whatever floats your boat. But if you're carrying debt, if you are not consistently putting good money into retirement and kids' college and whatever else, you ought not to sap that needed money into a pricey toy.

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