Readers of this blog understand that, in the end, divorce is a financial transaction. It is a process imbued with enormous emotional consequence. People marry and have children hoping and often expecting the best. We know it does not always turn out that way, and along the way, people turn to lawyers to develop a financial plan for the hereafter.
In an effort to keeps things “objective,” I have searched for tools to help evaluate complex financial decisions in a post separation world. So, for many years I have sought guidance on how much is the reasonable cost of a car? I have read a lot of material on mortgage/rental cost. It suggests that core housing costs (mortgage, taxes, insurance) should be not more than 28% of gross income, but that total household debt should not exceed 41% of your gross. There are markets where clients will laugh at those percentages, contending they would live in their cars on that kind of budget. My impression is that lenders are willing to push the envelope and accept higher percentages, but they want facts that will otherwise make them feel comfortable with the loan.
Back to cars. I saw no “standard” until this month when I read the November Bulletin for the American Association of Retired Persons (AARP). The article’s title is “How much car can you afford?” This article has a formula that makes a lot of sense, even for those who are not separated or divorced. Let’s follow the bouncing automotive ball.
Gross Monthly income before taxes $9,000
(that should include support you receive)
Divide that number by 3 $3,000
Add the following monthly debts:
Credit card payments $600
Other car loans $0
Student loans $200
Other debt $100
Subtract the monthly debt from the gross income, divided by 3 and you get $300.
AARP says that $300 is your maximum monthly payment. The AARP charts then employ a device to show how credit ratings and 48/60 month payouts affect the costs. That’s a little more complicated than this article can digest. They help define your maximum loan eligibility. The chart also suggests that depending on how many miles your car has, you need to plan on costs of 6-12 cents per mile as a maintenance budget. So 12,000 miles a year means be prepared for $700-$1,000 for maintenance. The average cost of auto insurance in the U.S. is $70 a month, but if you live in and around Philadelphia, $400 a month is not a crazy number. Regular gas is $2.80 a gallon. If you drive a car that scores 20 miles a gallon and you drive those 12,000 miles, you are going to need 600 gallons of that $2.80 fuel. $140 a month. So real cost:
$300 for the car
$125 for the insurance
$ 70 for the maintenance
$140 for the gas
The AARP article indicates that the reasonable costs are measured by the car payment/lease payment and not the add-ons. Nevertheless, the add-ons can’t be ignored. Consider what it costs to operate a Range Rover versus a Camry. And, realize that the gas, maintenance and insurance can easily rival the cost of the car itself.
People who are not happy at home sometimes find spending as a kind of emotional outlet. For men in particular, cars are a frequent indulgence that may not look so bad when a couple is together, but seems wildly extravagant when we graduate to two households and payment of spousal or child support.
If you have $9,000 a month in income and take the standard deduction as a single filer, you will have standard deduction of $1,000 a month. So your taxable income is $8,000 a month and your federal tax will be roughly $1,500 a month. Social Security and Medicare will eat another $575 and state and local taxes $300. All in, you will have $6,625 to spend on everything you need after those taxes are deducted. Put 27% to housing and $2,160 is gone. $4,465 is left for everything. That car we just priced out is $635 a month “all in.” That brings you down to $3,830. In a nutshell, $120 a day for health insurance, food, clothing, vacations, dry cleaner and yes, CABLE.
Clients don’t like this analysis. However, the reality of it cannot be denied. AARP just helped us balance the equation that all too often does not “balance.” Housing and auto costs are often totally out of whack with what is objectively reasonable.