Can You Afford A Car On Minimum Wage?

For most people, having a car is crucial to get from point A to point B on land conveniently. However, buying and owning a car can be expensive, and it is important to consider various factors before buying a car to ensure you are making a sound financial decision. In this article, we will explore whether you can afford a car on minimum wage and the different factors you should consider.

What Is The Minimum Wage?

Before finding out if you can afford a car on minimum wage, we first have to clarify what the minimum wage is.

The federal minimum wage in 2021 is $7.25 per hour.

However, many states do have their own minimum wage that is higher than the federal’s minimum wage. To see what your state’s minimum wage is, check out this interactive map published by the Department of Labor.

For the purpose of this article, we will use the federal minimum wage of $7.25 per hour in our calculations. Assuming a 40-hour workweek:

Monthly income: $7.25 x 40 hours x 4 weeks = ~$1,160 per month

Annual income: $7.25 x 40 hours x 52 weeks = $15,080 per year

Taking into account federal, state, and FICA tax withholding, and potential health insurance premiums, let’s use $14,500 a year in our projections for simplicity’s sake.

How Much Does A Car Cost?

According to Edmunds, the average price for a used car was $25,410 in the second quarter of 2021. Of course, this is just the average and the number is largely skewed by many expensive used cars in the market.

So what is the average price of a cheap, reliable used car? According to USA Today, experts agree that the lowest price for a cheap and reliable used car is ~$2,500. Since that is the lowest price for a cheap and reliable used car, we will use a purchase price of $4,000 instead to account for a more realistic purchase price now that is in decent condition.

Note: If you are on minimum wage, you need to manage your expectations and look for cheap and reliable used cars. You should not be looking for newer, mid-high-end cars that can ruin you financially to impress people that you don’t even like.

If you want to purchase a used car at $4,000, you’ll have two options:

1. Pay in cash
2. Take out a auto loan / personal loan to pay for it
   • Most lenders have a minimum amount of $5,000 for auto financing. This is why you’ll probably have to take out a personal loan instead if you want to finance your car.
   • You may need a cosigner if your credit is not good enough.

Other Costs Of A Car

Besides the actual purchase price of the car, there are other costs that you’ll need to consider as well. Below are 6 biggest costs of owning a car:

1. Fuel
2. Repairs and maintenance
3. Depreciation (we are excluding this from our monthly calculations since it is negligible for older cars and the “expense” is not tangible, meaning you’re not physically paying for it)
4. Tires
5. Insurance
6. Registration, licenses, and taxes
7. Interest on financing

These costs vary according to your specific situation.

Since I personally own a 2005 Corolla that is still functioning like a beast and is appraised for about ~$4,000, I will use my personal car to estimate the total costs of a cheap and reliable used car below.

Assumptions for the estimated cost of a cheap and reliable car:

• Purchase price of car: $4,000
• Miles on car: 140,000
• State: Alabama
• Miles per year: 10,000
• Time period: 5 years
• Credit score: Fair (640-699)

On a 5-year period, you can expect to spend about $3,280 per year or $273 per month on a cheap and reliable used car.

Can You Afford A Car On Minimum Wage?

The simple answer is yes, you can afford a car on minimum wage. However, it really depends on one’s situation. Once you have a number for your income and expected total costs for a car, we can now determine if you can afford a car on minimum wage. Below is a general rule of thumb of what experts recommend:

As seen in the illustration above, experts recommend having car costs at about 10-15% of one’s monthly income. According to our assumptions:

Projected monthly income = $1,160

Projected total monthly cost for car = $273.33

Cost of car / monthly income = 23.6%

Based on the 10-15% rule, you may not be able to afford a $4,000 car on minimum wage.

However, it is important to note that everyone’s situation is different and the true costs of a car may be different for everyone too. The 20/4/10 rule is also for best practices and is not a hard-fast rule that you have to adhere to.

If you created a budget, accounted for essential living expenses so that your needs are taken care of, and there is wiggle room for a car payment that will improve the quality of your life, you may be able to get a cheap and reliable car. Just remember to at least have an emergency fund of 3-6 months of living expenses first.

Here are some ways to decrease the estimated monthly cost for a car:

1. Experts recommend a 20% downpayment which will lower your monthly finance costs. Start saving now!
2. Maintenance costs may vary. You may end up only needing to pay $30 monthly on maintenance if you can find a reliable car in good condition. Be sure to do your due diligence when test driving and looking through the car history.
3. Spending less on fuel.
4. Find a cheaper car that has more miles on it to lower your cost. Do note that older cars generally tend to have higher maintenance costs over the long run due to wear and tear.
5. Decreasing your expenses in your budget.

If you can decrease your costs and get your total monthly costs of a car to about $170-$180 (about 15% of the monthly minimum wage), that will be ideal.

Besides, knowing the purpose of the car is important as well. If it allows you the mobility to get to your job and put food on the table, buying a cheap and reliable used car may make sense.

Tips For Buying A Car On Minimum Wage

To summarise, here are some tips on how to afford a car on minimum wage:

1. Create a budget to find out how much extra money you have monthly for car payments.
2. Build an emergency fund of 3-6 months of living expenses first.
3. Aim to pay no more than 15% of your monthly income on total car costs (including monthly payments, fuel, maintenance, insurance, etc.). That’s about $174 per month on minimum wage.
   • Either decrease your expenses or save for a downpayment until you can allocate 15% of your budget towards monthly car costs of $174.
4. Review your savings to see how much you can allocate towards a downpayment if you’re financing.
   • It is recommended you either pay in cash or have at least 20% of the downpayment to lower your car costs.
5. Research for cars that fit your budget range.
   • Use this affordability calculator to find out what you can afford. Be sure to account for other costs as well inputing the monthly car payment.
   • Make sure the car researched is in good condition so that you avoid paying a fortune on repairs and maintenance.

5. If financing, shop around for the best auto loans.
   • Learn the best ways to increase your credit score to qualify for a better interest rate.
6. Shop around for the best auto insurance with Gabi to get the lowest rate possible.
7. See if you qualify for any governmental assistance to increase your monthly cash flow.
   • Earned income tax credit
   • SNAP / WIC benefits
   • Child tax credit