WHY THE MIDDLE CLASS CAN’T AFFORD A NEW CAR, ACCORDING TO MONEY EXPERT HUMPHREY YANG

It’s no secret that some things are getting more expensive. New cars are no exception — although prices have fallen slightly, the average cost of a new car in 2024 is over $47,000, according to Kelley Blue Book. If that price seems unreasonable to you, you’re not alone.

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Money expert Humphrey Yang breaks down the state of the U.S. auto market on his YouTube channel. Read on for Yang’s insights into why many middle-class Americans can’t afford a new car, plus his three tips for car shopping on a budget.

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What’s Going on With the Car Market?

If you’ve shopped for a new car recently, you already know that prices seem a little out of whack. New car prices peaked in 2023 and, while slightly lower in 2024, are still at an all-time high. There are several factors driving this price hike, including higher manufacturing costs and increased demand in the wake of the COVID-19 pandemic, as reported by Bloomberg.

Unfortunately, middle-class salaries in the U.S. aren’t rising at the same rate. The national average income in 2023, as reported by USA Today, was around $59,384. That’s not much more than the average car price — it’s no wonder financial experts like Humphrey Yang say the middle class can no longer afford a new car.

According to Yang, many Americans take out expensive loans to purchase a new car. That’s one reason auto loans account for about 9.2% of total American debt, more than credit cards or student loans.

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Can I Afford a New Car?

Considering all that, can you afford a new car?

Remember that car dealerships will encourage shoppers to buy regardless of their income. They offer longer loan terms — up to 84 months — and higher interest rates, which means you’ll end up paying much more than the actual vehicle price. So, before you head to a dealership, consider these factors:

Your income: If you plan on taking out an auto loan, make sure you can afford the monthly payments on your current income.
Your credit: The interest rate of your loan will depend on your credit score.
Your life plans: A lot can change in 84 months. You may need to make room in your budget for a new home, child or other life event, which will make that car payment more burdensome.
Other expenses: Insurance, gas and maintenance will add an extra $300 or more to your monthly costs.

Looking for more concrete guidance? Yang outlines two basic rules to determine if you can afford a car.

The 20/4/10 Rule

The 20/4/10 rule is an old-school financial tool to help you plan a new car purchase. Here’s how it works:

Your down payment should be 20%
Your loan should be no longer than four years
Your monthly transportation costs should be less than 10% of your gross income

Remember to factor insurance, maintenance and gas into your total transportation expenses when using this rule. Under the 20/4/10 rule, you must make over $150,000 to afford a new car with an initial price of around $48,000.

The 35% Rule

If the 20/4/10 rule seems a little dated and unrealistic to you, consider the 35% rule. This simply states that your total vehicle costs should not exceed 35% of your gross monthly income. 35% is still a lot to spend on your transportation, but it might be a more realistic target for many Americans.

Humphrey Yang’s 3 Tips To Afford Your Car

Even under the 35% rule, most middle-class Americans can’t reasonably afford a new car. But that doesn’t mean no one can afford to drive anymore. There are plenty of ways to drive in style and on budget. Yang offers these three tips:

Drive an EV

Electric car prices are plummeting in 2024, thanks to a surplus in supply and lower battery costs, as reported by The Washington Post. Used EVs are even more affordable. According to Yang, a used EV is as much as 20% cheaper only one year after its original purchase.

Many EVs are eligible for tax credits, which can make your total cost even lower. On top of that, electric charging is generally cheaper than gas, with EV owners paying less than half the fuel costs of gas car owners per year.

Buy Used

Whether you choose an EV, hybrid or gas-powered car, you’ll save a ton of money by buying a used vehicle. New cars significantly depreciate in value in the first two to three years. That depreciation means you’ll lose a lot of value when buying a brand-new car. It also means used and pre-owned cars are a much better value for similar quality.

Yang’s advice is to shop for a three- to four-year-old car — it will still feel new and have low mileage, without the sticker shock of a new vehicle.

Choose a Low-Maintenance Car

Luxury car brands might seem more appealing, but they’ll end up costing you much more than tried-and-true staples. That’s because luxury cars require specialized maintenance on a regular basis.

Instead of shopping for an Audi or Benz, opt for a brand with lower maintenance costs, such as a Honda, Toyota or Hyundai. Be sure to research the expected maintenance costs of your car’s make, model and year before you make your purchase.

Yang’s Most Important Advice

The average American salary isn’t high enough to afford a brand-new car. Rising costs, interest rates, insurance rates and gas prices are putting pressure on the American middle class — but that doesn’t mean there’s no hope. It might just mean that new cars aren’t worth the hype anymore.

Yang’s final piece of advice is to ignore the peer pressure. When you see a friend or colleague driving a brand-new car, remember that they’re most likely struggling with debt and high monthly costs.

Whether you’re abiding by the 20/4/10 rule or the 35% rule, you can keep your monthly transportation costs low by choosing an EV, buying used instead of new and opting for low-maintenance brands. Your future self will thank you.

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This article originally appeared on GOBankingRates.com: Why the Middle Class Can’t Afford a New Car, According to Money Expert Humphrey Yang

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