Want to buy a new car? This simple rule will let you know what you can afford

Ramit Sethi: Here's how to figure out how much car you can afford

A lot of experts will tell you that buying a new car is a terrible investment. But buying a new car can be important or valuable to you for other reasons, says Ramit Sethi, the best-selling author of "I Will Teach You to be Rich."

"You might have heard a lot of people telling you don't ever buy a new car, [it's] a huge waste of money," Sethi says. "I disagree with that. I think there are a lot of reasons to buy a new car."

Maybe you want something reliable that you won't have to constantly take in for repairs. Maybe you want the latest safety or fuel efficiency technology. Or maybe you just want to reward yourself by buying something shiny and exciting.

Whatever your reasons, if you are considering buying a new car, Sethi tells CNBC Make It, there's one big question to ask yourself: Can you afford it?

Running the numbers to determine the answer to that question can be complicated, so Sethi offers what he calls the "20-4-10 rule." Here's how it works.

Put 20 percent down

If you're not buying the car outright, you'll need to secure some financing. Most lenders will require a down payment, and Sethi recommends putting down 20 percent.

If you want to purchase a car with a sticker price of $30,000, then, you'll need $6,000 for a down payment.

Take a four-year loan

The most common term for an auto loan is currently 72 months, or about six years, according to Edmunds. But that's too long, according to Sethi. 

Instead, look for a loan with a term of four years (48 months) or less. "That way you minimize interest," Sethi says.

If you can't manage the loan payments of a shorter loan, you need to find a cheaper car.

Use only 10 percent of your income

Finally, Sethi says, you should only put 10 percent, max, of your gross monthly income toward car expenses. So back to that $30,000 car and $50,000 income example. Under the 20-4-10 rule, you should only be spending about $400 a month, total, on the vehicle and related expenses, he says — and that accounts for everything, including gas, insurance, DMV fees, repairs and even fines.

"There are a lot of fees when it comes to buying a car that people don't think about," Sethi says. At one point, he says, his car payment was only $350 a month, but he realized he was paying roughly $1,000 a month when he factored in all the costs (and a few speeding tickets).

"If you stay within those boundaries, you're going be safe to buy the car that you want," Sethi says. "But if you find that you're pushing those limits, then you might be paying too much."

Don't miss: This simple, 4-step plan can help you get a raise in 2019

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