How To Decide If a Car Payment Fits in a Recession-Proof Budget
According to a Pew Research study, 72% of Americans view current economic conditions as fair or poor, while 38% think they will be worse by this time next year. Not many experts are predicting a recession anytime soon, but continuing U.S. trade tensions and high inflation are making people think twice about their spending in 2026.
A "recession-proof" budget is always a good way to handle money and not just when the economy is bad. Carrying low debt, spending thrifty and keeping funds liquid will help you keep track of your total assets and liabilities.
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If you're considering buying a car, you have to be sure it fits into your financial plan and your budget, while also taking into account the current economic condition. When it comes to deciding if a car payment fits into your recession-proof budget, here are a few things to consider.
Do You Have an Emergency Fund?
Seriously, if you only have $5 to put away a week, start an emergency fund now, put it in a high-yield savings account and let it grow. A good rule of thumb is to save anywhere from three to six months of living expenses (including car payments), but in times of economic insecurity, aim for more.
How Much Can You Spend on a Car?
According to the U.S. Department of Transportation's Bureau of Transportation Statistics, the average American household spends 15% of their after-tax income on transportation — including loan payment, insurance, gas and maintenance — with lower income households spending 30%. Ideally, you should be aiming for a 5% to 10% spending threshold on car payments if you're using a recession-proof budget.
What's Your Debt-to-Income Ratio?
Along with your credit score, car financing is approved based on your debt-to-income ratio (DTI), which measure your total monthly debt against your total monthly income. According to LendingTree, agencies look at the back-end DTI, which includes auto loans, student loans, personal loans and credit cards to your mortgage (but not groceries, utilities or medical bills). You should also be aware of your rate and keep it under 36% in stable economic times and lower if budgeting for a possible recession.
How Safe Is Your Job?
When making a high-end purchase like a car, it's good to evaluate your job security. Many companies have to lay staff off when consumer demand decreases, but when it comes to a recession, there are certain industries aren't as impacted, per CNBC. Length of employment, industry demand, transferable skills and company performance should factor into your decision to finance a car during economic upheaval.
What About Opportunity Cost?
Before purchasing your next vehicle, you should assess not just the initial price and ownership costs, but also the possible opportunity cost. A car is a necessity for many Americans, but for those struggling to get by, "You could have invested the downpayment or the monthly payments in stocks, real estate crowdfunding or other asset classes that have historically appreciated over time," said Financial Samurai Sam Dogen.
Regardless of the economic climate, your car payment should not be a burden that jeopardizes your financial stability. If you're budgeting for a future recession, always ask yourself how a job loss would impact your car payments and always consider buying a cheaper vehicle — with cash.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.