function calculateRule() {
var carPrice = parseFloat(document.getElementById('carPrice').value);
var annualIncome = parseFloat(document.getElementById('annualIncome').value);
var interestRate = parseFloat(document.getElementById('interestRate').value);
var resultsArea = document.getElementById('resultsArea');
var summaryBox = document.getElementById('summaryBox');
if (isNaN(carPrice) || isNaN(annualIncome) || isNaN(interestRate) || carPrice <= 0 || annualIncome <= 0) {
alert("Please enter valid positive numbers for all fields.");
return;
}
// 20% Down Payment
var downPayment = carPrice * 0.20;
var loanAmount = carPrice – downPayment;
// 3-Year Monthly Payment Logic (36 months)
var monthlyRate = (interestRate / 100) / 12;
var termMonths = 36;
var monthlyPayment = 0;
if (monthlyRate === 0) {
monthlyPayment = loanAmount / termMonths;
} else {
monthlyPayment = (loanAmount * monthlyRate) / (1 – Math.pow(1 + monthlyRate, -termMonths));
}
// 8% of Gross Monthly Income
var monthlyGrossIncome = annualIncome / 12;
var maxAllowedPayment = monthlyGrossIncome * 0.08;
// Update UI
document.getElementById('resDownPayment').innerText = "$" + downPayment.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById('resMonthlyPayment').innerText = "$" + monthlyPayment.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById('resMaxPayment').innerText = "$" + maxAllowedPayment.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
// Logic Check
var isAffordable = monthlyPayment <= maxAllowedPayment;
resultsArea.style.display = "block";
if (isAffordable) {
summaryBox.style.backgroundColor = "#d4edda";
summaryBox.style.color = "#155724";
summaryBox.innerHTML = "PASS: This vehicle fits within the 20/3/8 rule based on your income.";
} else {
summaryBox.style.backgroundColor = "#f8d7da";
summaryBox.style.color = "#721c24";
summaryBox.innerHTML = "FAIL: The monthly payment exceeds 8% of your gross income. Consider a cheaper vehicle or larger down payment.";
}
}
Understanding the 20/3/8 Rule for Vehicle Purchases
The 20/3/8 rule is a conservative financial guideline designed to help consumers purchase a vehicle without compromising their long-term financial stability. Unlike standard bank lending criteria, which often allow for much higher debt-to-income ratios, this rule focuses on minimizing interest paid and preventing a car from becoming a "wealth killer."
Breakdown of the Rule Components
20% Down Payment: You should put at least 20% down in cash. This ensures you have immediate equity in the vehicle, protecting you from being "upside down" (owing more than the car is worth) the moment you drive off the lot.
3-Year Loan Term: The vehicle should be financed for no longer than 36 months. Long-term loans (60, 72, or 84 months) result in significantly higher interest costs and often outlast the vehicle's peak reliability period.
8% of Gross Income: The total monthly payment (including principal and interest) should not exceed 8% of your gross (pre-tax) monthly income. This ensures you have enough cash flow for savings, investments, and other living expenses.
Example Calculation
Imagine you earn $75,000 per year and want to buy a $30,000 car at a 6% interest rate.
The 20: Your down payment must be $6,000.
The 3: You finance $24,000 over 36 months.
The Math: A 3-year loan for $24,000 at 6% results in a monthly payment of $730.14.
The 8: 8% of your $6,250 monthly gross income is $500.
In this example, the vehicle fails the test because the $730.14 payment is much higher than the $500 limit. To follow the rule, you would need a larger down payment or a less expensive car.
Why Follow This Rule?
Vehicles are depreciating assets. By limiting the loan term and payment amount, you avoid over-leveraging yourself on an item that loses value every day. This discipline allows you to redirect more of your income toward appreciating assets like stocks, real estate, or retirement accounts, which is the cornerstone of building significant wealth over time.