My 19 yr old sister is going through this right now as well. She's had a decent '98 Neon for the last two years she bought from my girlfriend for under $2k and it's just now getting to the point where it's no longer a reliable car, but it served her very well for the last two years. She went with my parents and fell in love with an '04 RX-8 and had trouble understanding why she couldn't get approved for a $19k car when she's working, going to school full-time and has other money coming in from my step-father's military disability. It came down to lack of credit. She's now looking at $8-10k cars and is still kinda screwed because my parents don't have the best credit rating so they cannot co-sign for her. It would be better to take the money she has saved for her down-payment and use her car to trade for something around $4-6k and keep it for a few years and then upgrade once she's established more credit. I've tried to help her realize that she doesn't want to spend everything she makes on a car payment & insurance, but it's not sinking in.
Buy something kinda middle of the road, drive it, pay it off, and upgrade later when your resources and budget aren't as limited would be my advice.