We all would love to go out and buy our dream car, but most people can’t actually afford the luxurious and powerful car of their dreams. As such, most of us have to turn to our budget when car shopping. The smartest thing to do is calculate how expensive of a car you can actually afford.
This means looking at the money you take in, factoring all your expenses – both car-related and otherwise – and looking at what kind of down payment you can contribute. After you know your monetary parameters, then the fun of looking for the vehicle you want begins. Here’s some information on the how to determine the amount of money you should spend.
Look at How Much Money You Take Home
Looking at your income is the first step to figuring out how much car you can afford to buy. You shouldn’t start looking for a car by searching the web for the car you want. All that does is encourage you to buy a car that’s out of your budget. Think about your net pay. This is the amount of money you make after deductions for things like insurance and taxes.
For example, if you take home $36,000 a year after taxes, insurance, and whatever else is deducted from your paycheck, then that’s what you need to work off of. According to Money Under 30, after you have determined your net pay, you should think about how much you should actually spend on a car. Generally, that number should be between 10 and 20 percent of your annual income. So, using the $36,000 referenced above, that’s between $3,600 and $7,200.
That might not seem like a lot of money, but if you can only afford a $7,000 car and you go out a buy a $12,000 vehicle, you’re going to use money from some other area of your budget to pay for it. Money Under 30 notes if driving is extremely important to you, then it can be okay to spend more than 20 percent of your income on a car. That means you’ll have to spend less money on things like eating out or entertainment and live a little more frugally. Due to the fact that most people need and use a car for basic transportation and not much else, the 10 to 20 percent recommendation is the smart way to go.
Consider Insurance, Gas, and Maintenance
Car ownership isn’t just about your monthly car payment. Car insurance, gas, and maintenance are a significant part of car ownership and can be costly. You can spend a couple hundred dollars or more per month on these things alone.
When considering how much of you annual income you’d like to spend on a car, make sure to factor in these things as well. This might mean you have to look for a car that’s vastly different than what you had in mind going into the process, but the last thing you want to do is buy a car and then not be ready for the additional expenditures and put yourself in a tight spot financially.
Not all of these expenses aren’t fixed, either. You could drive more from one month to the next, using up more gas, and you might need to pay for an unexpected repair one month and spend next to nothing in maintenance the month after. You need to build space into your budget and be ready for the unexpected. The smartest thing to do is get estimates for all of these expenditures and then budget to spend less than that.
Make Sure You Can Put Down 20 Percent
The vast majority of people out there can’t pay cash for a car. This means they have to get a car loan. No matter what car you get or what loan process you go through, most financial advisers will tell you to put down 20 percent when you buy a car.
The Simple Dollar reported the 20 percent rule is generally used for new cars and that you can put down less when you buy a used car if you need to. Still, no matter what car you buy, you should never put down less than 10 percent.
According to Bankrate, the average down payment is actually around 10.5 percent, but it’s always smarter to put more money down, and 20 percent is a number that’s generally still easily manageable. By putting down a reasonable amount of money, you’ll significantly reduce your monthly car payment and you’ll end up paying less in the long run because the amount of money interest accumulates on is lower.
Think About Your Other Expenses
We could cite the recommended percentages all day, but the fact of the matter is every person’s situation is different. This means if you’re strapped for cash, spending 10 to 20 percent of your annual take home pay on a car could be financial suicide. On the flip side, if you make a lot of money, spending 10 to 20 percent on a car might be more than you actually need to spend to get a car that suits your needs.
Because of this, you need to think about your own personal situation. Factor in all of your other expenses, including all your debts, housing and living costs, and recreational expenditures. It’s important to consider every financial variable before you jump into any specific car payment situation.
If you’re unsure of how to proceed, seek some help from a financial adviser. They can help you nail down a dollar amount you can comfortably spend on a vehicle and help you find the best way to pay for it. Additionally, they can help you manage and reduce debts and expenses so you can get the vehicle you truly need.