So, you’ve decided to buy a new car. That’s exciting, but before you run to the dealership, take a moment to look at your finances and determine how much car you can really afford. Understanding your budget before a big purchase is a big step toward creating healthy financial habits. Check out the following 5 tips to help you decide how much you can afford to spend.
Run the numbers yourself. Car dealerships are in business to make money. If you go in without a plan, you’re likely to spend more than you intended. Based on income and credit alone, you may qualify for quite a bit more than you can comfortably spend. You’re the only one who really knows your scenario, so it is important that you do your own homework before you get to the lot.
Make a monthly budget. If you haven’t already made a monthly budget, now is the time to lay out your finances on paper. Chart your spending for the past month or so and add up your monthly expenses by category. Subtract this from your income to see how much (if any) you have left over. Once you have your budget you can easily see how much monthly payment you can afford. You can also analyze your spending and find areas for savings.
Stay at 10% of your monthly income. Now that you know how much you can spend each month, let’s figure out how much you should spend. Conservative experts advise that your transportation budget shouldn’t exceed 10% of your monthly income. This means that if you bring in $4,500 per month, your transportation costs should be no more than $450. This includes your car payment, gas, maintenance, insurance, etc.
Try the 20/4/10 rule. To extend the 10% rule a little further, think about applying the 20/4/10 rule. This rule of thumb says that you should:
- Pay 20% down
- Take no more than a 4-year loan term
- Allocate 10% of the monthly budget to transportation costs
This helps you manage your long-term costs as well as your monthly payments. Car dealerships are great at shifting the numbers around to make it look like a good deal, but lower payments over a longer term can mean trouble. It’s important to pay attention to the down payments and loan costs to make sure you’re not spending more in the long run.
Don’t forget about extras. There is more to consider than just the sticker price of the car. Each purchase comes with some additional fees and expenses to consider. Loan origination fees, sales taxes, vehicle registration, and insurance will all add up. Be sure to include these when you draw up your budget. And don’t forget about the cost of using the vehicle—gas, oil changes, minor and major repairs, etc. Make sure your budget leaves room for all the costs that come with vehicle ownership.
Buying a car can be an exciting experience. Just be sure to be prepared before you take the journey to the lot so that you stay in control of your finances. Talk to your financial advisor and get pre-approved for a car loan before you even set foot in the dealership.