Step 3: How Much Car Can You Afford?
Determining what car you need includes determining what car you can afford.
While there’s plenty of excitement associated with buying a car, that excitement can quickly turn to disappointment or frustration if your next car ends up costing you more than you can afford. But if you take some time to determine your total budget before you buy you can feel confident about your choice from the start. This will reduce your anxiety during the negotiation process and helping to ensure your purchase will remain affordable down the road.
Determining your car budget requires more than just focusing on your monthly payment or the total price of the car. While this is the largest chunk of your car budget, the costs for fuel, insurance, repairs and maintenance also need to be included. A general rule of thumb is to spend no more than 20 percent of your take-home income on your car – or cars if there is more than one in your family. This includes monthly car payments as well as all ownership costs.
To determine your budget, start by assessing what you are spending now, using your credit card or checking statements to locate all the costs associated with your car for the last year. Divide the amount by twelve to get your monthly average. Can you afford that amount for the next five years (or however long you plan to keep your car)? Adjust up or down accordingly, keeping in mind the 20 percent guideline and any factors in your financial situation that should alter that percentage.
Once you have your overall car budget see how it sizes up against the cars you are considering buying. Consider not only the total cost of the car (including the interest rate on any purchase amount you are financing) but also the ownership costs. While using ownership cost data for a specific car from the Internet is a great starting point, keep in mind that these are based on national averages. In particular, your insurance and fuel costs may be radically different than any online estimates. Call your insurance agent for premium quotes on each car you are considering. Do the math on the number of miles you drive annually and the fuel costs in your area to get a better picture of your actual costs.
While you might be a little wide-eyed at the size of those numbers, don’t fret because most car shoppers can reduce their total car costs dramatically. First, assess the value of the car you are replacing so you can negotiate your trade wisely or sell the car privately. Then, look at the manufacturer’s website to see what rebates and incentives are offered for the car, as well as what group discounts you may qualify for (including discounts for military personnel, recent grads or car buyers who work in certain professions).
Finally, visit an independent vehicle information website to check for any manufacturer cash incentives they are paying to dealers to sell certain cars. While dealers are not obligated to share these incentives with car shoppers when negotiating a price, they may choose to do so if a savvy car shopper mentions them.
Selling or trading your old car, plus all of these discounts, can take thousands of dollars off your total purchase cost. The result can mean the difference between a favored car fitting into your budge or being too expensive to buy.