Unless you live in an urban area offering a plethora of public transportation options, chances are you need a car. When it comes to buying a car, just like when it comes to buying most other big-ticket items, you can either pay cash or finance it. Budget your new car purchase based on what you can afford in both the long and short term, and use these tools to help you make the most financially responsible choice.
-What you need to understand about cars
Cars are depreciating assets, meaning they lose value the moment you drive them off the lot. Every mile ticked on the odometer means more lost money. Financing a depreciating asset is never a wise move. Therefore, it makes sense to budget for your new car purchase in cash, and leave financing as a last resort.
-Budgeting for a cash buy
First, you need to draft a budget. Pencil your monthly income and subtract your monthly expenses from it. The remainder is your disposable income. If you aren’t happy with that number, adjust your expenses downward, giving you more disposable income wiggle room. The more disposable income you have, the easier it is to save up for your new car in cash.
For example, if you earn $4,000 a month and your expenses total $3,000, you can allocate $1,000 a month to your car savings account. In 12 months you will have saved $12,000, enough to purchase a modest used vehicle.
Extra tip: Write in a predetermined monthly savings as part of your budget so that you always have an emergency fund handy. Never rely on your disposable income for all your savings.
-Budgeting for payments
If, however, you prefer to finance your next vehicle, your budgeting plan will look a little different –and a little more complicated.
Figure out how much money you can afford to put toward a car payment, using your disposable income. From that, subtract your insurance payment and maintenance. Then, multiply your monthly amount by the financing term you are comfortable with (choose between 36, 48 and 60 months). This will give you an idea of the price range for your purchase.
For example, if you can afford $400 a month, but your insurance runs $120 and your maintenance is $50, reduce your budgeted car payment by $170 (your maintenance and insurance). This leaves you with $230. Multiply $230 by 60 months and your car budget is around $13,800, before factoring in finance charges.
No matter your method of purchase, make sure to remember that cars only go down in value and are a temporary fixture in your life. By driving frugally, you can put your money toward financial pursuits that gain value over time, and buy bigger, better cars later in life. Don’t overstretch your car budget, and make responsible choices now to reap the rewards later on.