The Worst Combo For Your Finances
One of the worst financial combos is owning a car that you purchased for much more than 1/10th your gross income and renting. You now have two of your largest expenses sucking money away from you every single month.
Think about all the wealthy people you know or the millionaires next door. Chances are high the majority of them own their homes and drive used cars. Their cars likely dont come close to 50% of their gross income.
If you want to achieve financial independence, follow my 1/10th car buying rule. Letting material things stress you out is no way to live.
If you want to detonate your finances and end up working longer than you want for the sake of a nicer ride, then go ahead and spend more than you can comfortably afford. After all, weve only got one life to live.
What Are The Best Brands And Models Of Cars For New Drivers
Of course, you want a brand new car, but its usually not practical for first-time buyers. If you have not had a drivers license for a good several years, it is often a good idea to buy a cheaper, smaller car that will cost less in repairs and maintenance. That way, you can build up experience in owning, maintaining, and driving a car without paying through your nose for a costly decision.
Speaking of wants, some people would settle for a plain car, while others have additional expectations. Of course, you want to buy a car thats practical for you. If youre the only person driving short distances in the car, you dont need a whole lot. However, if you have a family or an active, sporty lifestyle, you might look at the following options:
- A reasonably good sized trunk
- Automatic sliding windows
- Phone charging jacks
- MP3 connections
Luxury features include under-seat built-in storage, leather upholstery, separately controlled air and back-seat heating, and TV screens in the backseats. You might also need to check whether you need to hitch a trailer to the car and consider how you will use the car. Theres no point buying a large SUV if youre the only one who uses it for short drives to and from work.
Remember, the more expensive your car, the more expensive the insurance
CNBC rated the following cars as the best affordable models for first time buyers:
How Much Should You Spend On A Car Based On Your Income
As a rule of thumb, you should never spend anything more than 100% of your income. Generally, it is advisable to spend between 10-15% of your annual income, and if you want to buy the car of your dream you can consider spending 15-30% of your income.
Here’s an example for you. Let’s say that your annual income is around $60,000. Then you should spend around $9,000 on buying a car. This kind of rule helps you in limiting your finances and prevents you from borrowing more than you need.
Also, because purchasing the car is not the only cost involved in owning a car , not spending too much on it will leave you some kind of buffer to afford such costs.
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Buying A Car: How Much Car Can I Afford
Before setting your sights on a new ride thats out of reach, determine the answer to a crucial question you should be asking: How much car can I afford?
How much to spend on your next vehicle depends on many factors, with one of the main ones being price. This guide outlines the costs that make up your car payment, helps you determine the amount you can spend each month, and how to calculate a price range for shopping within your budget.
The Best Websites For Car
In this digital age, you can thankfully say goodbye to making trips to a car dealership where youll be inundated with slick offers by a salesman. If you really want to understand and compare the benefits of different cars, then there are plenty of opportunities to do so online.
That being said, not all dealerships are filled with sketchy salespeople, and a key benefit to visiting one in person is that you’ll be able to negotiate prices. This is not an option when browsing online as the prices are generally fixed.
However, car shopping online has its advantages, including the ability to search at your own pace and sometimes find lower prices than an in-person trade.
If youre looking to go down the online route, here are some sites to help you get started:
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The Compromise: 20% Of Annual Income
For me, if Im going to buy a new car I want something thats as safe and reliable as possible for my needs. Especially with a young family and two busy working parents, reliability is keysending the car to the shop all the time would be a hassle. The last two vehicles Ive bought have been between two and three years old with around 20,000 miles on them. The newness of the cars was good for their reliability, but the fact that they were used took thousands off the price of buying new.
How much car you can afford? is a different question than How much you should spend on a new car?
A loan officer will look at your income and credit report and say: You can afford $650 a month. You could finance a new Porsche for $650 a month if they stretch the loan out long enough, but you certainly shouldnt spend that much on a car.
If you take pride in your frugality, 1015% of your income sounds about right. If you value the reliability a newer, more expensive car brings, then 2025% is a good benchmark. This gets you $5,000 to $7,500 on a $25,000 salary. Still not a lot, but youll have more options. At a salary of $50,000, you can spend $10,000 to $15,000 which should be plenty for a basic used sedan under 100,000 miles.
Use Edmunds to get dealers to fight for your business! Pick your car and see the best price before you leave home.
Current Income Debts & Credit Score
It is important to have a good understanding of your current income, debts, and credit score before you go shopping for a car loan. Using a budget tool like Personal Capital to organize your personal finances so you can see everything at a glance.
Your monthly income, credit report, and monthly debt payments on personal loans or credit cards are just a few things a bank or credit union will look at before giving a loan amount to someone.
Not sure about what your credit report is going to say? You can get a free credit report from right now!
Too much debt can make it challenging to pay off all those bills each month, leaving little leftover for other expenses like getting a new car. Using a debt planner can help you see how to get your debt paid off.
No more than 36% of your income should be debts if you already have 10% in debt like student loan payments, medical bills, personal loans, or credit card debt, then you can only afford 16% more of your gross income in getting a new car loan.
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The Three Rules Of Car Financing
The rule of thumb when it comes to smart auto financing is the 20/4/10 ratio.
According to this rule, when buying a car, you should put down at least 20%, you should finance the car for no more than 4 years, and you should keep your monthly car payment at or below 10% of your gross monthly income.
Why is the 20/4/10 ratio smart? Heres why:
Negotiate But Be Realistic
Negotiate with the dealer if you feel comfortable to. Dealers will almost always set a low part-exchange price first, leaving room to offer you more. But you should still be realistic. The dealers will want the best deal out of the trade-in, too and theyll only offer what they feel the car is realistically worth. Just because you treasure your ten-year-old Fiesta, doesnt mean others will.
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Get Affordable Car Insurance
The best place to get affordable car insurance is with Allstate. With Allstate, youre in good hands. Getting a quote is free and easy. Make sure you have the best auto insurance possible to protect yourself and your family.
Every year, there are hundreds of thousands of accidents on the road. You need great auto insurance to protect your finances as well.
How Much Car Can I Afford
Fitting a car into your household budget is no easy task, and financial experts do not agree on how to determine its affordability. One school of thought holds that all your automotive expenses gas, insurance, car payments should not exceed 20% of your pretax monthly income. Other experts say that a vehicle that costs roughly half of your annual take-home pay will be affordable. Then some frugal personal-finance gurus say you should spend no more than 10%-15% of your annual income on a vehicle purchase. Pretax, post-tax, annual income these terms are enough to make a person ask: “How much car can I afford?”
There’s no perfect formula for how much you can afford, but our short answer is that your new-car payment should be no more than 15% of your monthly take-home pay. If you’re leasing or buying used, it should be no more than 10%. The reason for finding a vehicle that falls below 10%-15% is that the payment isn’t the totality of what you will be spending. You’ll need to factor in the costs of fuel and insurance, and many people overlook that. We put those costs at another 7% of your take-home pay. So, all in, you’re looking at a total budget that is ideally, no more than 20% of your monthly take-home pay.
While the 10%-15% rule may not work for everyone, it’s a good starting point for finding a target price that won’t leave you scrambling to pay your bills every month. Here’s how you can get a more customized number for yourself.
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Older Cars Can Be Good Buys Too
This doesn’t mean a car that’s older than the 3- to 4-year-old sweet spot is always a bad buy. If an older car has been well taken care of, it is possible that it’s a good purchase for you.
“If you’re looking for something that is a stopgap between now and a year from now when you’re planning on buying a new car, it might not be a bad thing to buy a $3,000 or $4,000 car with 100,000 miles on it,” Reiss says.
Video by Jason Armesto
Just be sure it doesn’t have thousands and thousands of dollars of needed repairs. You should look to see which parts have and haven’t been replaced, and how recently, along with how much it will cost for you to do any repairs you might anticipate. Car manuals will note what needs to replaced at what number of miles driven.
“If you’re spending more than about $4,000 a year on maintenance, then you probably should look a little deeper and find something that’s not going to need $4,000 a year in maintenance,” Reiss says.
Do Some Competitive Research
Another important step to take before arriving at the dealer is to do your homework. Visit multiple websites and check the value of similar vehicles with the same mileage while monitoring ecommerce sites to follow your car models auction price. Print out that information, says Fix. The first offer you get from the dealer is going to be low. When you counter-offer with a higher price you can say, heres the paperwork to back that up, she says.
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Shop Around For Trade
Trade-in offers can vary, depending on what the dealer already has in inventory, the cars condition and how well the dealer feels the car will sell. You could prevent some of the back-and-forth negotiating at one dealer by getting a few trade-in quotes from different dealers. Get a quote from one, go to another and ask it to beat what the first offered. Be sure to get all offers in writing. Here are some places you could go:
A different brand dealership. Take your car to a dealer that does not sell your cars brand. An example would be taking your Ford to a Nissan dealer because a non-Ford dealer may offer you more. The reasons behind this are that there are fewer Fords with which to compete and If the car you are driving was a popular rental, lease or fleet model, they also transact at lower prices, says Matt DeLorenzo, managing editor for Kelley Blue Book. If you go to a dealer of the same brand, you could be competing against those depressed prices with your privately owned vehicle.
A used-car-only dealership. Places like CarMax advertise fast, free quotes on trade-ins, so stopping by may be a pretty painless way to get a written trade-in offer.
Online services. Some sites offer to buy your trade-in online. Whether you trade in your car for a new one or sell it using an online site, an offer from an online service might be useful. KBB Instant Cash Offer is one example of a site you could use.
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Why Is My Amount So Low
Cars may be necessary transportation, but their quick depreciation means spending more than you have to on a car is a fast way to make your hard-earned money disappear unnecessarily.
A bank or car dealer will likely approve you for much more than your result on our calculator. But what the dealer says you can afford and what you can actually afford are very different. Remember, if you stop paying your car loan, the bank repossesses the car. Either way, they win.
The result of our car affordability calculator shows you a sensible amount to spend on a car. And yes, it might be far lower than you might think. But remember that the more money you spend on a car, the less money you have available for everything else housing, food, travel, entertainment, paying off debt, and saving.
Your car is one of your largest monthly expenses the lower you can keep that expense, the faster youll be able to build wealth in other areas.
Determine Your Fuel And Insurance Costs
Before you set out to buy or lease, find out what your fuel expenses will be and what it will cost to insure the vehicle. Both costs vary considerably based on your location, your driving history and the vehicle you’ve chosen. Even though it takes a little work to come up with these estimates, you shouldn’t overlook them. Knowing these costs can help you choose among multiple vehicles. Some may cost more to fuel up others might have a higher cost to insure.
The EPA’s Fueleconomy.gov website has a detailed listing of fuel economy figures as well as annual fuel cost estimates for both new and used vehicles.
For insurance quotes, contact your agent or insurance company about the vehicle you’re interested in. You should be able to get an accurate estimate. Or go to the auto insurance website of your choice, and there should be an option to get an online quote. Do insurance and fuel costs add up to 7% or less of your monthly paycheck? Then you’re OK.
What Are The Cons Of Spending More Than 10
Spending more than 10-20 percent of your annual income on a vehicle can bring added financial stress in more ways than you may imagine.
Every time you leave that trophy car parked in a parking lot or on the street it’s susceptible to dings and scratches at the hands of random passersby or worse. Then there’s the fact that simply driving around town in that deluxe ride can come with added worry, too, because needless to say you’re at the mercy of other motorists and their possibly less-than-stellar driving skills.
Overstepping your boundaries as far as your budget for a new car goes can also lead you to want to spend or, better put, indebt yourself even more in order to complete the look by way of frivolous things like a new pair of designer sunglasses or interior accessories. In short, when it comes to choosing a car thats right for you, savvy vehicle owners know practicality should never take a backseat to style. Rather, the two go hand in hand.
It’s important to remember that yes, whichever vehicle you decide to choose can be fun to drive and easy on the eyes, too. But it needn’t involve overhauling your lifestyle or reinventing your entire persona.
Your vehicle is essentially a way of getting you and all you need to haul, be it the kids, cargo or just you, from point A to point B. Period.
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Luxury Vs Affordable Brand
I would like to touch upon this topic of car purchase. Why?Because I have seen people comparing cars like BMW/Merc/Audi with Toyota/Honda/Hyundai/Renault/ etc.
I personally think that they should not. If One can afford the price tag, they can straight away go for BMW/Merc/Audi/Volvo, No need to compare them with economical segment cars.
These are premium cars, and people who can afford to drive these, should not bother about value for money etc. Comparing technical specification of BMW with Renault, is not worth an effort.
Luxury cars compliments the social status of rich. Safety, performance and comfort of premium cars is far better. It is only a matter of how much extra one can pay for the extra-tech given by the luxury cars w.r.t the following features:
If one can pay, luxury cars will always outclass other brands. Overall experience of driving a luxury car is incomparable.
But the point that must not be forgotten is ones social status. A decent SUV like XUV500 will cost Rs.20lakhs. A similar sized SUV by BMWX1 will cost Rs.40 lakhs. The cost difference is too high.
If one can afford BMW X1, there is no point comparing XUV500 with it. Similarly, if ones affordability calculation highlights XUV500 as the right pick, buying BMWX1 will be a mistake.