There’s no one answer when it comes to the «right» amount of money to spend on a car. Learn about the cost of buying a new car.
Buying a car is a complex decision. You have to balance budget with desire and need, which can be really challenging.
Matthew Angel, advice director for USAA, remembers the day his friend’s 23-year-old son got his first job and bought a new car. «It was an expensive sports car – all the bells and whistles,» he says. «His parents thought he was totally crazy for spending all that money on a car.»
Angel saw their point – but he saw their son’s, too. «Sure, maybe it was a splurge, but he did his homework first,» he says. «Being young and single with not many expenses and a steady income, he had it in his budget to spend more on a car than most other people. So in his circumstances, it wasn’t such a bad move.»
There’s no one answer when it comes to the right amount of money to spend on a car. It all comes down to your budget and the total cost of buying a car. Read on to learn how you can balance the features and price tag of a new set of wheels with your other financial goals.
How much can I afford?
If you already have a car payment, it can be tempting to think of that current payment as a regular bill, asking yourself, «How installment loans in Kentucky much more could I manage on a monthly basis?» However, this line of thinking can contribute to car payment creep, leading to higher and higher car payments over the years.
Everyone’s budget is different when they go to buy a new car, but as a general rule of thumb, you want to keep your monthly car payment average at or below 15% of your take-home pay.
«The total cost of buying a car includes the monthly payment for your car or truck, sales tax, insurance and fuel, vehicle registration fees, and maintenance and repairs,» Angel explains. For more information, check out these Questions to Ask Before Buying Your Next Vehicle.
Depending on where you live and work, parking may be an additional expense – one you should definitely weigh if you’re deciding between owning a car or relying on public transportation and rideshare services.
The best way to find your take-home pay is to look at your most recent paychecks. If you don’t have a set salary and your paychecks vary, figure out the average amount you take home each month, and use that number as a guide. Try to keep your car expenses at or below the 15% of the take-home mark.
*Examples based on a single filer taking one federal, state and local allowance with no pre-tax or post-tax deductions. Your specific tax situation can vary widely from these examples. Be sure to consult a tax professional regarding your specific situation.
What’s the total cost of buying a new car? If a person were making $50,000 a year, they might estimate their monthly auto expenses this way:
Be sure to eliminate the guesswork by getting an insurance quote on the specific car you’re looking to buy, as well as checking its gas mileage and how many miles you typically drive to estimate fuel costs.
Test drive your budget
Think you’re ready to buy a new car? First, take your new budget for a test drive. In other words, set that money aside – the total cost of ownership – for a few months to make sure it fits comfortably within your budget. If you already have a vehicle, set aside the difference from what you’re currently paying and the total cost of ownership for the car you’d like to buy.