Budgeting for a New Car

Budgeting for a New Car

Done right, getting a new car can be a dream come true. Done wrong, it can be an absolute nightmare. So, what's the difference between doing it right and doing it wrong? The main one is ensuring the car you buy fits comfortably into your monthly budget. In other words, properly budgeting for a new car can help you ensure the best possible outcome.

Assess Your Current Financial Obligations

The first part of the car shopping process entails taking stock of your finances. This should be done before you give any thought at all to the type of car you’ll buy. Approaching it this way will help you protect your heart. The last thing you want to do is fall head over heels for something your budget will strain to support.

So, list all of your fixed monthly expenses — food, clothes, housing, utilities, insurance, internet, telephone, cable (if you have it), savings, investments and the like. Your eventual car payment will be folded into this category too, but we’re getting ahead of ourselves. Next, list all the payments you make on debt — credit cards, student loans, medical bills and etc.

Apportioning Your Income

Many financial experts agree a healthy budget allocates 50 percent of your total income to needs, 30 percent to wants and 20 percent to savings and investments.

Needs are the fixed monthly expenses we noted above. In most cases, your car will fall into this category because you have to get back and forth to work, as well as conduct the other vital aspects of your day-to-day life.

Wants include dining out, shopping, entertainment and hobbies.

Savings and investments are self-explanatory to a degree. However, part of that 20 percent should also include debt service. While the minimum payments on credit card debt should be lumped in with your needs, any amount you pay above them should be considered saving and investing. After all, the interest rate you’ll pay on most debt of this nature exceeds what you’d earn from typical investments. Therefore, paying off this type of debt should be considered an investment in your future.

Making the Calculations

To keep the math easy, let’s say you make $10,000 monthly. This means $5,000 should go to your needs, $3,000 can be put toward your wants and $2,000 should go toward your future.

Now, within all of that, most experts also recommend spending no more than 22 percent of your total monthly budget on automotive expenses. Keep in mind this includes insurance, maintenance, fuel and registration. If you adhere to this formula with a $10,000 monthly income, your car expenses should total no more than $2,200, as the remaining 28 percent of your needs budget will have to cover all of the other essentials.

OK, Let’s Get Real

You might well be carrying more debt than will comfortably fit into these guidelines. Further, housing costs in many part of the country will dictate allotting more of that 50 percent to a roof over your head.

What’s more, if your credit score is a bit soft, you’ll be looking at a higher interest rate on your car loan and you’ll ideally have at least 20 percent of the purchase price of the car saved to use as a down payment and obligations in here. In other words, while this formula presents a handy rule of thumb, you’ll need to make adjustments to accommodate the realities of your life. Plugging your actual numbers into this equation will show you where you stand.

If things aren’t quite penciling out on a new car purchase, consider lease deals rather than buying a car outright. This will relieve some of the strain on your monthly budget and ensure you drive a car less prone to mechanical issues, which can make your car expenses even higher.

Long story short, budgeting for a new car based upon this formula will help you ensure you get the best car you can afford, while seeing to it all of your other financial obligations continue to be met.

And that — really is an automotive dream come true.

Photo by Mike from Pexels
Powered by Blogger.