When it comes to shopping for our next new car, most of us have the age old problem of having champagne tastes while on a beer budget.
So, how much should you really spend on that new car you are looking at?
Many experts advise that your car expense should not be more than 20% of your monthly income. And by the way, that should include all of your car payments. For instance if you own three cars then your total payments should not exceed 20% of your monthly income.
And we’re talking take-home pay here for your monthly income… not your gross pay.
Right up front, let’s get something straight. Cars (unless you’re collecting) are poor financial investments.
Because right from the get go your car will begin depreciating the minute you turn the key, your new car is an expense and definitely not an investment.
When it comes to calculating your budget for your new car, one of the first things you will want to look at is what interest rate you will be paying on your car loan. Obviously, the lower the rate the more car that will fit into your monthly budget.
Also, whether you have a trade in and if you have the ability put money down on your purchase will also affect what your monthly payments will be against your budget.
The more down payment that you can come up with, the more car you will be able to afford to buy and still be under your 20% budget limit. Though, really this only applies where the monthly payment is concerned, because if you put a large amount of money down against a more expensive car, you could still be spending more money than you should for a depreciating asset.
There can be exceptions to the 20% rule.
One of these exceptions might be if you happened to be a recent college graduate just embarking on a new job and career; and you are still living at home with your parents. By not having a house payment or a rent payment, you would be able to allocate more of your budget for a new car payment.
You should always keep in mind the amount that you can truly afford. Keep in mind that cars come with other expenses other than just the monthly payments. Be mindful that you will also be on the hook for gas, insurance, maintenance, and repairs to your car.
Insurance can be a big stumbling block for those who may be new at buying a car. Some models such as sports cars or those that rank high on the vehicles that are stolen list, can cost quite a bit more per month to insure.
So, although you should certainly keep the 20% rule firmly in your mind when shopping for your new car… don’t forget the other costs of car ownership and be sure to calculate them against your monthly budget.
Be sure to do plenty of research when it comes to calculating your total cost of car ownership per month. If you take the time to consider all the expenses, you’ll do fine and have a pleasant experience owning and driving that new car.