Buying a car is a big decision that affects your spending now and for years to come. How do you keep it rational? What should you ask yourself before you buy? And are there any simple rules to follow?
Do you even need a car?
This depends mostly on where you live and what you do for work. Getting around varies a lot, even between big cities. In some places you can easily get from A to B by public transport, car sharing or bike. If that is your case, and you have no other reasons such as kids or frequent trips, write down your top reasons for wanting a car. Is it worth the money?
A car doesn’t mean happiness
It is tempting to make a big purchase right after you graduate or land your first job. Many people see a car as the ultimate sign of adulthood and independence, but that is not really what it is for. A car helps you get around. That is the reason to buy one, not to impress the neighbors.
A used car will get you far
Far with your budget, that is. The moment you drive a brand new car off the lot, its value drops significantly. If you truly have the money, that is fine, go ahead. But chances are you will make a smarter financial decision by buying used. So the next question is…
What’s your car budget?
How much do you want to pay, and what do you really need from the car? Visit a few dealerships or browse listings online to get a feel for prices and models. Working out your car budget takes more than a few seconds. You need to understand what you can afford versus what you need.
Photograph by Jaromir Kavan on Unsplash.
20/4/10: a simple car budget rule
This rule helps you check whether you can really afford the car you picked, and keeps you from overspending. Remember, a car is just a way to get around. Here is what the numbers mean:
20% down payment
This may seem like a lot, but a bigger down payment keeps you from owing more than the car is worth. A car can lose value fast once you drive it away. Owning something worth more than what you owe on it is key to staying on top of debt. So the key question is: can you pay 20% of the price upfront? Many dealers ask for money at signing anyway, and the more you put down, the less interest you pay. Our savings calculator shows how long it takes to save up for it.
A loan of no more than 4 years
Keeping the loan to 4 years or less keeps the total interest you pay down. This matters even more if your interest rate is high. Keep the loan short, but make sure you can still make the monthly payments without trouble.
10% of your income for monthly costs
Keep your car payments under 10% of your monthly income. Versions of the rule differ: some use gross income and count only the loan payment, others include fuel, insurance and maintenance. The stricter version, all car costs within 10% of your take-home pay, gives you the most breathing room.
Feeling overwhelmed?
If buying a car stresses you out, here is our simple advice: buy a used car and drive it for many years. A brand new car won’t make you better off. Plenty of people who are comfortable today started out exactly that way.
Start by setting a budget for your car costs and sticking to it.