Your car is an important part of your daily life. It helps you get to work, pick up groceries, and go on fun adventures. However, a car is a substantial investment and can make up a significant part of your monthly spending. If you are considering buying a new car, it’s important to understand how to budget for this major purchase. There are many factors to consider ahead of time to make sure you commit to a deal you can afford. By putting in a little effort now, you’ll be able to enjoy the process of finding your next vehicle and focus on the details that matter to you like protecting it with a quality car cover.
1. Know What You Can Afford
How much money you make every month determines how much you can comfortably spend on a car. To keep your budget balanced and give you enough money to pay for other necessities in life, you should aim to keep your car sticker price around 15-20% of your take-home pay. Another common budgeting rule is the 50/20/30 budget. You’ll divide your take-home pay into three different categories: needs, wants, and savings. You should spend about 50% of your take-home pay on needs, including your home, food, utilities, and car. If you’re spending more than 50% of your take-home pay on your basic needs, you may need to reduce your car budget.
2. Decide Between a Loan and Cash
Aside from your home, your car is one of the largest purchases you’ll make in your lifetime. When purchasing a car, you’ll need to decide between financing your purchase with cash or a loan. If you have the diligence and patience to save for your new vehicle, then paying cash is a great choice. You won’t have a large monthly loan payment, freeing up your money for other financial goals. However, it can take several years to save up enough money for a new car.
Loans help you afford the car you want sooner since you don’t have to have all the cash saved upfront. However, loans charge fees and interest, which increase the total price of your car. In most cases, you’ll need to have at least 20% of the vehicle cost saved up to make the down payment on a car loan. A larger down payment often means better loan terms and lower rates.
3. Plan for Maintenance
The AAA estimates that it costs around $0.09 per mile to maintain your car. If you drive an average of 10,000 miles each year, that equates to $900 in annual maintenance costs. Maintenance costs encompass routine tune-ups, oil changes, tire rotation, and switching air filters, among other essential tasks. Performing preventative maintenance according to the manufacturer’s user manual for your vehicle can help prevent costly repairs later on.
You should set up a savings account for the known car maintenance expenses for your car and deposit money into it every month. You can determine how much money to put into your account by adding up all the routine maintenance expenses for the year and then dividing by 12. For most cars, your monthly maintenance savings plan will be less than $100 per month.
4. Build Your Emergency Fund
Unexpected expenses occur when you own a vehicle and, according to a recent survey, 64 million Americans could not afford an unexpected repair without going into debt. You should have a separate savings account to cover these unplanned expenses. Many people call this account their emergency fund. A typical emergency fund has at least three months of your monthly expenses saved up.
An emergency fund helps you stick to your budget even when unexpected car repairs happen. If you’ve been in an accident, you can use your emergency fund to cover the cost of repairs if it’s something minor. This helps you save on your insurance premiums, as well, since many insurance companies will increase your rates after you’ve filed an accident claim.
5. Look for Deals on Insurance
Buying a new car is a great time to look into changing your insurance to see if you can get a better deal. Many insurance companies offer discounts if you purchase multiple policies from them. If you have a home, a boat, or a motorcycle, you might be able to combine these policies to save money each month. If you just have a car you are looking to insure, you can get multiple quotes quickly and easily online. After comparing offers, call your current insurance company to say you are thinking about switching because you found a better deal. They might surprise you by lowering your rate.
Another way to lower your monthly insurance payment is to increase your deductible. The deductible is the amount of money you must pay after a claim before the insurance covers costs. Increasing your deductible by a few hundred dollars can save you money each month. Remember to have enough cash in your emergency fund to cover the increased deductible cost.
6. Cut Other Expenses
If your current budget doesn’t have room for the car of your dreams, consider reducing your spending in other areas. Costs like housing and utilities are typically fixed, but you can cut lifestyle costs, such as eating out, travel, and non-essential goods. A budgeting app or transaction monitoring tool can help you identify how and where you spend the most money every month. If you spend a lot eating out every month, consider cooking a few more dinners at home and taking your lunch with you to work. This can reduce your monthly food budget by as much as 75%, leaving enough to put into a savings account for your car down payment.
Stick to Your Budget
Buying a car is an exciting milestone, but it is crucial to have a budget planned so you can accommodate the expense of car ownership comfortably and avoid financial strain. While it is essential to budget for the initial sticker price or your car, planning for routine maintenance and creating an emergency fund can help you more easily manage the cost of operating your car and spend less time worrying about finances and more time enjoying the freedom that a car offers.