Determining Your Car-Buying Budget
Buying a new car is an exciting process, especially when you’ve been saving and waiting for the right one to come along. Cars are an expensive investment that take time and consideration. Before you hit the dealership, do a little math and determine both your overall and monthly budget.
To estimate your car-buying budget, the first thing you want to do is calculate your overall monthly income. Figure out how much money you’re bringing home after taxes and list out all of your expenses. Once you determine where the money is going and how much you’re spending, you’ll be able to identify places you can cut back on expenses and calculate your current automotive expenses. Make sure you factor in any debt you have, such as student loans, your mortgage and credit card bills.
Instead of solely looking at a vehicle’s MSRP, you should consider its estimated monthly payments when figuring out your budget. Philip Reed at NerdWallet explains that your down payment, trade-in contribution (if you’re trading in a vehicle) and the length of your auto loan will all help determine your monthly payments. By putting together your budget based on monthly payments instead of overall MSRP, you’ll be able to take a closer look at what you’re spending and how feasible a vehicle truly is for your budget.
15 percent rule
When it comes to expenses, you don’t want to over-commit to an expensive monthly payment. In fact, Ronald Montoya, a contributor at Edmunds, recommends limiting your car payment to 15 percent of your monthly income. Additional automotive expenses such as car insurance, gas and maintenance should make up another 7 percent. Montoya says that, in total, you don’t want to spend more than 22 percent of your monthly income on automotive expenses.
If you’re leasing your vehicle, Montoya recommends limiting your automotive expenses to 10 percent of your monthly income. Of course, this rule isn’t set in stone; the percentages can fluctuate based on your priorities. However, it’s a good guideline to keep in mind when putting together your budget.
Factor in fees
When you buy a new car, the sticker price can be a bit misleading. Whatever price you agree upon — sticker price or a negotiated price — you’re going to have to pay a few additional fees. Added fees such as sales tax, registration fees and documentation fees can add an extra 10 percent to the cost of your vehicle, according to Philip Reed, plus any interest on your auto loan. Make sure you factor those fees into the overall cost of the vehicle, and therefore your monthly payments, before signing on the dotted line.
Whether you’re leasing or investing in your next car, it’s important to keep an eye on your finances and make sure you don’t overspend. Once you’ve figured out your budget, head over to the dealership to find the car of your dreams.