For many people, the allure of a new car, fresh from the manufacturer, can weigh pretty heavily when purchasing a car. However, is a new car the best choice? The answer: it depends.
There are different things to consider when purchasing a car; like your budget, the price of the car, the add-ons (usually pretty awesome but how often will they actually be used?), and the financing. The truth is that many people want to be wealthy, or at least live comfortably… really, who doesn’t?
So the key to getting yourself in that position of wealth is making financially sound decisions throughout your life. For many young people, buying a car is one of the first big financial decisions they will make. So why not make it a good one that leaves you driving away with a smile and the financial security to keep that smile on your face for many years to come?
I’m going to outline the four considerations in different segments over the next three to four weeks. Let’s get started on Your Budget.
What are you willing to pay for a car? Many people simply look at the sticker price to figure out whether or not they can buy it. The more important number is the monthly payment. There are certain ways to lower your monthly payment but doing so may not be the wisest choice.
We’ll address some of these issues more in the financing segment. In general, a safe budgeting choice would be to keep your monthly car payment between 10-15% of your take-home pay. If you get outside 15%, sacrifices may need to be made in other areas of your budget; however, everyone’s situation is different. The 10-15% generally applies when you also have a housing payment at a suggested 30% of your take home pay. If your housing payment is lower than 30% of your monthly budget, you can use discretion in applying more of your monthly income to your car payment. However, if you anticipate buying a home or moving to a nicer apartment, you should take into consideration a reasonable estimate of how much you’ll pay towards your housing in the near future.
Knowing the maximum amount you can afford in a monthly car payment before you go into the transaction is crucial to making an informed decision. Although the Beamer, Benz, or Bentley might sound good on the radio, it might not fit well in your budget (besides, they’re not American made!).
When you narrow down your search for what kind of car you’re looking for (fuel efficient, gas hog, roomy, luxury, etc.) pick a few cars that fall within your budget. Before going to the dealer, do a preliminary screen and check with an online calculator (http://www.onlineloancalculator.org/) and make sure it fits your monthly budget.
Be conservative with the variables you enter into the calculator. For example, the average national rate for used car loans is about 3.5% (http://www.bankrate.com/), so you would enter 4-4.5% in the calculator for your interest rate (if you’re buying a used car).
In addition, if you’re buying a car in Pennsylvania, you will owe 6% sales tax on top of the price you paid (residents of certain Pennsylvania counties may have to pay more than 6% sales tax). The more conservative the variables you enter, the higher likelihood of success in making the payments.
The important thing to remember is to always keep your budget in mind when you’re going to purchase a car. Otherwise, you could get in over your head and get a real bad start if your goal is to live comfortably. Car salesmen get a commission of the price of the car they sell.
So what are their financial incentives to lead you towards one of their more expensive models? Be smart and don’t get pushed around. By having your budget in mind before you go, you may even be able to negotiate the price of a more expensive car down to within your budget. See you in a week or so.
*I work as a financial planner, not a car salesman. Therefore, I cannot answer specific questions about certain make or models of cars. I am simply a financial advisor. The next three segments will be out in the weeks to come. Oh, and a picture will be coming as well.
Financial Executive, Member FPA
Kaufman Financial Services
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