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Now that you’ve read the post on buying a new car vs. a used one. I’ve shown that getting a used car is a good way to go. You’re wondering how much you should spend on a car? You might also be looking for ideas on how to save up money for one?
These 11 simple tips will help get that car faster and easier without strain on your savings.
1. Stick to 10%
The general rule of thumb for how much of a car you should have is 10% of your annual income. So, if you’re earning $30,000 a year, your car purchase shouldn’t be more than $3,000 total.
But we know we get into expensive leases for cars that are $20,000 or more – that’s about 66% of our annual check!
It might feel that three thousand dollars can’t buy a very good car – a junker. This is not true, here’s an example of some cars for sale online that cost $3,000 or less:
- 2003 Ford Escape XLS
- 2005 Ford Focus
- 2003 Toyota Corolla LE
- 2007 Subaru Forester
These were listed on CarFax, but you can find newer models in private owner sales in your local classifieds.
2. Don’t forget the Extras
When choosing a car, don’t forget to factor in the extra costs, especially if this is your first car.
Check how much the cost of car insurance, maintenance, gasoline type (gas, diesel, hybrid), taxes and tags. If it’s your first car, you may be surprised how much these cost monthly, here’s a general idea of monthly costs for the 2007 Subaru Forester mentioned earlier and using the national average:
- Average cost of car insurance – $112 monthly
- Average cost of maintenance – $645 annually, or $54 monthly
- Average cost of gasoline – $2.88 (as of May 2017), $130 monthly (22.15mpg)
As you can see the average cost for the Forester can be almost $300 monthly. Keep in mind these have not been adjusted for region, discounts, driving records and everything else. It may be much less
Research how much these will cost monthly along with the car payment (if any) and see if it’s still feasible to get that car or make do with one that costs less monthly.
3. Buy a Car for your Needs
I’ve said this before – buy a car that fits your needs, not your ego. Many times, folks go for the showy, status-boosting new vehicle when a simple sedan would make your budget happier.
I also mentioned that getting a used car allows you to upgrade as well. So, for around $3,000 you can get a 2005 Cadillac Escalade.
Just remember, if you’re doing it to show off to your friends, it’s time for a personal re-evaluation – friends come and go but you’ll still be stuck with that car debt.
4. How to Finance
We figured out how much of a car we should get – 10% of our annual income, now we need to decide if we need to get financing for it.
You’ll need to have at least 20% of the cost for a down payment. The loan shouldn’t be for more than 4 years. Again, I previously mentioned this depends on your personal credit for how much interest you’ll be charged.
So, let’s say you have a credit score of 712, that’d be a 5.12% interest rate on the used Forester. You put down 20%, that’s $600. The loan would be for $2,400 and its monthly payment would be $55.40 for 4 years.
You should keep your monthly car payment (including the insurance, and other expenses) at or below 10% of your gross monthly income. A $30,000 a year job is about $250 monthly for all car expenses. But you really shouldn’t need to get a loan for a $3,000 car and you should have paid for it in full with cash instead. I’ll explain how to do that next.
5. Have a Car Savings Fund
Looking at how much a car loan and monthly maintenance costs, you may be going over the recommended budget amount. For example, the $55 monthly car loan plus the monthly costs of the Forester would be about $355 – $105 more than the recommended amount.
Instead, designate some money in your budget each month for a car fund. Put that money into a separate savings account so you won’t be tempted to dip into it. A little bit can go a long way, $40 a week is about $1923 in a year (0.40% interest) which is $3855 in 2 years, which is the full amount plus extra.
6. Use an Online Auto Loan Site
If you do need to get financing, such as needing it for a new job right away. There are advantages of using an online auto loan site as opposed to an on-site loan.
An online loan site can save time and money. They offer an easy to fill out application form with a quick response time. Some sites even offer lower interest for applying online as opposed to over the phone or in person.
Still, some other sites offer discounts if you opt for automatic payments.
Be sure to shop around for the best rate that fits your needs and your budget.
7. Trade-In or Sell?
If you are getting a used car from a dealer, you can consider the trade-in value of your current car to help choose your next car.
For example, we’re staying with our $3,000 budget limit, and our old 2000 Pick-up’s trade-in value is $2,100, we can get a car for around $5,100.
But, if you sell this same Pick-up yourself, it’s value is actually about $3,200, which is more than the total of our budget!
If you already have the $3,000 saved up, then you can total these amounts and search for a car that’s about $6,000 and actually get a newer model, which will last longer too.
8. Take Your Time
Take your time and shop around. Don’t grab the first car you see in the classifieds – unless by chance it’s a really good deal, but how often does that happen? Check other cities near you or even a bit further away for better prices and options.
Again, if this is needed quickly, this decision should never be rushed. Otherwise your budget and you will suffer for as long as you own that car (sometimes longer).
9. Be Flexible
This may be hard for a few people but be flexible with the brand and type of car you want. This is similar to getting a car that fits your needs.
Instead of being fixated on wanting a Subaru Forester, look into getting similar station-wagon based compact crossover SUVs such as the:
- Honda CR-V – a 2005 model is available for $3,000
- Ford Escape – a 2005 model is available for $2,900
- Kia Sorento – a 2009 model is available for $3,000
It doesn’t have to be a station wagon/SUV crossover, maybe a compact SUV can do the trick? How about a full SUV, a regular station wagon, or a large sedan instead?
10. Reevaluate your Needs
Re-evaluate on the exact needs for this car – is it just to drive back and forth to work? Go on family trips? Haul stuff around? Then think about how often you will actually do those things?
Do you do extensive hauling or just twice a year? Maybe the occasional trailer rental is cheaper instead?
Do consider reevaluating if you really do need a car in the first place. Do you live close to work – within walking distance or biking distance? Are there a lot of public transit or ride-sharing options available?
Compare the monthly cost of public transit or ride-sharing such as Lyft, with all the expenses of car ownership. Is it cheaper just to ride instead?
11. Alternatives to a Car
I asked earlier if you really do need a car. Here are some alternatives to buying a car:
– Public Transit
I mentioned Public Transit, the average cost of riding the bus or subway is about $80 a month to and from work 5 days a week (a little less if you buy a monthly pass). About $2 a ride.
– Uber or Lyft
– Use a Car Share Service
If you opted for public service, but you need something for the weekends such as long errands, going out of town and such. Contemplate using a car sharing service such as ZipTrip allows you to “borrow” a car for an hour, a day or a week.
Membership rates are $7 a month (or $70 a year). Driving rates are $8 to $10 an hour.
– Carpool with Co-workers
If some co-workers near nearby, ask to carpool with them in exchange for gas money. This could be more enjoyable especially if you’re good friends too.
Let’s say they have a large sedan that usually holds about 15 gallons of gas, then the average cost of gasoline mentioned earlier $2.88, so that’s about $43 for a full tank of gas.
Let’s also say it’s 25 miles to work one way – 250 miles in a week, about 1,083 miles driven to work a month. That’s about 2 and a half tanks of gas, you agree to split the cost of gas, so your cost monthly is only about $65 a month.
Let’s compare the monthly costs of the Forester against the alternatives and their pros and cons:
- Forester – $300 a month.
- It’s yours and “ready to go”, grab the keys and head out
- May incur extra expenses for repairs, upgrades, accidents, etc.
- Public Transit – about $80 a month
- Advanced Planning needed (find schedules and times)
- Long waiting periods
- Not a direct route, may need to ride longer times to reach designation
- Uber or Lyft – $480 a month
- Costs more than your own monthly car budget
- Could be cheaper if your monthly budget is higher, you’re in a large city with expensive parking fees, etc.
- Car Share – $7 a month membership plus $8 – $10 an hour
- Let’s say you use this for errands on the weekends for 6 hours. Public Transit $80 plus $240 for 4 Saturdays a month – $327.
- Advantage is the savings over monthly budget plus more autonomy on the weekends.
- Carpool – $65 a month
- Carpool during the week and use public transit on the weekends – $97 ($65 plus 8 bus rides at $2
- Carpool during the week and use RideShare on the weekend – $305
As you can see, there are many alternatives available and so many variables to consider and play with too.
Getting a car shouldn’t be a fast and easy decision to jump into. Patience, comparisons, and even sacrifice may be necessary to getting a car that you need and want without stress and a huge debt.