The two biggest expenses for most people are their housing and transportation. If you want to get ahead financially you have to get these decisions right. If you spend too much on either, you are going to have a hard time building wealth.
I don’t want to shame anyone for buying a nice car. Instead, I want to help you make smart decisions with your money. Here are some items to consider before starting your search:
Budget
When buying a car, you have plenty of options to choose from. You may have an idea of what car you might want, but not be sure on what to spend.
The general guideline I like to follow is the 20/4/10 rule. This rule recommends you make a 20% down payment on the car, take 4 years to pay back the car loan, and keep your transportation costs under 10% of your gross monthly income. The 10% spent on transportation cost includes car payment, maintenance, gas, insurance, etc.
For example, if you make $7,000 per month, then you should spend $700 or less on transportation (example below):
Monthly Cost Estimate:
$450 Car Payment
$100 Insurance
$100 Gas
$50 Maintenance
$700 Total per month
Prioritize
Every purchase made is a tradeoff against some other user of the money. If you spend money on this, you have less money to spend on that. This is especially true for any big-ticket item like cars.
One of the biggest jumps in cost is going from a regular car to a luxury car. This is not only more expensive upfront but can be more expensive to maintain. And that’s fine assuming you have the rest of your finances in order. But if you drive a luxury car and your finances are a mess, there’s a pretty simple remedy.
Another huge debate is buying new vs used. A brand-new car loses about 20% of its value the first year. However, used cars are more likely to need maintenance sooner. Personally, I always buy used but I understand why some people prefer new cars.
Everyone is different and it’s important to determine what is a priority for you.
Negotiation
When negotiating the worst they can say is no. There’s no harm in asking or shopping around for a better price. Growing up I always went car shopping with my Dad and here are some strategies we use:
Payment: Always ask for the out the door price. Dealers love to add on miscellaneous charges right before the deal is final. Also, don’t negotiate based on monthly payment. If you say your budget is X amount per month, dealers might extend the length of the loan to match that number.
Research: It’s hard to negotiate without knowing the market. Use sites like Cars.com or Kelly Blue Book to research prices on the car you want. Oftentimes you can find the exact same year/model for cheaper and use that as leverage when negotiating.
Trade In: To maximize your profit you have to sell the car yourself. I’ve sold four cars under $20,000 and got around $4,000-$6,000 more than the trade in offer. If you do not want to sell it yourself, I’ve found that CarMax typically makes the highest offer.
Bottom Line
Overspending on a new car can blow a huge hole in your finances if you’re not careful. A car is a necessary expense but doesn’t have to break the bank. Use these tips as general guidelines when starting your car search. And as always, please don’t hesitate to reach out with any questions
Disclaimers / Sources:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
New cars lose 20% of value after their first year of ownership from carfax.com.
