If you’re planning on buying a new car this year, you should be prepared and do your research before making one of the biggest financial decisions of your life. Buying a new car especially can become quite costly, and for this reason alone, creating a solid car budget is essential.
Here are some things to keep in mind when creating a car budget:
- Write everything down. This should always be your first step. Record your car budget, what your income is, how much you are spending each month, how much are you able to spend on a car and what other extra expenses (including gas, insurance, maintenance, etc) you should keep in mind.
- Be realistic. Ask yourself what you can afford. If you look at or test out cars that are way out of your price range, you may be disappointed when you realize they don’t fit into your car budget.
- What kind of car you want. Do you just need a car that gets you from A to B? Do you need a 4 door? Do you need more trunk space? Hatchback or sedan? Figure out what you need in a car. Keep in mind though the difference between what you need and what you want. You may want a Mercedes Benz but you really only need a Ford Fiesta.
- Costs of owning a car. These include the initial purchase price, registration and title costs, GST/HST, financing costs, depreciation, and possibly storage costs. Keep all these costs in mind, write them down and make sure to budget accordingly.
- Operating costs. These include filling your tank with gas, accident repairs, maintenance, tires (including winter tires), parking costs, tolls, tickets and fines. Keep all these costs in mind, write them down and make sure to budget accordingly.
- Borrowing money. If you’re going to borrow money to help pay for your new car purchase, it is generally recommended to never borrow more than 20% of your yearly net income. To figure out what 20% of your yearly net income would be, take the amount you earn per month after taxes and multiply it by 12 months. Take that total and further multiply it by 20% to receive the final total of what your maximum debt should be.
- Financing Options. There are several different ways that you can finance your car, with pros and cons to each; however the two most popular ways are through a dealership or a bank. While a dealership is much more convenient and quick, it is often a high pressure, big sales push that could possibly lead to you paying higher interest rates. A bank or credit union though provides you with much more competitive rates, personal service, simple interest loans and overall helpful financial advice with purchasing your car. However, banks and credit unions are not as convenient as going through a dealership as it can’t just be set up at night or on the weekend. Ultimately, it is important to do your research and see which institution would suit your needs best.
- Down payment. Prepare to have a huge chunk of change on you as down payments are expensive. However, the more you pay on your down payment, the better off you are and the less you’ll have to pay in the long run for your car. Most dealerships generally recommend a down payment of at least 10% of the total vehicle price. To figure out what your down payment is, take the total vehicle price and multiply it by 10% to receive the final total of what your minimum down payment should be.
- Stay positive. At the end of the day, try not to let yourself get too frustrated or stressed when figuring out your car budget or even buying the car itself. As long as you stick to your budget and have done your research, you should enjoy the brand new car which now belongs to you.