Is it time to buy a new car? Are you wondering what you should be spending (or not spending) on your new wheels? We know that it’s tempting to buy the newest model hot off the lot, but this week’s episode offers some guidance on what to consider when it’s time to buy a car, how much you should spend, and what to look out for in your payments.
[05:27] The role luxury and status have in our purchase decisions
[07:38] Why it’s important to consider why you’re buying a car
[08:13] Why buying luxury car is not a problem — as long as you can afford it
[10:20] Things to keep in mind with a car purchase, including additional costs
[11:43] The risks of unexpected maintenance
[13:43] How to break down the true cost of a vehicle
[15:40] Deciding if you even need a car
[15:46] What percent of income should be allocated to transportation, but only if you’re saving enough money
[16:34] How everyone’s values will affect how they spend on transportation
[18:30] How to pick a car that aligns with your values
[23:05] What to do if you and your partner both have cars/car payments
[25:11] When you might need to just buy a hooptie
[26:23] The trick to get those dents fixed 😉
[27:23] Whether or not you should pay off your car when you come into cash
[29:40] Tips and tricks for saving money on vehicles and loans
If there’s one universal truth to take away from this episode, it’s that cars are a luxury at this point — especially new cars. The average cost of a new vehicle is $37,285, according to Kelley Blue Book, and the average used-car price was $20,200 according to Edmunds — and we think that’s on the low end. But those averages also don’t account for supplementary (or additional) costs associated with vehicle ownership. Costs like:
With all that in mind, it’s time to dig into what kind of vehicle you can actually afford.
The first question we think you should always ask yourself when you think about vehicle ownership is: Should you actually buy a car? We don’t care what the answer is, but it’s important that you ask it. And from there, we have a follow-up question: Can you afford it?
Here’s a general rule of thumb (meaning that it’s not a strict rule, so much as a guideline): About 15-20% of your income should be spent on transportation. Our one caveat to that? Only spend that if you’re already saving 20-25% of your income. If you’re not able to save right now in the double digit percents, you may reconsider your ability to buy a higher-end car — or a car at all. Instead, you might want to find a car that fits into the lower percent of that 15-20% range or get real comfortable with not having a car until you can pump up those numbers.
What if you can’t afford a car right now? Well, do you live in a city with transportation, do you live close to where you live and work, or do you have easy access to other modes of transportation (bumming a ride from a coworker, borrowing a car from a family member, etc.)? Uber and Lyft are also great options, but they can add up, so be careful with that. Considering all of these factors may help you find ways to go without a car until you’re more ready.
If you’re in a situation where you don’t have your personal finances in order, you may need to buy a hooptie. You know, a real junker car. Nobody loves having one, but they serve a purpose: saving you money so you can get your finances right.
Of course, if you decide you do want to buy a vehicle — and can afford it — the next question is: what kind?
The first question, when you’re in the market to buy a new car, is: “What matters most?” Comfort, amenities, luxury, environmental impact, etc. are all acceptable factors when considering a new (to you) car. There’s also another factor: status. If status is important to you, and you have the money to back it up, go for it. But admitting that to yourself first is key.
However, we think status comes with a price tag that a lot of people don’t really want to pay, so dig a bit deeper on what “status” means to you. Is it having all the bells and whistles of a higher-end car, but you don’t want the price tag or care about the brand name? Sometimes even the cheaper brands have the same amenities as higher-end brands, and you can spend a lot less on a Toyota than you can a Tesla.
If things like better gas mileage, electric power, or space enough for friends and family are important to you, decide how much that’s worth. And don’t be afraid to shop around. Buying a certified pre-owned vehicle is also a great way to get all the bells and whistles without losing a ton of money as soon as you drive a brand new car off the lot.
If you’re in a relationship, the question is likely: How do we manage two car payments? Because, the way the universe works, you will both need a new car at approximately the same time. It’s just a fact of life. But if you have a spouse or partner who can hold on to their car a little longer (or your ride is still going, albeit with less enthusiasm than before), you can stagger payments that way.
Alternating your car purchases is a good way to keep costs down, and to not pay double car payments. Of course, it might be possible to share a car between the two of you (depending on your situation) if you’re in a pinch, want to save the environment, or just save a few hundo a month.
One of the biggest questions we get is: “Should I pay off my car note if I’ve got extra cash?” As a general rule of thumb (remember, not a strict rule), we say: If your interest rate is 6% or lower, you don’t have pay it off before the term is up. We say that because your money is likely put to better use being invested and saved, because you can get high rates of return.
However, if your interest rate is over that percent, or you’ve been swindled by a bank or dealer, you may want to pay off your car loan or refinance. Refinancing your car with your bank or credit union can save you a ton of money on interest. But if you already have a really low percent — like 3% or lower — you’re sitting pretty.
We’ve purchased a few cars in our day, and so have our friends. In this episode, we pass on some of the wisdom we’ve learned from our own experiences, as well as theirs. These include:
The vehicle invoice is the dealer’s cost on the car, and we’ve heard that you should only pay about $1,000 over their invoice amount. You’d be surprised how much dealers make just by adding thousands of dollars to the top of their invoice amount, so don’t be afraid to ask to see the invoice.
Most of the time, dealers offer to finance your vehicle for you. Before you go with their rate, though, ask what the buy rate is. The buy rate is the interest rate the bank charges them, and the dealership charges more on top of that. This can lead to you pay 2% and more on your loan! We think half a percentage or more is all you should be paying.
At the end of the day, nobody can tell you which car, interest rate, or monthly payment is right for you. If you decide you’re ready for a new car, truck, or SUV, we hope this has provided some guidelines to help. Of course, if you’re looking for financial advice specific to your situation, you can always take our Toujours Planning Quiz below to see if we can help.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual.
What if you had a clear formula to help you figure out how much to save… while paying down debt and enjoying life? It is possible… when you know your numbers.
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