What Car Can I Afford?
Intro
“What car can I afford” sounds like a silly question, right? When you look at your finances, it should be simple to derive a budget for a vehicle. If that were true, then I wouldn’t have wealthy friends scared to spend more than $10k and not-so-wealthy friends getting into car-sized financial crises. So how do you measure affordability? There are many ways, but I am a fan of groups of three, so let’s just start there.
1. Affordability in Your Income
If you’re buying a car, you’ll likely do one of two things. That is, you’ll either finance or you’ll pay outright. If you’re financing, I’d recommend choosing a percentage of your net take home pay per month and use that as a rule for your monthly payment. Many creditors use gross income as a way to measure credit line, but since you don’t take home gross pay, stick with net pay in your calculations. Decide on a chunk of your monthly take home pay that doesn’t make you lose sleep at night. Then, if you want to be extra cautious, make sure you’ve got an amount equaling three of those monthly payments tucked away in a savings account somewhere. This ensures that if you (for some reason) aren’t earning money for a little while, you won’t get your car repossessed due to missed payments.
If you’re paying outright, I’d recommend choosing a percentage of your savings to pay for the vehicle. Don’t dump your entire bank account into a car just to avoid a monthly payment. If a monthly payment isn’t your jam, that’s cool. Save more, so that you aren’t left with zero in the bank account when you buy that car. Why? Well, because emergencies happen. Car emergencies, house emergencies, and medical emergencies all happen. Odds are, you’ll need money for those when you least expect it, so it’s good to have some stored away!
By the way, if you want to estimate some car payments without getting your information sent to some dealership, you can use the tool below:
2. Affordability in Maintenance
At this very moment, there is a Porsche Macan sitting on Facebook marketplace for about $30,000. To me, this is a very attractive price for a very attractive car. I’d like to buy it right now, but I have a problem: maintenance cost. When a dealership sees that Porsche, they don’t see a $30,000 economy car, but a high-performance luxury car that was once twice that amount! Maintenance is a relatively easy thing to research. Below are some sites you can visit to estimate the ownership costs of vehicles:
This isn’t me saying you need to go and get the car that’s cheapest to maintain. What I am saying is that you need to be aware of the maintenance you are getting into. Once you know that, you can measure it against your finances and what’s reasonable for you and your family.
3. Affordability in Insurance
It is shocking how expensive it can be to get coverage on a vehicle in 2024. Rates are high for my family, and we have a near spotless driving record and pretty bland cars at the moment. Oftentimes, the price of a car can be super great and then you start talking about insurance. At that, if you are financing, you are required to get full coverage, in most cases. So how do you figure this into your calculations? The best way I’ve found is to gather a list of vehicles you’re interested in and then call your insurance agent. Make sure you have the year, make, and model handy and then start writing down quotes for each vehicle. Below is a handy spreadsheet I’ve made to make this process easier for you to organize.
https://docs.google.com/spreadsheets/d/16cofyc413SPDd3CW0RkaopmQ11ObktVxW6WDGO3kcPM/copy
Conclusion
Affordability in a vehicle is complex. Ultimately, it is up to you and your family to decide what the best vehicle-related financial decision will be. Strategy is necessary for every step. Get a plan around how you plan to pay for the car, how you plan to maintain it, and how you plan to insure it. If you can wrangle those three things, you’ve done very well. It has saved my wife and I a lot of trouble to think about our finances in those ways before diving into a buying decision as huge as a car.
Need to talk more about car buying and affordability? Feel free to reach out to us at thecarformeblog@gmail.com for any questions related to this!