Buying a car is an extremely exciting process, if you take away the time that it takes from actually picking your car to driving off the lot with it.
Man that buying and financing process is long and annoying (industry disruption idea, hint hint).
I’ve created a simple 3-step car buying guide as a checklist to see if you really should make that upcoming car purchase. As a bonus at the end, I also decided to cover if you should buy or lease the car.
The average monthly car payment in the U.S. is $554. If you can stomach that every month, more power to you, but you have to keep your other debts and personal finance goals in mind as well.
- 1 I want to buy a car I can’t afford
- 2 Don’t buy a car until you..
- 3 1. Can you pay it off in 4 years?
- 4 2. Are the car payments less than 15% of your income?
- 5 3. Is it the car you need for your lifestyle?
- 6 Bonus: Should you buy or lease a car?
- 7 Bonus 2: Always pay extra on monthly car payments if you can afford it
- 8 Conclusion
I want to buy a car I can’t afford
The issue these days is that most people can afford a car, but you choose a car that you don’t need to impress others. You’re the one stuck with the high monthly payments, and it’s added stress.
Did you forget that the brand new Benz that you just bought requires premium gas? No more 87 unleaded for you, you’re paying the top 91 premium gas everything you get to the pump.
When it comes to maintenance, it’s been said that yes imported cars do cost more when doing maintenance, but that the parts tend to last longer. Doing my research here, I have found answers for both sides.
From my personal experience, we do one German and one Japanese car, and while both do cost more to maintain during servicing and gas, they do seem to be well built.
Let’s get into the core of this right away, and see if, based on your unique situation, how much car you can really afford.
Don’t buy a car until you..
Have some of your money invested in assets!
Whether it’s a CD ladder (more on that in another post), stocks, bonds, or any other asset, make sure you have invest in some assets before you buy a car.
The financially literate buy a car differently than others.
I remember meeting a family friend a few years back, he does well and owns some properties. He wanted a new SUV for the family, to replace their older one, and was going to buy a fully loaded Volvo SUV.
Regardless of how much it cost (probably around $60k), I was blown away about how he was going to pay for it.
He had invested in assets for some time, where the dividends and stock value growth were enough to pay for his car monthly payments.
He had planned it out years before, that he would keep investing, and the growth would pay for his toys.
Investing in assets that can then help pay for your car is the wisest thing you can do. The hard part here is having patience to delay the car purchase for a year or two if you’re just starting out.
I just talked to him recently and he bought his wife the highest iWatch you can buy (around $1,200) all from this strategy, nothing came out of his pocket. 🤯
1. Can you pay it off in 4 years?
We bought our last family car towards the end of 2019, and I was surprised to see how long they’ll give you a loan for a car these days.
We had an option to “lower our monthly costs” by going for a whopping 72-month car payment loan. That’s insane.
Doing my research, I even found a 97-month loan, what the heck?!
Honestly, we all have different situations. Someone you talk to might say you should only buy what you can pay off right away.
That’s all well said, but we have bills to pay and personal finance goals to hit, so we want to spread out our income to different things.
So that being said, I would recommend that you set yourself a maximum limit of 4 years or 48-months.
Doing this, you stay in the mindset that you have the intention to pay off this car soon, and hopefully drive it for years after that with much lower expenses.
By picking 4 years as the limit..
- You also reduce the total cost of your loan. The longer the loan, the more the bank or dealership gets.
- You get a higher monthly payment that you can reference with my next point to see if you can really afford it. Don’t get fooled by the dealership when they sit you in a luxury car, and “help” you afford it by stretching out the loan.
Stick to the 4 year maximum loan period to get a car that you can afford.
2. Are the car payments less than 15% of your income?
I just mentioned that you should do a 4-year maximum loan period. Doing so you’d get a higher monthly payment than if you stretched it out longer.
Take this number, let’s say its $459, and see if that monthly car payment will be less than 15% of your monthly income.
Whenever I buy a car, I even go lower to below 10%. I work for myself, and income can go up and down every month, so I keep that in mind when adding this to my monthly expenses.
In the $459 example, you’d want to bring home at least $3,100 a month to be under the 15% rule. If you make more than that, great!
If you’re lower than that, you need to rethink things. Before going to the dealership, I would recommend you do this exercise.
- Take your monthly salary and multiply it by 15%. For this example let’s say your salary is $2,500 a month, and the 15% of that is $375.
- Now, this $375 is what you can afford max on a monthly basis. That’s it.
- When it comes to how much car you can buy, multiply the $375 by 48 (for the 4-year loan period) which gives you $18,000. That’s the max car you can buy.
I bet that the $18k looks way to low for you right? We’ve been well primed by car companies to think that we deserve the fancy car in our 20s, so it’s easy to understand why we all think “Can you even get a decent car for that price?”.
If you want to not have a car purchase weigh you down with debt, it’s smart to keep the 4-year and 15% rule in mind. Your life is different than mine, so you can adjust as needed, but I wanted to give you the training wheels, along with my experience & research to show you what would work best.
If $18k is too low for the new Lexus you were looking at, why not buy it used with fairly low mileage and 3-4 years old?
Cars around the 3-4 year old time period tend to be a goldmine for used car buyers. People who buy cars often tend to get bored of them after 3-4 years, and if you find one where the owner kept it well, you’re in luck.
So remember the 15% rule, let that be your absolute maximum. Do the exercise I just shared above. If the total car payment number is not as high as you hoped, consider buying used!
3. Is it the car you need for your lifestyle?
This is where the car ads really get you. You’re in your 20s and just got a decent paying job, and you’re riding the corporate ladder. Why not get that BMW 3-series right? You can afford the promoted monthly payment.
If you read everything I said, you’ll know that most of those promoted monthly payments mean you get a really long loan period, meaning more loan fees.
This 3rd point is up for discussion, but I know many people who buy a car that they didn’t really need. Did you really need 3rd row seating? Did you really need AWD? What about that 15-speakers BOSE system?
Remember that a new car can lose 20-30% of its value in the first year alone, is it worth buying the car you have in mind?
I’m guilty of wanting all the nice bells and whistles in my car, I would just advise to cut out what you don’t need and only get necessities.
Quick example, I told you we bought our last car at the end of 2019. We live in a mobile age, and have unlimited data. So I made sure that navigation wasn’t included in the car, but that it had bluetooth.
Doing that saved just under $2,000 from the total car payment. What’s even better is that the Google Maps on your phone is updated constantly, whereas the navigation in the car requires manual updating (and it costs money).
We also didn’t care about a sunroof, in our past cars we barely opened them. So we also made sure to not have that as an added cost.
Look at your situation, are you single or are you married with kids? Get a nice car that you deserve in your current situation, but also make sure to tweak your needs so you remove any “fat” from the car.
Bonus: Should you buy or lease a car?
This one’s difficult honestly.
My opinion is always to choose to buy the car. The goal is to pay it off in 4 years, and own it outright for several years after, so that you really get the value out of the car.
Leasing is almost always not a good option in my opinion. It’s a way for dealerships to get you in an expensive car and lower your monthly expenses.
In a few years, you return the car (or choose to buy it then), and start the cycle all over again.
Pros of leasing
- Lower monthly payment.
- Usually no down payment.
- Sometimes better incentives like free oil changes and other perks.
Cons of leasing
- Mileage restrictions, usually 12k a year.
- Usually higher insurance premiums.
- Expensive termination fees if you want to get out of your lease before contract period.
- Gotta pay for all the wear and tear when your lease period ends.
I digress though, everyone’s situation is different. If you’re always moving for your career every few years, and would rather keep your belongings minimal, it might make sense to lease.
The goal here in step 3 is to sit back and think things through before you buy a car.
If you did the first 2 exercises, and started thinking about the car you really needed, and realized that 3rd row seating isn’t needed, you might have just removed those type of cars from your watch list and reduced the car cost by $8,000.
If you want to do an exercise, use this car lease calculator from Cars.com, to see if a loan or lease is best for you.
Bonus 2: Always pay extra on monthly car payments if you can afford it
When you buy a house and make monthly payments, you have to let the bank know how much is going towards the principal.
With your car payment, you can just add $50 or $100 every month and it will go towards the principal payment.
This can make it an easier process for you to add more towards the required monthly payment, so you can pay off your car quicker.
I almost always add $50 at least to the car payment, but another idea could be to just round up to the next hundred dollar value.
If your monthly payment is $548, try to make $600 payments every month.
If you can do even more, go for it!
Figuring out how much car you can afford is easy, you just:
- Limit the total car payment loan to 4-years
- Make sure that the monthly payment isn’t over 15% of your monthly income.
- Make sure that the car has only the things you need, removing the extra.
The last part is usually the hardest, the emotional part of buying a car. Everyone want’s tv’s in the car and fancy autotainment system, but know that you might not need all of it.
Get creative like I did, when I shared how I removed the $2,000 navigation feature and used bluetooth to use Google Maps from my iPhone instead.
I hope this post was helpful, i’m sure there are many other questions running around in your thoughts. Please ask away below and I’ll make sure to reply right away.