Owning a car comes with numerous benefits. You get the freedom to travel and explore different places without relying on others. In case of an emergency may be at night, you don’t have to disturb your neighbors or wait for an ambulance. You can drive the sick relative to the hospital without wasting time. It’s convenient since it’s available whenever you require to attend somewhere in a hurry and it also saves time.
If your family is big, going on a holiday using public means can be expensive and inconveniencing. You can’t even carry a pet. You are also limited to the luggage you take. With a big car, you can bring the family and all the things that you require.
Unfortunately, you have to factor in the cost. Whether you want a second hand or a new car, there is the initial cost of owning one. You might ask 'how much should I spend on my first car?' Remember, you have several responsibilities to fulfill. If you are the breadwinner and leaves in a rental, house rent is waiting at the end of the month. Other costs include; school fees, shopping, and other expenses. Once you get the car, there is fuel, insurance, service, among additional charges. You also need to invest and own a home and secure your future.
It’s vital to consider how much you earn annually. It gets worse if your income is not consistent. You can’t afford to spend your entire paycheck on the car. Remember a car is not an emergency. You can wait to buy when you stabilize. Unlike the land, a vehicle keeps on depreciating. Once you get bored, you don’t expect to resell it at the same price. If you must buy immediately, here are the costs you should prepare to meet.
Car Costs You Can’t Avoid
Fuel cost is directly proportional to the usage. So how many miles do you travel per month? If you divide that figure with your fuel economy rating then you multiply by the market price of a gallon, you will know how much you spend in each month. It’s good to evaluate if that cost is manageable.
Maintenance and Repair
Is the car still under the factories warranty? You are safe. If it’s not, get ready to incur oil change cost, changing tires, timing belts, warning lights, among other expenses. Regular maintenance and car servicing is another cost you need to factor in.
As indicated earlier, the more you use the car, the more it depreciates. After buying a new car, it will lose its value by 20 to 30%. For the next five years, the depreciation rate is 15% and 18%. Unlike fuel, depreciation is not a cost that you will incur monthly. It’s not a cost that you have much control either. When reselling, you will feel it.
Car registration fee, MOT test checks, vehicle excise duty(VED), car insurance, breakdown cover, parking fees, and among the expenses you need to get prepared to face. With these costs in mind, how much should you spend if you want to own a new car?
Remember, car dealers, are interested in making a sale. It’s not their business what you do with the car after they sell it to you. They don’t care how much you make annually and if you can afford to maintain it. So, be wise and buy a car that suits your budget. No one would hate to drive a new Mercedes Benz. But the problem is, can you afford it? Before visiting any car dealership, here are some of the budget rules that should guide you.
How Much Should I Spend on My First Car - The Basic Budget Rules
You can enjoy or get depressed after owning a car, depending on how well you planned. If you buy an expensive car and spend beyond your means, you will be committing financial suicide. You may end up in depression. To avoid that, consider these golden budget rules.
a. 1/10 RULE
So, how much should I spend on a car if I make 100,000 dollars annually? According to the 1/10 rule, you are not supposed to spend more than 10% on your annual income on a car. Does that sound crazy? Consider this, in that income; you will incur maintenance and servicing costs. Other costs include the opportunity cost. If you invest half of your income in a car, imagine if you could have invested 40% on the stock market? The monthly returns could boost you.
An expensive car also comes with stress. You are worried about what would happen if someone messes with it. Even in bed, you dream and imagine of thieves stealing it. The level of stress for someone who spends his entire paycheck on a car is high compared to someone who planned and only used only 1/10 of the income on the vehicle.
Again upon buying an expensive car, your statues automatically change. You will have to change your wardrobe to fit in that class, adding to unnecessary costs. Even as the vehicle starts depreciating within a short period, you may begin to regret the foolish decision you made. You can avoid that, by sticking to the 1/10 budget rule. The best decision would be to go for a 3-5 years old economy car.
b. The 36% Rule
The next question is, how much should I spend on a car if I make 60000 dollars annually? You have to consider your debt level. Are the 60,000 dollars gross or net? The 36% rules warn you against spending more than 36% of the gross income on the total debts that you have.
So when buying a car, you should put into consideration all the other debts. Are you servicing a mortgage? Do you have a student loan or even credit cards? If whatever you pay annually is above 36% of your gross income, use public means, and avoid a car. But if you don’t have any other loan other than the new car loan, apply the 1/10 rule. You can take a 3-5 years old economy car.
c. The 20/4/10 Rule
According to the 20/4/10 rule, how much of your income should you spend on a car? Note that the rule applies to those who want to pay a down payment then pay the remaining amount over a few years.
Before walking to the dealer, take into account the 20/4/10 budget rule. You can pay a down payment first then clear the balance later. According to the rule, only buy the car if you can afford to make a down payment of 20%. You should be able to clear the balance in 4 years or even less. The monthly payment plus all the car expenses, including insurance, should not exceed 10% of your total income.
Remember clearing a car loan within four years, will save you from paying a high-interest rate. You wouldn’t like to spend a car for over ten years. The faster you clear, the better. Unfortunately, the rule does not put into consideration the other debts that you may be having.
Tips for Buying a Car
The rules above will guide you in deciding whether you will go for a second hand or a new car. The tips below will guide you on how you can save the cost when buying a car. They include;
1. Take A 2-3yrs Old Car
Once a brand new car hits the showroom, it’s expensive to purchase. Convincing the dealers to sell it at a lower price will be an impossible task. But as time goes, the same car will start depreciating. In 2-3 years, you can buy it at a reasonable price hence saving on the cost.
2. Save For The Car
Loan repayment can be stressful, especially if your income is not consistent. The accumulating interest in the back can be stressful as well. Since a car isn’t an emergency and there are other alternatives of means of transport, take time and invest. Save money for the type of car that you want. Once the money is enough, buy cash.
3. Avoid Huge Loans
Car dealers can be very convincing. They may sell the car above its actual value. After taking a huge loan, even if you decide to resell the car to clear it, the money will not be enough. If insurance compensated you in case of an accident and you choose to pay the loan, the money would not be enough. So take time to compare different prices, and asking for advice. Pay a down payment and avoid taking loans with huge interests.
Buying a new car is exciting. After all, how will you prove to the society that you are on another level? Unfortunately, it comes with several costs of which if you are not careful, you may end up getting stressed up. It’s essential to consider the budget rules. Consider your total income, the percentage you total loans takes on your income. If possible, pay a down payment of 20%. Also, repay within four years. Each month, the entire car cost, including monthly repayment, should not exceed 10%.