Chances are, buying a car will be the second biggest purchase you ever make. Besides buying a house, cars are one of the most expensive things we own, unless you have a hobby that requires expensive equipment. Sifting through pictures of cars and descriptions online can feel overwhelming. Showing up at a dealership with your budget in the back of your mind can feel like a catch 22. But don’t worry, here are some tried and true car buying tips that anyone, even someone who has never bought a car before can take to heart.
Budget in Mind
First, start by saving and having a budget in mind. Do you really need a car? What will the primary purpose be for the car? How many seats and what features do you realistically need in a car? If you need car seat configurations, make sure this vehicle allows for the amount of car seats you need and you can put them where you need them! We learned this one the hard way!
My goal is to never finance a car but always pay with cash, as in most cases they are depreciating assets. This being said, if you do not have the means to pay cash for a car and need one now, make sure your monthly payment plus repairs, insurance, and license and taxes are within your budget.
How Much Car Can I Afford?
There are lots of different philosophies when it comes to this, but I have two personal views on the matter.
- I will never buy a new car until my net worth is over $1M. There’s nothing intrinsically wrong with buying a new car, but the amount of depriciation is significant when driving it off the lot. Until I have the money in the bank to take that kind of a hit, I’m going to stick to used vehicles.
- The total value of all of your vehicles put together as a family should not exceed 35% of your annual household income. That means if you make $100,000 and are a two-vehicle family, the value of your vehicles should not exceed $35,000, or roughly $17,500 a piece. If you have one vehicle that is more of a drive-a-few-miles-to-work and sit all day kind of vehicle and one that is more for family driving, maybe you spend a little more on one and less on another.
How to Find the Right Car
Begin by doing your research. Kelley Blue Book is consistently known to provide a great basis for research when comparing vehicles, features, and prices. After you’ve done some initial research, start by letting friends and family members know you’re looking. The more people you have helping you look or keeping an eye out, the better. You may have someone in your circle who is looking to sell something you may be interested in also.
Next, shop around and test drive. Go to dealers, look on sites like CarGurus or Carvana, and don’t be afraid to go old school and call a number on a sign in someone’s front yard. The less rushed you are, the more you can hunt for a great deal. If you’re like most, you will keep your car anywhere between 6-11 years, or maybe even longer! Since this is a long-term purchase, the last thing you want to do is feel rushed or pressured into something. If you test drive a car, you do not have to buy it. Please walk away if it’s not right!
Once you’ve found the right car, in the right budget, seal the deal! Often, sticker prices are negotiable. If you can’t negotiate on price, negotiate other add-ons like free car washes or new tires before you purchase. Don’t forget to negotiate your trade-in value as well if you are trading in your car! Do some research before you go to know how much your vehicle should trade in for!
If you’re buying a car from a lesser known seller, pay to have it inspected during your test drive. Don’t forget, all cars, especially used cars, require maintenance. Make sure to think about maintenance that might need done right away during the negotiation process and use that to help you lower the asking price. Don’t forget about license and registration fees that will have to be paid as well.
Remember, cars are almost always a depreciating asset. This means whatever you pay today will probably be more than the car is worth tomorrow. Don’t throw your budget out the window by locking yourself into more car than you can afford.
How to Save for a Car
Since cars are the single most expensive purchase we make, other than our houses, saving for one can feel overwhelming. But it doesn’t have to be. The amount of car you can afford comes down to you saving the money yourself or paying interest on a loan. Just think, if instead of a $500 a month car payment, you can save that $500 a month at 7% interest for 5 years, you’ll have almost $36,000 after 5 years to buy a new car. That’s a nice car! But if you take out a car loan and want to pay $500 a month, you can only afford a car worth just over $24,000 (assuming an average used car 9% interest rate over 60 months). That’s a $12,000 difference in cars, when you save your own money and earn compound interest vs. pay someone else compounding interest.
So if you’re in the market for a new-to-you car in the next 3-5 years, start saving now! Then you’re the one compounding your savings instead of locking in compounding interest. Don’t worry if you can’t save thousands a year! Even $600/year or $50/month compounded at 7% interest is over $4,300. In my area, I can get a 15 year old car with under 90,000 miles for that price if I shop around. That’s if I have nothing to trade! If I have value in my current car, I could probably get an even nicer ride.
Conclusion
Budget. Save. Research. Shop and negotiate. Plan for other expenses that might arise. Then, celebrate and drive off into the sunset in your new ride!
So, what’s your plan for your next car purchase? Remember, if you fail to plan, then you plan to fail.
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