How dreamy is a new car smell? There is truly nothing like it: leather seats, new carpet, a shiny new dashboard, and endless road trip possibilities. I love new cars, but I hate buying a new car, or any vehicle, in general. It always seems like you aren’t getting a good deal - even if you get one. If you go the new route, you have a salesman you don’t want to deal with, a negotiation period that is treacherous, and the dreaded financing chat. If you go the used route, you aren’t sure what you’re getting is what is advertised. You don’t know what’s under the hood, but it’s better than buying new — enough of this madness.
A car is something that is socially acceptable to overspend on. And because we drive our car to work, to see our friends, and to go out and about, we think it is an extension of ourselves. No one wants a clunker, but so many people are spending 100% of their income on a brand new car that they can't afford! These 2018 statistics may jolt you into reality:
1. Nearly half of Americans have an auto loan (45%)
2. The average loan amount is $31,099 (the average income in America for an individual is $31,099)
3. The average interest rate on a car loan is 8%!
Could cutting out your car payment save your financial life? The answer is yes.
Let's get down to reality unless you can pay cash, under no circ*mstances should you be purchasing a brand new car. And even if you can pay cash, you should still buy used because there are so many other people that lease or can't afford a car, you may find a year or two old vehicle for an absolute steal! Simply put a car isn't worth it. Why? Because cars are liabilities.
A previous article I wrote discuss the difference between an asset and a liability. An asset is something that appreciates over time, a car is something that depreciates over time. A car is a liability and liabilities should be lessened as much as possible.
So, there's my argument. Car buying is a huge problem, people are spending 100% of their annual income, they are transferring their worth into the car they are driving, and they mistakenly think that their car is an asset. So, this car buying is going to be based off of the normal American’s circ*mstance. This will be based on using 10% of your income and due to that will be about purchasing a used vehicle.
Now, let's get to the good stuff.
1. Set Your Base Budget
Your car should be 1/10th of your gross income. So, if you are the average American and make $31,099 a year, your car should be no more than $3,100. Think this is too low? Save your income or get a side hustle to earn more to afford the car you want. The truth is that you CAN find a car in that range, it is not impossible and in fact, there are many cars in that range. It just isn't socially acceptable to drive a car in that range. That is something you will have to address head-on if you want to get financially secure.
If you need ideas, here is a great visual from financialsamurai.com:
2. Factor in Other Costs
Buying the car is only half the battle, now you have to maintain it and insure it. The average car insurance cost is $120 per month. Then you have to get your oil changed which is another $30 - $90 and put gas in it, wash it, replace the wipers, and get new window washing fluid. It is a LOT — the more expensive the car, the more expensive the maintenance. The average cost to maintain a sedan is $10,000 according to AAA. If that doesn't make you want to faint, I don't know what does. Remember this when you are tempted to go outside of your original budget.
3. Choose the Car
Pick out a car before you pick out a car. Have an idea of the vehicle that can fit in your budget and have at least three options. This way, you won't get overwhelmed by this process. To get started, check out Edmunds, TrueCar, Cars.com, and AutoTrader. There are so many used cars on the market that it can be easy to get sidetracked. Once you have the vehicle that fits your safety standards, aesthetic standards, and budgetary standards, then you look for one.
4. Decide Where to Buy
When you are buying a used car, you have many options where to buy. The above websites to gather information about vehicles are also a place where you can purchase a used car. However, if you want a more regulated experience, you can search your local dealerships for certified pre-owned vehicles or used car superstores. If you decide to go the private seller route you may not have as many protections is something goes wrong. They are usually sold in as-is shape so do your homework and make sure you ask for a carfax.
5. Update Your Insurance
The last and most important option is updating your insurance. This is something that can be overlooked while you’re feeling excited about your new car! When you finally purchase your vehicle, you want to make sure you shop around and don't just stick with your usual insurance provider. You can save hundreds of dollars, if not thousands if you shop around for your insurance.
A car is simply a means of transportation, not a status symbol for money you don’t have. Remember this when thinking about your retirement or your family’s future, or your own hopes and dreams. Would you rather spend an entire year’s salary plus $10,000 annually to own a car? Or would you rather reach other dreams? If you can afford a luxury car and it fits in your budget, go for it! I am all for rewarding yourself after you have achieved success. I am not for buying a car you cannot afford that will stop you from becoming financially free. Don’t be like the rest of Americans. Put your ego aside for a few years and reward your future self.
