So itís time for your first car, or maybe itís just time to replace the current one and you want to do a better job budgeting for what is one of the biggest purchases youíll make in your lifetime. Either way, youíve come to the right place because what you donít want to ever do is find yourself in a situation where you can no longer afford your car payments. Car Pro Show Host Jerry Reynolds addresses that situation here
. In this article, we take a look at how you should budget for your vehicle purchase and its ownership costs.
How Much Car Can You Afford?
Many financial experts recommend spending no more than 10%-20% of your take-home pay on car expenses. A good rule of thumb would be 10-15% of your monthly take-home pay for your car payment, and the rest on ownership costs like those outlined below:
- Auto Insurance
- Currently the national average cost to insure a vehicle is $1,457. Insure.com
- Repairs, Including Tires
- Recommended Maintenance
- Transportation Costs Like Tolls, Parking
- Licensing/Registration/Taxes as regulated by your state
The 10-20% strategy wonít work for every budget, so itís important to study your own finances carefully and accurately to come up with the figure that works best for you.
True Cost of Ownership
The true cost of ownership can be difficult to tally. Ownership costs vary per car and a lot is determined by whether it is new versus used and how long you keep the vehicle. Where you live and its climate also matters in both maintenance, transportation and insurance costs. Road conditions play a huge role, too. If you live in places with poorly maintained roads full of potholes, youíre likely to end up with more flat tires and thus higher tire replacement expenses. Your age and credit score also impact things like your car insurance and loan interest rates, which factor into the equation. Thatís why there is no magic number that will be true for everyone, and why, again, you should look at your own personal finances, location and other mitigating factors when budgeting.
New VS Used
There is also the new vs used debate that many shoppers go through in their thought process. Which one is ultimately the best budget decision? That too varies per owner.
Sometimes a pricier new car will be more reliable, which will cost you more every month, but save you in ownership repair costs down the road. Whereas sometimes going with a budget or used model model could save you money initially, but net your higher repair and maintenance costs over time. Researching vehicle reliability is key is the latter case. In terms of new cars, remember that while new cars come with factory warranties, they usually donít cover general maintenance or tire replacements unless you buy an additional maintenance plan in the finance office to cover those costs for a certain time period.
In terms of insurance costs, new cars also typically have higher premiums over used vehicles. So youíll likely pay more in ownership costs for a new vehicle in that area.
AAA 2018 Your Driving Costs
Here is a general idea of how much it cost to own a new vehicle in 2018, according to the American Automobile Association
. In its recent Your Driving Costs
study, researchers found that the average cost to own and operate a new vehicle in 2018 was $8,849 per year (based on 15,000 miles driven.) The figure factored in the cost of fuel, maintenance, repairs, insurance, license/registration/taxes, depreciation and loan interest.
According to AAA, the vehicles with the lowest ownership costs are:
- Small sedans
- Small SUVs
- Electric vehicles
According to AAA, the vehicles with the highest ownership costs are:
- Large Sedans
- Medium Sized SUVs
As always, do your homework before making a car purchase and look at your budget closely. Itís also a good idea to check with your financial advisor if you have one to get personalized financial advice.