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My twitter feed keeps coming up with links to financial calculators framed around the question “How much car can you afford?”. This question makes me cringe because it’s totally the wrong question to ask.
This question starts from the assumption that you want to and should spend as much as you can.
You should absolutely live within your means, but that doesn’t mean you should live right up to your means.
One of the most crucial money lessons is to mind the gap; in other words the distance between your income and your expenses.
If you spend more than you earn, you’re in trouble. If you spend just less than what you earn, you’re in the rat race forever.
People who figure out what they “can afford” and spend that much don’t end up ahead - they end up scraping by.
People who are successful at beating the money game don’t ask a question like “How much car can I afford”; they ask “How much car do I really need?”
How much car do you really need?
To really answer this, you have to take a step back - why are you getting a car and what is it for?
The obvious high-level answer here is transportation but it’s not that simple. If you want to make sure you don’t overspend, here’s a list of questions to go through before pulling the trigger on your new ride:
What am I transporting?
Take a serious look at what your normal driving conditions are and think about what vehicle types satisfy those conditions.
Is this really what you’re doing day-to-day?
You might be shuttling 5 kids around town on a daily basis or you might be hauling furniture and lumber back and forth as you remodel and flip your new rental property.
If this is the case, a minivan or van may be a good fit for you.
Then again, you might just be driving from your house to work, the grocery store, and back home. If you’re the only one riding in the car, do you really need the ability to seat seven adults?
A common retort here comes from people concerned about the exceptions; as an example: “What about when I’m going golfing with friends? I need to fit them and their clubs…”
Don’t let the once-in-a-whiles take precedence over your normal life
I love my friends too but building your life around the exceptions ties up your money in places you can’t recover it from.
How many Uber rides would it take to make up the price difference between a subcompact and a full-blown SUV? Don’t forget to throw in the total cost of owning the car (maintenance and fuel economy).
You have a better job for that money - don’t tie it up!
How can I finance my car?
A few months back I was getting an oil change and I overheard a woman talking with a car salesman about financing the new car she was looking at. What I heard made me cringe:
“The 60-month loan with $2000 in rebates is probably the better bet; you’ll own more of the car if you trade it in before you pay off the loan, which is what 99% of people do anyway” (at this point the woman was nodding her head as if this all made sense)
Most people accept a car loan as a fact of life, blindly paying interest and digging a financial hole. Sadly, this woman didn’t question whether she’d be trading in her car in less than five years after buying it.
With all this in mind, maybe I can give a good answer on “How much car can I afford?”
However much you can pay in cash
Not that you should spend every last dime, but if you can’t afford to pay cash, you should consider whether you really need to buy a car at this point or if there are any other options you have instead.
Save up until you can pay cash in full - once you’ve got the car in-hand you’ll have trained yourself to have extra money you can now start putting into other savings or paying off your other debt
What do I value?
Presuming you have a good grip on how you plan to use whatever vehicle you buy and you know what you can pay for in cash, you’re in a good state to figure out where to add cost to align with the things you value.
We transport our kids in our minivan, so you better believe that the crash safety rating was at the top of our list.
We wanted to have a car with high miles-per-gallon for both environmental and financial reasons.
We also wanted a car with a reasonable total-cost-of-ownership; you won’t feel so great about that low sticker price if you end up paying tons in maintenance costs and repairs.
These were our top points, but yours could certainly be different.
If you love the technology in newer cars, consider renting one for a day so you can enjoy it without making the long-term commitment.
You’ll spend a whole lot less and still get a chance to see if the bells and whistles are novelties or if they really make your life better enough that they are worth paying for.
Identify the elements of a car that are most valuable to you from a functionality and finances perspective; rate each car you’re looking at on these and pay attention to the trade-offs.
How could I change my lifestyle?
Have you considered how you could change your lifestyle to change your answers to these questions for the better? Do you really need a car in the first place? Could you bike instead?
Could you take the bus, ride-share, or go down to one vehicle? Maybe you don’t even need to buy a car at all!
What does this car say about me?
This is one of the trickiest parts. We live in a world today that judges you based on the clothes you wear and the car you drive.
Cars are no longer just transportation devices; they are status symbols and tech toys.
So, as a savvy consumer, what do you do?
Ignore the judgments of those around you
You have to decide what’s more important to you - getting the nod of approval from strangers around you or living in alignment with what you truly value.
Your self-worth isn’t determined by what you drive.
The world of car-buying decisions is vast - new vs used, body style from subcompact through oversized SUV, features, safety, fuel economy, and brands.
Ultimately, nobody can tell you exactly what you should buy based on some formula.
Only you can understand your values and apply them to your finances. That said, here’s the four guiding principles to remember if you want to keep thrifty in your car purchase:
- Consider your other transportation options
- Buy for your normal driving habits not for the exceptions
- Don’t let others’ opinions of your ride be a factor
- Only pay what you can pay in cash
Good luck and keep thrifty!
Did you have a great/terrible experience with your last car purchase? Help others with what you learned in the comments below or find me on twitter