Learn How to Calculate (and Stay Within) Your Automotive Budget
For many people, purchasing a car can be a daunting task. It is a costly investment and should take a great deal of consideration as you could be driving the vehicle you choose for years and years to come. As a buyer, you have many choices when purchasing a vehicle including make, model, trim level, features, and more. However, the most important factor to determine before starting the car-buying process is your budget.
So, how much of your income should you really be spending on a car in order to stay financially stable? Continue reading to learn how to calculate your automotive budget, as well as reduce costs to stay under said budget.
Car Budgeting Calculations
Your salary, along with your debt and expenses, are the most important factors to take into consideration when determining your automotive budget. In particular, you may be wondering what percentage of your income should go towards your car payment. Learn a few budgeting calculations formulated by financial experts below.
The 15% Rule
If you are looking to be frugal with your car purchase, then you may want to consider the 15% rule. According to financial experts, you should spend less than 15% of your gross monthly salary on a vehicle. Meaning, if you take home $3,000 per month, then your car payment (in addition to other car expenses, such as insurance, gas, and maintenance) should all be under $450. It is important to note, however, that this rule does not take into consideration any debt or other expenses.
The 20/4/10 Rule
The 20/4/10 Rule is another popular car-budgeting financial guideline that takes additional factors into account. This recommendation suggests making a 20% down payment on a four year (or less) car loan, and keep your vehicle expenses under 10% of your monthly income. The length of your car loan is important to consider, as the shorter the loan time, the less interest is accrued.
The 36% Rule
A third budgeting recommendation that we suggest utilizing if you have other debt (i.e. mortgage, student loans, credit cards) is the 36% rule. This guideline states that you shouldn’t spend more than 36% of your gross annual income on all of your debts combined. Therefore, if you have no other debt besides your future car payment, you can spend 36% of your annual income on the vehicle. However, since this is not the case for most people, the 36% rule suggests examining your current debts, and calculating how much room you have left for a car loan. After completing these calculations, you can figure out how much your car payment will need to be in order to keep your total debt under 36% of your annual gross income.
Which Rule Should You Use?
It’s important to note that these guidelines are not set in stone and that you should take other factors into account. For example, if you have many other expenses or debt obligations, you may need to spend even less on your car payment in order to be able to afford it.
On the other hand, if you have minimal expenses and really value and spend a lot of time in your car, then you may be able to increase your budget. Individual lifestyles and priorities are different, so determine which rule works best for you!
How to Reduce the Cost of Your Car Purchase
Once you have decided on a budget, you can start looking for vehicles priced under that number. Here are some helpful tips on how to reduce the overall cost of your car so you can stay under budget.
Buy Used
There are many benefits to buying a used car instead of a new one. Not only will you be saving on the initial price, but the interest on your loan will be lower, as well as your insurance costs. Cars last much longer than they used to in the past due to higher quality parts and better construction. According to research by Car and Driver, the average car lasts about 12 years or 200,000 miles (300,000 for electric engines). This extension of lifespan makes used cars a worthwhile investment.
Trade-In Your Old Car
Another method to stay under budget is to trade-in your old car for credit towards your new one. This takes the hassle of selling your old car off of your hands and has many financial benefits including tax advantages. Trading in your old car will help you afford an upgraded vehicle while staying under your budget.
Financing
Last but not least, it is important to compare dealership financing options in order to get the best rate. Here at Battleground Kia, we offer competitive financing rates on a wide variety of new and used trucks, cars, and SUVs. For more information on the financing process at Battleground Kia, contact our finance team today!
Ready to Make the Purchase?
Now that you have established your budget and know how to reduce the cost, you can start looking at potential vehicles. Here at Battleground Kia, we would be happy to help you find the perfect car within your budget. Contact us with any questions about our inventory or financing options, and come by to take a closer look at any of our vehicles.