One of the biggest mistakes people make when vehicle shopping is basing their decision on the monthly payment. This seems like a logical place to begin as you contemplate your vehicle choices and financial terms, but a vehicle purchase involves much more than simply the monthly payment.
In fact, to determine "how much car can you afford," you should consider two main items: the total cost of car ownership and your other existing monthly expenses.
Let's start with the total cost of car ownership. Some financial experts say your car payment should be no more than 15 percent of your monthly take-home pay. Why? Well, the payment—lease or finance—only addresses the cost of the car payment. What many people don’t factor is there are other related vehicle costs such as: fuel, insurance, maintenance, annual registration fees, and possibly parking and/or tolls. These items, and maybe others, should be part of your decision.
Do your research and understand the cost implications for different vehicles. Usually, a pricier model means a more expensive insurance premium, maintenance costs, and higher-grade fuel. A new, sleek model may look pretty, but remember to think with your head, not your heart, before you commit. Sites like Edmunds and Kelley Blue Book are great resources to uncover some of these details before visiting the car dealership.
Your second consideration should be knowing the other existing monthly expenses you need to manage. Do you have a mortgage payment or rental fees? How much credit card debt do you have? What are your monthly food expenses? Are you paying off student loans, or paying for childcare? Monthly expenses will look different for everyone, so it's important to review your budget and decide what your comfort zone is for an auto purchase. Make a list of your existing financial obligations and add the "total costs" that you would take on with a new vehicle purchase. Also, be sure to make room for a little “rainy day” money for life’s unexpected moments.
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