Determining How Much $ To Set Aside
Getting your dream car can become a reality if you follow these tips. The first thing to consider when getting a new car is that the amount of money you spend should not be limited to the loan you qualify for.
There are additional cost in owning a vehicle.
The 10% Rule of Thumb: your total transportation costs, which include car payments, gas, insurance, parking fees, maintenance (oil changes, breaks), car washes, etc…should not be more than 10% of your monthly net income.
So if your NET monthly salary is $2500, you should not spend more than $250/mo for your transportation costs.
According to Dave Ramsey, who is a debt consolidation expert, the total value of all your vehicles in your household should not exceed 1/2 of your household annual income. This means not spending $$ for that supercar 🙂 Ramsey also recommends to set aside 20% of your net monthly income for investments.
Pay Cash Or Installments?
Let’s take a look at the pros and cons of paying cash for your car vs making monthly payments, AKA getting a car loan. I recommend setting aside cash and paying cash for your car IF your credit score is not at least 750 or above. Having a 750+ credit score will put you in “Tier 1” when borrowing money for a car loan, therefore your interest rate will be lower and borrowing money will not cost you too much.
If, on the other hand, your credit is less than stellar, you should try and boost your credit first.
If making car payments, try to put at least 20% as a down payment. Also, don’t take up loans of more than 4 years (48 months). This will limit the amount of interest you will be paying.
How To Save For A Car
Having cash laying around in your checking account can be risky, as you might (will) be tempted to spend it, and then justify the spend as necessary, where, in most cases, it wasn’t.
The secret to save money for a car is to allocate a set percentage every month to a SEPARATE, high-interest earning account. I do not recommend investing this money in the stock market because buying a car is a short term goal, and the stock market can be extremely volatile in the short term.
I recommend investing this money in short term investing, like the app Acorns. This is an automated investing app. You can link your debit or credit card and each time you make a purchase with that card, the amount will be rounded up to the next dollar. After reaching $5 in round ups, that $5 will be automatically deposited into your investment portfolio.
This is a great way to basically use your “change” wisely. By investing it!
What About My Current Vehicle?
If you want to get a new car, chances are, you will have to part ways with your current vehicle. But remember, your goal is not necessarily getting a new car. Your goal is to save on transportation costs, and used that saved money for investment.
Be sure to include maintenance costs in your transportation budget. Often times people overlook this. Maintenance is necessary to keep your vehicle safe to drive, but also to keep its value when selling the car. A good maintenance record (keep those service receipts!) is a great way to show the potential buyer that you took care of the vehicle, and therefore you are a trusted individual whom to buy from.
When selling your car, first ask your family and relatives, to see if anyone is interested or needing a car. You might find your buyer right there. If not, just post an ad on Craigslist (with clear pictures) and a detailed description, along with mentioning the service records and what maintenance has been done. This will boost your chances to sell your car quick.