The cost of a car payment has risen steadily over the last two years, with inflation not letting up any time soon on a family’s auto budget. It’s not unusual for a new car to cost the same as a small apartment.
And since everyone’s financial situation is different, it’s important to tailor your car budget to fit your unique circumstances. In this blog post, we’ll show you how to calculate an auto budget that works for you.
Know Your Income
The first step in budgeting for a car is knowing your income. This includes your regular paychecks, any side hustle earnings, and any other money you might have coming in (e.g., alimony, child support, etc.).
Once you have a clear picture of your income, you can start thinking about how much you can realistically afford to spend on a car. It’s no secret that cars are expensive.
In fact, the average price of a new car is now more than $48,000! For many people, that’s more money than they have on hand, which means they need to finance their purchase with an auto loan.
And while there’s nothing wrong with that, there is something wrong with overspending. Here’s why you should be mindful of “how much car” you can afford.
You'll End Up Upside Down on Your Auto Financing
If you spend more on your car loan than the car is actually worth, you’ll end up “upside down” on your loan. This means you’ll owe more to the bank than the car is worth, which can be a real problem if you need to sell or trade-in your vehicle before the loan is paid off.
You Could End Up Defaulting on Your Car Loans
If you can’t make your monthly payments, you could end up defaulting on your loan—and that would be a major problem. Not only would it damage your credit score and make it difficult to get approved for future loans, but it could also lead to legal trouble and wage garnishment.
Less Money for Other Expenses
By overspending on your car loan, you’ll have less money available for other expenses like food, housing, and utilities. This can put a real strain on your finances and create more stress at home.
Consider Your Expenses
Your next step is to look at your current expenses and figure out what you can cut back on to free up some extra cash for your car budget. Do you really need that expensive coffee every morning?
Could you cook at home more often instead of going out to eat? Could you get rid of your gym membership and start working out at home? Every little bit helps when you’re trying to save up for a car.
That said, trying to save money can feel like a never-ending uphill battle. But if you focus on cutting your big expenses first, you’ll find it’s much easier to free up money in your budget for things like a car payment. Here are a few tips to help you get started.
Focus On Your Housing Costs
Most people’s mortgage or rent payment is their biggest monthly expense. If you’re struggling to make ends meet, take a close look at your housing situation and see if there’s any room for improvement.
Could you downsize to a smaller apartment or condo? Refinance your mortgage? Get a roommate? Even making small changes can free up hundreds of dollars each month that you can put towards other expenses—like a car payment.
Cut Back On Luxuries and Unnecessary Expenses
Take a close look at your spending habits and see where you can cut back, even if it’s just a little bit. If you have expensive taste, try switching to less expensive brands or cutting back on how often you indulge.
If you have subscriptions or memberships that you don’t use often, cancel them. You might even consider getting a watchlist app on your phone to help you keep tabs on the shows and movies coming to streaming applications each month.
Becoming more purposeful in what you watch could save you $100-$200 per month in subscriptions without actually missing out on anything. That’s a good portion of your car payment right there!
Create a Savings Plan for Big Purchases
Saving for a large purchase, like a car can feel overwhelming. But if you break it down into smaller goals, it’ll be much more manageable—and much less painful!
Figure out how much money you need to save each month to reach your goal, and then set up automatic transfers from your checking account into a savings account so you don’t have to think about it (or be tempted to spend the money instead).
Before you know it, you’ll have the cash on hand to buy the car of your dreams—without going into a lot of debt! Or, you can put down a nice downpayment to lower your monthly and improve your terms.
Determine How Much You Can Afford to Spend on a Car Financing
Now that you know your income and expenses, you can start thinking about how much you can afford to spend on a car payment each month. A good rule of thumb is to not spend more than 20 percent of your monthly income on your car payment (including insurance, gas, and maintenance).
So, if you make $3,000 per month, your maximum car budget would be $600 per month. Some of the more careful among you may wish to calculate that solely on your primary revenue stream.
However, side-gig workers with consistent revenue might feel a bit more adventurous. As long as you can count on the money coming in, feel free to include it in the mix.
Mastering the Auto Budget Means Dependable Wheels at a Price You Can Truly Afford
Calculating an auto budget doesn’t have to be complicated or time-consuming. By following the simple steps outlined above, you can easily determine how much you can afford to spend on a car payment each month.
And once you know what you can afford, financing a car becomes that much easier. Are you ready to take that next step toward the car of your dreams? Apply today to see what your next ride should be!