How Much Should I Spend on a Car?

How Much Should I Spend on a Car?

The sad thing about cars is that like boats and diamond rings, they’re depreciating assets. As soon as you drive yours off the lot, it immediately begins losing value. Some people are lucky enough to live somewhere with a reliable public transportation system. And others can bike to work. If you don’t fall into either of those categories, however, a car isn’t something you can put off buying.

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If you’re preparing to purchase a new or used vehicle, you might be wondering, how much should I spend on a car? We’ll answer that question and reveal ways to make sure you’re not overpaying when you buy your vehicle.

The True Cost of Buying a Car

Next to buying a house, buying a car is likely one of the biggest purchases you’ll make in your lifetime. And if you want a quality vehicle that isn’t going to break down, you’re probably going to have to pay a pretty penny for a new ride. The average cost of a brand new car was about $33,543 in 2015, compared to $18,800 for a used one.

When you buy a car, of course, you’re paying for more than just the vehicle itself. Besides the fee you’ll pay for completing a car sales contract (known as a documentation fee), you might have to pay sales tax. Then there are license and registration fees, which vary by state. In Georgia, for example, you’ll pay a $20 registration fee every year versus the $101 that drivers pay annually in Illinois.

The amount you pay up front for a car can rise by 10% or more when you add taxes and fees into the equation. And if you need a car loan, you might have to put 10% down to get a used car and 20% down to get a new vehicle. If you decide to roll the sales tax and fees into the loan, you’ll cough up even more money over time because interest will accrue.

Once the car is in your possession, you’ll have to pay for insurance, car payments, parking fees, gasoline and whatever other costs come up. In a 2015 study, AAA found that a standard sedan cost Americans $8,698 annually, on average. As convenient as having your own car might be, it’ll be a huge investment.

Related Article: The True Cost of Cheaper Gas

How Much Should I Pay?

How Much Should I Spend on a Car?

The exact amount that you should spend on a car might change depending on who you ask. Some experts recommend that car-buyers follow the 36% rule associated with the debt-to-income ratio (DTI). Your DTI represents the percentage of your monthly gross income that’s used to pay off debts. According to the 36% rule, it isn’t wise to spend more than 36% of your income on loan payments, including car payments.

Another rule of thumb says that drivers should spend no more than 15% of their monthly take-home pay on car expenses. So under that guideline, if your net pay is $3,500 a month, it’s best to avoid spending more than $525 on car costs.

That 15% cap, however, only applies to consumers who aren’t paying off any loans besides a mortgage. Since most Americans have some other form of debt – whether it’s credit card debt or student loans that they need to pay off – that rule isn’t so useful. As a result, other financial advisors suggest that car buyers refrain from purchasing vehicles that cost more than half of their annual salaries. That means that if you’re making $50,000 a year, it isn’t a good idea to buy a car that costs more than $25,000.

How to Buy a Car Without Busting Your Budget

If you’re trying to figure out how to make your first car purchase happen, know that you can do it even if your finances are currently in disarray. If you look at a website like Kelley Blue Book before visiting a dealership, you’ll have a better idea of what different makes and models cost. From there, you can set a goal and work towards reaching it by saving more and keeping your excess spending to a minimum.

Once you find a car you like (and that you can afford), you can save money by challenging or cutting out certain fees. For example, you can lower or bypass dealer fees for shipping and anti-theft systems. If you’re planning on getting an extended warranty, you can shop around and see if there’s another company offering a better deal on it than your car manufacturer.

Meeting with more than one dealer and comparing offers can also improve your chances of being able to find a vehicle within your price range. So can timing your purchase so that you’re buying a car when a salesperson is more open to negotiating, like near the end of a sales quarter.

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If you need financing, it’s important to make sure you’re not getting saddled with a car loan that’ll take a decade to pay off. Long-term car loans are becoming more common. In 2015, the average new car loan had a term of 67 months versus the 62 months needed to cover the average used car loan.

The longer your loan term, however, the more interest you’ll pay. And the harder it’ll be to trade in your car in the future, especially if the amount of the loan surpasses the car’s value. That’s why some experts suggest that buyers get loans that they can pay off in four years or less.

The Takeaway

How Much Should I Spend on a Car?

How much should you spend on a car? Only you can decide that after reviewing your budget and figuring out if you can pay for the various expenses that go along with owning a car.

Keep in mind that getting a new or used car will likely involve taking on more debt. If you can’t make at least minimum payments on the debt you already have, it might be a good idea to get a part-time job or concentrate on saving so you won’t have to take out a huge loan.

Update: Have more financial questions? SmartAsset can help. So many people reached out to us looking for tax and long-term financial planning help, we started our own matching service to help you find a financial advisor. The SmartAdvisor matching tool can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to three fiduciaries who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.

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7 Small Ways to Save Big on Gas

7 Small Ways to Save Big on Gas

Gasoline can get expensive, but most of us have to drive at some point or another. Driving around to find the cheapest gas  in town is one way to cut a big chunk out of your monthly gas bill. But there are many tips and tricks that can reduce what you pay at the pump. Here are seven strategies that can help you save money on gas and reduce your environmental footprint.

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1. Service Your Vehicle Regularly

Properly maintaining your vehicle can improve its fuel economy. You’ll need to replace dirty filters as often as possible and use the right motor oil whenever you top up. Using the wrong oil could waste gas by making your engine work harder. If you aren’t sure which grade of motor oil your car needs, you can check your owner’s manual.

It’s also important to keep your tires properly inflated. Tire pressure should always remain at the level recommended by your car’s manufacturer. And you’ll need to make sure your tires are aligned. When it comes to gas mileage, a simple tune-up can go a long way.

2. Use A/C Wisely

In some cases, you can waste gas by cranking up the A/C. But it all depends on where you’re driving. If you’re driving fast because you’re on the highway, for example, having the windows open can increase drag and reduce fuel economy. So using A/C when you’re speeding down the freeway won’t prevent you from trying to save money on gas.

In most cars, the A/C turns on when you try to defrost the windshield. Using a less powerful setting is one way to avoid wasting energy.

3. Find Cheap Places to Fuel Up

7 Small Ways to Save Big on Gas

Generally to find cheap gas, you’ll need to stay away from wealthier neighborhoods and check out stations in the suburbs if you’re driving through a major city. Apps like GasBuddy, AAA TripTik Mobile and Waze can help you find low gas prices in your area.

If you’re trying to spend less money on gas, waiting until your gas tank is empty and filling up a little at a time throughout the week isn’t a good idea. In fact, doing that could damage your car. It’s best to wait until you have a quarter tank of gas and fill it up all the way.

Related Article: States With the Worst Drivers

4. Earn Rewards for Buying Gas

If you drive a lot, it may make sense for you to get a credit card that rewards you with cash back or points for buying gas. Depending on the kind of credit card you qualify for, you could earn gas rewards of up to 5%.

5. Travel Lightly

Carrying around a heavy load can add unnecessary drag. That’s why it’s a good idea to clean out your trunk and remove anything from your roof that you don’t need. By removing excess weight, you’ll be able to maximize your vehicle’s fuel economy.

6. Drive Slower

7 Small Ways to Save Big on Gas

Cars often use more gas when drivers speed up. Exceeding your car’s optimal speed can reduce your gas mileage. In many cars, it’s best to drive at around 50 mph if you want to save fuel.

When you need to accelerate, it’s best to tap the gas pedal lightly. Speeding up too quickly or hitting the brakes too hard can reduce your miles per gallon.

Related Article: How to Trade in a Car

7. Drive More Efficiently

In addition to monitoring your speed, you can drive more efficiently by paying attention to details. For example, it’s a good idea to turn off the engine if your car has been idle for a while. Avoiding potholes and sudden stops can also make a difference when you’re trying to save money.

Using cruise control while you’re driving long distances may also help you use less gas. If you want to go the extra mile, consider buying a more fuel-efficient car. Spending a bit more on a new ride might make sense if you want better gas mileage.

Final Word

Sometimes you have to get creative when you want to cut costs. By making some adjustments to the way you drive and maintain your car, you can save big bucks on gasoline.

And if you can capitalize on the best times to buy gas, you probably should. Usually, it’s best to get gas either early in the morning or late at night.

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