Know how much vehicle you can afford.
It’s the key to buying a new vehicle while ensuring you don’t overextend your household finances, according to experts including Consumer Reports and Edmunds.com.
Even using a car affordability calculator assumes that you know your monthly budget.
But many people don’t know their financial limits, which is a good way to get into trouble – making late payments, missing payments, or defaulting entirely, possibly resulting in higher fees, extending your payments, credit dings, or even worse, having your vehicle repossessed.
Those difficulties – unless they are catastrophic – may be avoidable by setting up a monthly budget.
Of course, there are general formulas to determining how much vehicle you can afford:
- Edmunds.com suggests a car payment no more than 20 percent of your take-home pay, “less if you’re sticking to a tight budget,” others suggest a total of 35 percent of pre-tax annual income.
- The most-popular formula – once cited by personal finance experts – is the 20/4/10 ratio, which recommends keeping your monthly car payment, including principal, interest, insurance and other expenses, at or below 10 percent of your pre-tax monthly income.
General formulas, though, leave a lot of room for error, because they assume you already know something about your household budget and may not be realistic for your personal situation. It’s also easy to miscalculate or underestimate expenses and throw everything else out of whack. Including knowing how much vehicle you can afford to purchase.
So, let’s assume you have decided to create a household budget before making your vehicle purchase.
You’ve made a good decision, because “the price limit should be part of a budget that ensures a car purchase doesn’t jeopardize your overall financial well-being,” according to U.S. News Money. You can get started with Santander Consumer USA’s video, Setting a Monthly Budget, and using the basic Finance Calculator, which both are located in our new Learning Center.
Of course, you can take your budgeting a bit further by itemizing, and then categorizing your monthly, quarterly or annual expenses to get a more detailed picture of your household finances.
This detailed budget would include rent/mortgage, utilities, food/groceries, transportation, student loan payments, credit card payments, medical expenses, clothing, entertainment, home maintenance, cable/satellite, internet service, telephone and insurance.
The Monthly Budget Tool under Educational Courses in our Learning Center should help you with this.
Once you’ve gotten all of this figured out, you should have a pretty good idea of what’s left over, including how much of a monthly car payment you can afford.
Taking a realistic look at your household finances can help you decide whether to purchase a new or pre-owned vehicle, whether to go for that full-size SUV or a less-pricey sedan, how particular you’re going to be about the color and other cosmetic features of the vehicle.
Knowing how much vehicle you can afford before shopping can help you stay on track overall.
Setting a monthly budget
Whether you’re looking to save money or see where your money is going, setting a monthly budget is a great way to get a handle on your expenses. A budget can help form a snapshot of your finances and help you meet your financial goals.
According to Bankrate.com, the first step in setting a budget is tracking your spending. Once you know where your money is going, you can make the necessary adjustments to start saving. Investopedia says you should save up to six months’ worth of expenses in cash in case a financial emergency strikes.
Another tip: paying off credit card debt. Paying down debt can help you save money in interest.
Set some goals. Do you want to save for a car? Or maybe a down payment on a home? Set some priorities for the things you want most. And remember to use cash. Using credit cards and debit cards tend to make you overspend.
Creating a budget will help you get a clearer picture of your finances!
For more videos and smart financial tips, visit our Learning Center at SantanderConsumerUSA.com