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Since buying a new car is a big investment, you'll want to take your time and shop around to find the perfect vehicle for you. One of the most important questions you need to ask yourself when you are planning to buy a new car is the budget you can spend on it.
What you should spend on a new car will vary based on the type of car that you want, your annual income and expenses, and other factors. We want to help you make informed decisions that will allow you to confidently go on a car-buying journey and have a realistic budget in mind.
List Your Car Must-Haves
Start by making a simple list of what your car needs and what features that it would be nice to have, but aren't necessary. This list will vary a lot based on your personal taste and what you plan to use the car for, but it is a good way to know which vehicles are in your financial range.
New or Secondhand?
If you want to buy a car, you need to think carefully about a number of different things. You may decide to buy it new or second hand. One of the main advantages of buying a used car is that you can save a good deal of money and they depreciate at a slower rate. It's pretty likely that you'll enjoy free servicing after you purchase your new vehicle. Your car will be fitted with the latest technology and you can be sure that it will run well and be in tip-top condition without any need for regular maintenance.
Calculate Your Income and Expenses
The next step is to figure out what you should spend on your car: decide what proportion of your income you should put towards it in order to maintain a reasonable spending budget. Deduce your regular living expenses from your income, and any debt obligations you may have. It is recommended that you spend only 10% of your income on your new car; if you want to buy a more expensive car, you might want to spend 20-30% of your income on it.
You should take into account a number of ongoing expenses when preparing your budget, from regular bills to insurance. These costs may include fuel, service and repairs, insurance, depreciation, loans, licensing, etc.
It is possible to control how much you spend by deciding how much you can afford to spend on a car before you start looking for one, but you should also consider the cost of the vehicle itself and the way that you will finance it.
How Much Should You Spend?
The ‘one-size-fits-all’ rule – spending 30% of your income: It's entirely personal to decide what you should do with your money, but most people want to adopt a general spending plan that applies to all of their purchases. You can spend up to 35% of what you earn each year on a car. This number covers most people's needs. If you earn $20,000 a year, that gives you a monthly budget of $7,000 for a car. It's not a lot of money, but it's more than enough to buy a reliable used car.
At the other end of the scale, someone who makes $150,000 a year could spend $52,500 on a new car. It will enable you to buy a wide range of new cars, including luxury cars. However, someone earning $150K might get annoyed when they hear someone say that they shouldn't buy a high-end luxury car for that amount.
The most important thing to do is to break down your budget into tiers. You should decide for yourself whether this tier is right for you. It depends on how much you have saved and whether you plan to pay cash or use a credit card. It also depends on how important your car is compared to other things that you need.
One of the rules of prudent spending – spend 10% of your income: For many people, spending 10–15% of their income on a car is best. If you earn $25,000 a year, you can buy a reliable used car for around $2,500–$3,000. If you earn $80,000 a year, that's going to buy you a used car for about $10,000 — $12,000.
The compromise – 20% of what you earn: If you want to buy a car, you want one that is as safe and reliable as possible. Being able to drive reliably is very important if you have a family. If you have to send the car to a mechanic all the time, it would be a hassle.
If you are very thrifty, then spending 10–15% of your income on a car sounds reasonable. If you value the reliability that newer, more expensive cars bring, spending 20–25% of your annual income on a new car sounds good.
If You Value Your Car Very Much: There’s nothing wrong with spending money that you earn to buy things that you value. You can spend a lot of money — perhaps even more than others think is wise — on things that interest you.
If you value your car, it makes sense to spend more than your annual salary recommends. You could spend up to 50% of your annual salary on a new car.
It may turn out that you value your car more than most people. You may get more money for the car when you sell it. You shouldn't forget that because a car is such a big expense, you have to be extremely careful about other expenses.
There is no one-size-fits-all solution to buying a car, as everyone has different needs and wants. It is important to carefully consider all of your options and take advice from a number of different people if you wish to. Deciding how much money you will spend on your new car and how you are going to finance it is vital to finding the right model for you.