How to Figure Out if You Can Really Afford That Car You Want
The answer, I’m assuming is yes. Because where I live, America, we see cars as a status symbol. It doesn’t matter if you just got your license at 16 or if you’re in your 50s. Society seems to judge you buy what kind of car you’re in.
This mentality has gotten us into a lot of problems recently. People are paying way more for a car than they should be, just to try to keep up with the jones’s or to try and be in the dating pool.
I’m not even talking about the nice Italian cars such as Ferrari and Lamborghini. I’m talking about a brand new Impala or Mustang or Camaro.
Now, I’m not against nice cars. In fact I am a gear head, I currently live in Lansing, MI and I can see the GM plant which makes Camaros and Cadillac’s and to be honest, I drool every time I see them just sitting there. Especially the Camaro ZL1
There are a few steps to take when trying to decide how much of a car you can afford. Personally it’s my belief that if you can’t pay cash for it then you can afford it, but I know most people won’t hold themselves up to that standard.
Here is how to figure it out:
- Write down ALL of your expenses – I did this on Microsoft excel. Obviously you’ll write down your mortgage/rent, car payments, insurance payments etc…but to do this correctly you should just make a note of everything you spend during a 30 day period. This includes drinks you might get at a gas station etc… just don’t make a point to spend less during this period, spend as you normally would. Don’t forget to take out your insurance for the new vehicle.
- Subtract your expenses from your take home pay – Now you should have a figure left. Assuming you took no shortcuts to try and artificially beef up the number you can multiply that number by 36 or even 48. These are the length of a loan. That will tell you how much of a car payment you can afford including the interest.
The reason for 36 or 48 is anything under a 36 month loan you mind as well and pay cash for, and over 48 months you run the risk of having the depreciation of the car lowering faster than the loan amount. I actually did this with one of my car, I financed it at 72 months (LOL) with no down payment. Believe me, I learned from that financial mishap. Luckily I had the cash on hand to pay the car off after a few years because I grew in my financial IQ.
Make sure to get a quote (or several) on the insurance of the car you want to buy so you’re not stuck with it if it ends up being more than you might expect.