Budgeting Basics for Purchasing Your First Car
By Warren Clarke (guest blogger) CARFAX
5 January 2017
(Editor’s note: As U.S. automakers set a new record for cars and trucks sold in 2016, GreenPath welcomes guest blogger Warren Clarke from CARFAX to share five tips on buying a vehicle in 2017.)
Your first car purchase represents an important milestone in your adult life. Owning a car gives you the freedom to travel as you please, but it also brings certain responsibilities. As a car owner, you’re tasked with tackling all the expenses associated with purchasing and maintaining your vehicle.
You can avoid unnecessary hassles and stress if you manage this endeavor in a structured and organized way. In other words: prepare a budget.
Here are some tips to consider as you put together a budget for purchasing your first car:
1. Set a Purchase Price
Your first step in making a car purchase involves deciding how much you’re willing to spend on your vehicle. Most car purchases involve financing. When going this route, a good rule of thumb is to set a loan payment that is no more than 20 percent of your monthly income. This will help ensure you have enough resources on hand to meet other financial obligations.
One of the biggest factors of purchase price comes down to choosing between a new or used vehicle.
New cars offer the benefit of having never been driven, and this will delay certain types of repairs. New cars also come with manufacturer warranties that protect you from repair expenses. These warranties vary from automaker to automaker. The carmakers offering the best warranties right now are Hyundai and Kia, which provide 5-year/60,000 mile basic warranties and 10-year/100,000-mile powertrain warranties on all new vehicles.
On the other hand, used cars are often a much more affordable choice. Most cars lose about 19 percent of their value to depreciation after just one year of ownership. This makes used cars a compelling alternative from a financial perspective. If purchasing a used model, it’s important to have a mechanic inspect the vehicle. Set aside roughly $100 (about the cost of an hour’s labor for a mechanic) to cover this inspection.
If you want to reap the financial benefits of purchasing a used car while minimizing your exposure when it comes to repair costs, consider purchasing a certified pre-owned (CPO) model.
CPO cars are used cars that have been thoroughly inspected and refurbished, and they bring less repair risk than the average used car. Look for a CPO program that is backed by the manufacturer, since these CPO models come with manufacturer warranties.
2. Include Registration and Title Fees
Each state requires that a newly purchased car be registered by its owner, and this registration comes with certain fees. The method of calculating these fees varies from state to state, and your local Department of Motor Vehicles or town office will be able to give you an idea of what these fees look like in your neck of the woods. Keep in mind that these fees can be quite significant, so they should not be an afterthought.
3. Consider Sales Tax
Most states collect statewide sales taxes, and the rate can climb as high as 7.5 percent. If you live in a state that collects sales taxes, you will be taxed on the total cost of your vehicle purchase, so it’s important to factor it into your budget calculations. If you finance the car from a dealership, chances are the taxes will be included in your monthly payment, but if you purchase the car from a private seller, you may have to pay them separately when you register your car.
4. Make Room for Car Insurance
Car insurance is required by law, but the minimum coverage required varies from state to state. Keep in mind that state minimums are often quite low, and they may not be enough to meet your needs in an accident. Consult with an insurance professional to get a sense of the coverage that best suits your needs.
Your driving record and the neighborhood you live in will have an effect on the cost of your car insurance. Your insurance rate also hinges on the vehicle itself: In most cases, the lower a car’s price tag, the lower its insurance rate. As you weigh how much you can afford to pay in car insurance, keep in mind that you can reduce this financial burden by purchasing a less-expensive vehicle.
According to the Automobile Association of America (AAA), the average car owner pays roughly $1,115 per year in car insurance. This translates into roughly $93 per month.
5. Put Aside Money for Maintenance and Repairs
Over time, your car will suffer wear and tear, and parts will need to be replaced and repaired. You can stay ahead of these expenses by including them in your budget.
The amount required for maintenance will depend on several factors. One is the age of the car. All other things being equal, the newer the car, the less money you’ll have to spend on maintenance. The cost of the car is another factor. An affordable hatchback will be cheaper to maintain than a costly luxury sedan, since the parts for these economy cars are less expensive.
Data gathered by AAA AAA reveals that the average annual cost of maintaining a vehicle stands at $766.50 per year, or about $64 per month.
Preparation Is Key
From a financial perspective, car ownership sometimes brings a few bumps in the road. Some expenses are easy to predict, while others may be more unexpected and unusual. However, with prescient financial planning, you’ll be ready for all outcomes.
(Warren Clarke is a consumer advocate and car expert. As a writer for CARFAX, he has the chance to share his budgeting tips with car buyers.)