You have a good job and you are getting a decent income. You feel independent and happy that you are actually accumulating more money than you are actually spending. Having more income and lesser expenses is the key to financial growth and independence . But just because you have a fat paycheck, does it actually justify pulling out a car loan and buying that $40,000+ car? So what next ?
The TRUE COST OF OWNING a Car
For example, let’s say you buy that car you always wanted with that car loan which was easy to get. However you just realize the burden of gas expenses, monthly/ annual insurance fees, taxes, and additional maintenance costs. Don’t forget that you are still paying off the loan with interest; another big expense eating up your paycheck.
All this is called the TRUE COST OF OWNERSHIP.
The problem is not many people think about the true cost of ownership and they crash their finances!
Buying a car may not seem like much but this period in life is when most people, especially the young get into “unexpected” money problems. There are many reasons but a common reason most did not know their true cost of owning a car.
They Can Buy it but Can’t Afford to Keep it!
Another common problem is that most people can actually afford to buy a car but they literally struggle with the operating expenses. They struggle simply because they did not see the “other costs”.
If A Car is a Necessity
If you absolutely need to have a car, my advice is to consider doing a lot of research before buying a car.
Additionally, I recommend that if you buy a new car, make sure to finance the loan no longer than 4 years and make sure that all your car expenses (gas, insurance, maintenance, and etc.) do not exceed 10% of your income.
I like to share that a financial adviser I know recommended that if you do not want to worry about financial problems, he advises that people should buy a car that costs no more than 10% of their income. This actually sounds crazy but it is doable.
So if you have an income of $60K that means you should buy a car that costs $6,000. If you have an income of $30K, that means you should buy car that costs $3,000 and so forth.
There are used cars that exist in that price range so look around. Again, I can add so many things to look into when buying a used car but just make sure that any car you get for such a price is a reliable and a well-known car. (A well-known car is advantageous because it would be much easier and cheaper to get replacement car parts.)
Expenses Vary From Car to Car
Some types of cars get tax breaks while other kinds of cars have lower insurance rates. The point is, before you get a car, don’t just look at the price tag, make sure you do the research and know how much it costs to operate such a car.
Let’s say I buy a Landcruiser. It’s a nice big SUV with 4wd with all the other neat stuff. However, because it is a big car with a beautiful monster V8 engine, it is a gas guzzler. Because of the poor mileage, I am paying around $200 a month in gas compared to the $80/ month I used to pay with my Civic.
Overall, an SUV will cost much more to maintain and run than the average car. The question you need to ask yourself is, do you really need a nice big car to go from Point A to Point B? The answer is no.
Does it Matter if the Car is Used or New?
Most people will say that you will be better off with a used car but that is not always true. I say this because as long as you do your due diligence and know the costs of operating a car, you should be able to manage your expenses!
It’s not hard. Know yourself, know what you really need, and learn to manage your money well.