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By Thomas Muellner
With the constant chorus of TV ads pitching “0% financing for 36 months” and “$2,000 cash back,” it can feel like automakers are trying to give cars away at the local dealership. But like most things that seem too good to be true, the total cost of car ownership is a far stretch from those tempting offers.
In reality, buying a new or used vehicle is a major financial decision. Not only do you need to think through the upfront cost of the vehicle, but also everyday driving and maintenance expenses throughout ownership. Because of this, it’s smart to pump the brakes and look both ways before signing on the dotted line.
Whether you’re a first-time car buyer or looking to upgrade your current vehicle, this road map can help get you started saving for a new car.
The first step in saving for a new ride is creating a budget for both upfront costs and monthly expenses. As you’re putting this together, be realistic about what you can afford. The goal is to make sure that your total auto-related expenses account for no more than 20 percent of your monthly take-home pay.
Start by using an auto loan calculator to estimate a comfortable monthly payment and loan term. This will help you determine your “all-in” budget for a new vehicle.
For example, financing a $25,000 vehicle loan over a standard 60-month term is likely to saddle you with a monthly payment of $400–$500. Conversely, financing a $10,000 loan equates to a payment that’s closer to $100–$200 per month.
Third-party auto shopping sites, such as TrueCar and Edmunds.com, can be helpful here, as they allow you to easily browse and configure new, used and certified pre-owned vehicles across model years and manufacturers that fit your “all-in” budget. You may even find that you’ll be able to get more bang for your buck if you buy the previous year’s model or are flexible about included features.
Next, set a savings goal for your down payment. As a rule of thumb, if you’re shopping for a new vehicle, plan to put at least 20 percent of the total cost of the vehicle down at purchase; for used vehicles, a 10 percent down payment is typically sufficient. Though plenty of car buyers put down less, remember that purchasing a car with little or no money down will always cost you more in interest in the long run.
That said, your down payment can come from a variety of sources, including cash, trade-in and cash back rebates, so factor that in when setting your goal.
Also, note that your “all-in” total should account for state and federal taxes, city sticker fees, and title and license plate fees. Because these vary by region, it’s smart to check with your local DMV as part of the planning process.
If you’re buying your vehicle from a dealership rather than through a private seller, you’ll want to keep a close eye on any additional fees that might get tacked on while completing the transaction.
Be up front with the dealership staff about wanting transparency, and be prepared to leave the negotiating table if something feels off. Line item fees, such as vehicle preparation, VIN etching and paint protection are often overlooked by new buyers, and can be avoided by sticking firm to a pre-negotiated “all-in” price for the vehicle.
In addition to creating a savings plan for your down payment, outline a budget for your everyday driving costs. It’s wise to have a month or two of expenses stashed away, especially if you’re a first time owner. After all, you’re not going anywhere without gas in the tank and proof of auto insurance.
Here’s an example list to get started:
Moreover, the limited list above does not include yearly expenses, such as license plate renewal fees and city permits, which vary by locale.
According to auto advocate AAA, the average cost of ownership of a standard sedan tops $8,000 annually. And as you’ll see, the numbers can add up quickly if you’re not fully prepared.
The final area you’ll want to consider before buying a new car is how you’ll afford to pay for vehicle maintenance, including both scheduled service and unexpected issues.
Whether you’re in need of an oil change, new tires or a major repair, it’s important to make sure you’ve got enough cash on hand to cover your expenses. Ignoring maintenance needs can negatively impact the value of your vehicle, or worse yet, leave you stranded in a tough situation.
To avoid disaster, try to put away a small amount of money each month in a dedicated automotive emergency fund.
By dividing your savings plan into three parts – down payment, monthly expenses and an emergency maintenance fund – you’ll have a clear sense of the actual costs of vehicle ownership while working toward a tangible savings goal.
It may take time and a bit of hard work, but once you can give yourself the financial green light to make the purchase, that new car smell will be even sweeter.