If you are like most Americans, you probably spend more money on a car than you should. Did you know that during the “Cash For Clunkers” program, the average purchase price of a car was a whopping $25,000? Meanwhile, the average total household income of the car buyer was less than $60,000. Who goes and spends half of their annual income after tax on a heap of steel? Apparently hundreds of thousands of people, and that’s just a recipe for financial disaster. But you can follow tips to save money buying a car.
Think Twice Before Paying That Price
There are many ways in which you can save money on a car, the best way of which is to not buy one. However if you must, It’s important to realize that affording monthly payments does not mean you can afford a car. The government didn’t name their program “Lease For Clunkers” for a reason.
If you cannot afford to pay cash for your car, like it or not, it’s likely you cannot afford the car. The only time payments is OK is when you do have the cash to buy the car outright, but you have a higher guaranteed return on your money than the interest payments on the car i.e. 3% savings interest vs. 1.9% financing.
Before buying a car, it’s important to change your mindset. If you can keep an open mind about these three points, they will prevent you from overspending again. Keep in mind, I never said change was easy, especially if you have a car buying addiction.
Five Ways To Save Money When You Buy A Car
1. Spend no more than 1/10th your gross annual income on a car
Sam Dogen of Financial Samurai has a tough, but clever “1/10th rule” of how much you should spend on buying a car. For example, if you make $100,000, spend no more than $10,000. Gasp – that’s right. If you are only making $100,000, he suggests the most you can afford is a second hand Honda Civic with 30,000 miles on it.
The 1/10th rule is there to keep you honest about your spending because too many people feel that so long as they can afford the payments, they can afford the car. This is absolutely the wrong way of thinking for buying a depreciating asset. The ratio should also help motivate you to make more money.
If you want that new $65,000 Audi S5 coupe, go out there and try and make $650,000 by starting a business, going back to school and getting a great job, asking for a raise, starting a side gig, or improving your performance at your existing job.
2. Never buy new
You’ve heard the old saying that as soon as you drive a new car off the lot, it loses 20% of its value. It’s somewhat true, and yet so many people continue to buy new. Car manufacturing has improved a lot over the years, and we no longer live in the 80’s when car reliability was a bigger issue.
Manufacturers continue to perfect the quality of vehicles so that you don’t have to worry as much about maintenance calamities. Thus, the best bang for your buck is to buy a car that’s 3-5 years old.
The initial driver takes anywhere between a 30-50% depreciation hit that you avoid by buying second hand. Plus you’re being green by buying existing inventory. Buying new isn’t good for the environment because unless you destroy your old car, you’ve added and supported a new pollution-emitting vehicle going into the environment.
3. Always think in after tax dollars
If you are in the 25% Federal tax bracket, plus another 5% for State, you have to make $71,000 in gross income at the margin to afford a $50,000 BMW 3 series.
In other words, isn’t it a little extreme to spend 71% of your gross $100,000 salary on an automobile, while the remaining 29% goes to food, clothing, and shelter? As soon as you start multiplying everything you want to purchase by a range of 1.3 to 1.5X (depending on your tax bracket), you will start to realize the true cost of your expenditure and hopefully think twice before pulling the trigger.
Furthermore, keep in mind that buying a car guaranteed to lose you money because it is a depreciating asset. Wouldn’t you rather spend less on a car and put more of your money into investing and your retirement? Remember the more you save, the more freedom you’ll have.
4. Stop Worrying About What Other People Think
There’s no denying that we all have to deal with some level of social pressure and keeping up appearances. But just because your friends or neighbors have $60-80,000 cars, doesn’t mean you have to stretch yourself out of your limits to match or beat them.
Even if it’s super cool and green to own a Tesla Model S P85+, that’s not a car that most people can remotely afford. Forget about keeping up with the Joneses, and spend time researching more affordable options. Those neighbors and peers aren’t going to be there to bail you out if you get buried in debt. So don’t underestimate the importance of putting your own best interests first.
5. Save Money On Car Insurance
If you’re shopping around for a car, it’s also a great time to review your auto insurance policy and look for further ways to save. Auto insurance is the second biggest expense to owning your car so it’s worth the effort to shop around.
Esurance is the leading online marketplace to help you find the most affordable and reliable auto insurance. They get you comparison quotes to make sure you’re getting the best deal. And can easily purchase auto insurance straight from their website if you like what you find. I think it’s very important that everyone has at least basic liability car insurance.
Why? You can total your car and be fine. But if you total someone else’s car and injure them, they can go after you for ALL your assets and wipe you out! So it’s important to protect yourself. Check for a better auto insurance quote via Esurance today.
6. Use Your Car To Earn Extra Cash
Driving for Uber or Lyft is a great way to make extra money on your own time whenever you want. My friends and I average $30/hour driving 20 hours a week. An extra $2,000+ each month is fantastic spending money while having zero boss. It’s quite a thrill to be able to earn money so easily using technology.
Think Before You Buy
We live in a country where people feel entitled to accumulate debt and spend way beyond their means. Haggling at the dealership isn’t enough to save you from overspending. So instead, give yourself a chance to change your mindset. There is a big difference between what you need and what you may want.
Over-spending on a car is the #1 personal finance killer, and unfortunately that’s got to stop anytime soon. So I suggest before you buy your next car, go over the above five tips above and really think about whether you need to spend so much money on a vehicle. Instead of digging yourself into more debt, invest the money you can save into your future!
Updated for 2018 and beyond.
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