For most people, a car is a necessity. We often depend on our vehicles to get us to and from work every day, transport children to events, and even for pleasure. Because they are such an important aspect of your life, you want a vehicle that is reliable, comfortable, and maybe even a bit stylish. The vehicle choices are almost endless, so finding the right combination of wants and needs with an affordable price tag can be challenging.
Some people never buy a car, as they simply cannot afford one or they live in cities where public transportation and conveniently located shops, schools, and businesses make having a car a luxury, not a necessity. But if you need a car or you think you simply can’t live without one, there are some financial issues to resolve before you go car shopping.
The first is how much car you can actually afford. Because you may be able to finance your car with a loan if your credit is good and you have a steady income, you usually don’t have to come up with the entire cost in cash. (Then again, if you can wait to pay cash, it’s not a bad idea.) But if you’re borrowing, you will probably need a down payment in cash, usually about 10% - 30% of the total price. And you need to know how much of your monthly budget you can allot for installment payments on a car loan, plus the cost of fuel, insurance, and maintenance. One test to determine whether you have too much car (beyond your means) is if your monthly car loan repayment costs, insurance financing, maintenance and fuel costs (cost of car ownership) exceed the amount you are able to save in the month.
The second is, how important is having a car versus other financial goals? Like saving for retirement, house ownership, further education etc. Buying a car can actually make a big dent on your net worth being a depreciating ‘asset’ which requires maintenance. Vehicles depreciate rapidly, so if you finance the full purchase price, you often find yourself upside down on the loan immediately. Being upside down simply means that you owe more than the car is worth, as opposed to buying real estate for example.
Another consideration is the type and number of cars. Now, think about buying a super expensive luxury car or buying two cars because you’re married and you both work. Now you’re making mortgage size payments just to have something to drive you around.
Remember that not all vehicles are created equal. Some cars will hold their value over time better than others, and some cars have notorious maintenance issues. Do your research before buying your next car and don’t just buy something because it looks good in the commercials. You can not only save some headaches down the road by picking a reliable car, but if it retains its value you will take less of a hit when it comes time to sell.
Long story short, it’s up to you to decide how you want to spend your money. A vehicle may be a necessity, but it doesn’t have to negatively impact your financial future. If you aren’t careful, a vehicle can erode your wealth faster than anything else. Unfortunately, most of us need a car. That’s just the reality of it all. But you can take some steps to make sure that you’re keeping your car costs as low as possible so that you can focus on building wealth, not just maintaining a vehicle year after year.
Be smart about your vehicle costs. It might be nice to drive around in something a little fancy but is it worth the negative impact it may have on your long-term financial goals? That’s for you to decide.