We’re in the middle of summer – when we’re bound to see all sorts of reminders of America’s love affair with the automobile. It’s part of our national lore – from trucks to SUVs to sports cars, we love motoring down the road in style, even if we’ve got “no particular place to go.”
Some drive out of love – others, out of necessity. Unlike other countries which boast urban areas supported by public transit, basic automobile ownership is a must for most of us to function in today’s society.
Having a society reliant on auto transportation comes at a price. Edmunds.com reports the cost of an average new car has climbed to an all-time high of $35,176.
For many Americans, part of the auto-buying tradition is taking on debt to own them. By the end of 2017, Americans had applied for and racked up $568.6 billion in auto loans. The average new car loan as reported by Experian is $31,099 and on average Americans are extending the term to just under 6 years.
Before you jump into an auto loan for your dream car – in particular, on an expensive loan – this week’s MoneyDo is to make sure your overall financial plan can support an auto loan for the car you’re after.
The best way to consider your capacity to handle an expensive car loan is from a budget perspective. Here are some basic items you should probably have in place prior to purchasing your dream vehicle:
- 10% of your gross income is direct-deposited into a savings account. This is important and a basic component to building wealth. By “paying yourself first” funds can accumulate to deal with future financial emergencies such as a job loss. By removing the funds directly from your paycheck “the out of sight, out of mind” principle will eventually feel like you never had the additional income.
- 10%-15% of your gross income goes directly to a retirement account. For most of us pensions went away some time ago. Therefore, it’s imperative we put money away monthly for retirement to build our own “pension”. A basic rule of thumb suggests building a nest egg of 10 to 12 times your annual income by retirement.
- After you’ve accomplished the above tasks, ask yourself: is your remaining income sufficient to cover your budget plus the anticipated car payment? Make sure sufficient monthly income remains to cover this and less frequent expenses such as home/auto maintenance and insurance premiums. Even a small budget deficit can potentially build ancillary debt, like credit card debt, over time.
- Will other financial goals be sacrificed buy purchasing an expensive vehicle? Will you still be able to pay for a child’s education or a dream vacation if you purchase a luxury car? If not, which is more important to you?
Purchasing a car is often a thrill. Consider if you can experience the thrill without causing a deleterious effect on your finances. If purchasing your dream car works well in your plan, then by all means proceed.
However, if the price tag potentially compromises other aspects of your financial plan, proceed with caution. Perhaps stepping down a model or two, or considering the burgeoning used vehicle market, may deliver the same thrill without bringing potential harm to your future.