Buying a Car

Buying a car is a major purchase, so shop carefully. Your goal: to find the car you need at a price you can afford. The information to the left will steer you right.

How much car is too much? Get guidance here.

Financial experts recommend spending no more 12 to 15 percent of your after-tax monthly income for car payments.

To calculate how much car you can afford, multiply your monthly net pay (take-home pay after taxes are deducted) times 15% (.15). Your car payment should not exceed this general guideline.

The 15-percent rule is just a guideline. Depending on your life stage—and income—you may need to depart from it. For example, if you just graduated from college and are in your first job, you may be receiving an entry-level salary. In this case, a car payment equal to 15 percent of your take-home might not buy you much car. Assuming your other expenses are reasonable, you may need to borrow a higher percentage of take-home in order to purchase a quality vehicle.

Conversely, if you are a baby-boomer in your peak-earning years, you may be able to purchase a great car for much less than the 15% take-home figure.

Also keep in mind there’s more to the cost of a car than purchase price. Also factor in the operating costs (fuel, maintenance, etc.) and insurance. This can be a significant cost item, especially for high-performance vehicles. So think through how much you’re willing and able to pay for insurance each year before you begin car shopping. This will help you to avoid “falling in love” with a car that’s exorbitant to insure.

You’ll also want to consider the costs of taking out a car loan.


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