Budgeting for a New Car: The Smart Way

Budgeting for a New CarToday’s cars are more than just a mode of transportation; they have evolved to become a status symbol. What you drive tells the world how successful you are, how much money is in your bank account and reveals to the masses whether or not you are a savvy buyer. However, should a car, and what you spend on it, wield that much power?

What you need to know about cars

Cars are depreciating assets. No matter what vehicle you buy, it loses value the moment you drive it off the dealership’s lot. It continues to lose value based on its age and how many miles are on the odometer. If you finance a depreciating asset, it is akin to throwing money out the window. It makes far more sense to budget for your new car purchase in cash, and leave financing as a last resort.

It is easy to buy your car in cash

Draft your budget. Start by writing down your monthly income. Subtract your monthly expenses from that figure to find your disposable income. If you are not satisfied with your disposable income, adjust your expenses downward. Apply that disposable income to your car savings goal.


If you bring home $4,000 a month and your bills equate to $2,500, you can easily assign $1,000 a month to your car fund. In 12 months, you will have saved $12,000 –a suitable amount for a modest vehicle.

Cash versus payments

If you choose to go the financing route, your budget will look a little different, but your results will not be as good.

Using your disposable income as a guide, calculate how much money you are comfortable putting toward a car payment. Subtract your insurance premium and maintenance from that number. Multiply your new figure by a financing term between 36 to 60 months. The sum will be the amount of car you can afford to finance.

For example, if you can afford a $400 a month car payment, start here. If your insurance premium is $120 a month, and your maintenance costs are $20 a month, reduce your car payment by $140 (your maintenance and insurance). This leaves you with a car payment of $260. Multiply $260 by 60 months (five years) and you can afford to finance a $15,600 vehicle.

However, if you were to save $400 a month over the same duration (60 months), you could afford a $24,000 car, and not need to factor in budget busters like insurance and maintenance, since you would be without a car payment.

It is time to change your outlook on your wheels. Instead of seeing a car as a status symbol, look at it as a mode of transportation. Put your money toward investments that increase in value over time, instead of drown you in a sea of debt and depreciation. Making responsible choices with your money, and living beneath your means pays you back in many other ways. Budget and buy your next car the smart way, and enjoy coasting down the road of financial freedom.