Deciding to buy a car is a huge decision for many, especially talking about the first car. Everyone attaches high expectations at first, but these expectations are lost when budgeting and the financial situation are analyzed.
It is essential to buy a car that does not disrupt one’s financial condition. There are a lot of things in life that need to be handled. While buying a car, one must thoroughly think about the sacrifices one will be making.
Anyone who is planning to buy their first car must consider pondering upon the following questions.
“Do I need a car? If yes, then for what purposes?”
“What other financial goals do I have besides buying a car?”
“Is investing in a flashy and expensive car worth it?”
And the most important question, “How much should I spend on my first car?”
Answering the first three is not very tough because these are the primary reasons one begins to think that they need a car. The tough question is how much one should spend on their first car.
Analyzing the financial situation
One that has decided on why they need a car, it is time to jump on to the next question, which is the toughest one. The primary factors to consider at this stage are deciding whether one needs a new car or a used one would do, what safety features one wants in their vehicles, and will financing is the right decision or not?
Considering the budget is the most important step in deciding how much one should spend on their car. Disposable income, the amount of income left after fulfilling the monthly obligations such as payment of utility bills, mortgage, debt payments, and food, is a factor that determines the buying capacity of an individual.
After calculating the disposable income, the next things to consider revolve around the amount left after deducting the disposable income.
Rules for spending on a car
There are certain rules associated with the purchase of a car. These rules have been designed to help people struggling with determining how much they want to spend on a vehicle.
20% Rule:
According to the 20% rule, an individual must spend 20% of their home income on their first car. It means that other expenses, including all monthly payments, must be adjusted within 80% of one’s income. It is a very tough thing to do, and it will lead a person to live hand to mouth.
10% Rule:
If a person cannot adopt the 20% rule, which most people cannot, they can work on the 10% rule. It is a rule that requires an individual to spend 10% of their annual salary purchasing a car. It is not the most ideal plan for an average person. Through this rule, people earning $50,000 to $100,000 annually will not find a suitable car for them.
36% Rule:
Unlike other plans, the 36% rule focuses on the amount to be spent on monthly obligations.
Based on this rule, an individual must fit their monthly payments and expenses within 36% of their income. This rule might not be the smartest for people who are already close to 36%, and their monthly obligations take up more than 30% of their income.
20/4/10 rule:
An individual incorporating the 20/4/10 rule while buying their first car needs to take out 20% of their income for the down payment, get the remaining amount financed for four years, and set the payments equal to 10% of their total income.
With these rules, an individual will get a direction to find the answer to the question “how much should one spend on their first car?”. Also, based on these plans, people can work out their plans by combining the rules based on their requirements. An essential factor is, of course, the budget. When deciding the amount to spend on the first car, one must consider their financial situation budget constraints at present, and they should try to get their car payments financed in 4 years. A financing period of more than four years is not at all wise as a car goes through significant depreciation after four years.
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