How much should I spend on a car?

Dreaming of a new car is often the first step to owning one. But before you can collect the keys and drive off into the sunset, you need to figure out the costs. So, if you’re wondering, “How much should I spend on a car?”, it’s a good question to explore.

The true cost of getting a car

Determining how much you should spend on a car can depend on several factors. It may help to begin the car buying journey by understanding the true cost of buying and owning a car.

Total purchase cost

The total purchase cost of a car typically goes beyond just the sticker price (the dollar amount the seller is asking for a vehicle). Nevertheless, the sticker price, which itself may be negotiable, is typically the largest of all the expenses associated with buying a car.

Other expenses that usually get bundled into the total purchase cost include sales taxes, vehicle registration fees, car insurance and financing.

Cost of financing

If your plan is to finance the vehicle, there are various questions to potentially ask yourself:

• Are you willing and able to make a down payment on a car? The bigger your down payment, the lower the total amount you need to finance.
• What financing term (the length of the repayment period) might suit you best? The longer the term, the lower the monthly payments — but the more you’ll likely pay in overall interest.
• Do you already own a car that you can trade in to offset some of the purchase cost?

Of course, the above assumes you’re purchasing your car from a dealership. If you buy from a private seller, it’s more than likely you’ll be paying in cash. This is quite a different proposition than making monthly repayments over time. Paying in cash may also influence how much you spend on the car.

Running costs

Once you’ve purchased the vehicle, you need to keep it in good working order. Different types of vehicles carry different costs.

For example, owning a 10-year-old truck that you drive long distances is not the same as running a brand-new electric vehicle that’s mainly used for city driving. Smaller cars tend to cost less on gas (depending, of course, on how far you drive it), whereas some makes of vehicle might be more expensive to repair than others for similar work.

Routine maintenance, such as and annual inspections, are other costs to keep in mind. The cost of car insurance is another important consideration.

Buying out of state

If you purchase your car in a different state from where you intend to register it, there may be additional logistical considerations regarding transportation and registration.

Actual costs may vary depending on the states involved and whether you’re buying from a dealership or a private seller. Some sellers may deliver the car to you across state lines, though this may also come with a cost.

Budgeting for a car

Budgeting for your car is part and parcel of buying and owning a vehicle. In determining how much you should spend on a car, it helps to understand your existing expenses and what impact your future ride will likely have on your monthly finances.

Tracking income and expenses

Tracking your income and expenses over a month or two may be helpful in determining how much you should pay for a car. Monitoring what you spend in real time can produce insights that you might not otherwise realize.

Categorizing expenses

To better assess your spending, it may help to divide your expenses into essential and non-essential spending. Essential spending includes groceries, rent or mortgage payments and other expenses that you need to make. Non-essential spending includes things like dining out or recreation.

Expenses can also be categorized as fixed and variable. Fixed costs tend to cost the same month-to-month, such as rent. Variable costs, such as spending on entertainment or clothes, are (by definition) more likely to fluctuate.

Analyzing debt-to-income ratio

Another approach when budgeting for a car is to analyze your debt-to-income (DTI) ratio. This is the percentage of your monthly income that goes toward your debt repayments, such as your mortgage and any credit card or student debt you may have.

As a rule of thumb, the lower your debt-to-income ratio the greater the car payments you should be able to afford relative to your income.

Additional tips

Here are some additional tips to help figure out how much to spend on a car:

Set a budget first

In general, it’s helpful to set your car budget first and then find a vehicle that fits that budget, rather than finding a car and potentially being disappointed if it’s more than you can afford.

Separate needs from wants

From a sleek sports sedan to a rugged SUV, cars are designed to be desirable things. But do you really need that moonroof? Being realistic about what you need could help you find something you can comfortably afford.

Use tools

A car payment calculator can help estimate your monthly car payment for different scenarios. By inputting the ballpark amount you’d like to finance along with some other basic info, you can see monthly payoff options for various repayment terms.

Get prequalified

It may help to get prequalified for auto financing so you have a clearer estimate of what kinds of financing terms you may be eligible for.

In summary

How much you should spend on a car is a finely balanced question. It depends on several factors, not least your financial situation, the type of car you’d like and how you hope to pay for it. But with some research and legwork, you can find an option that’s right for you. Then it’s time to turn on the ignition, put your new car into drive, lean back and enjoy the ride.