Budgeting How Much Car You Can Afford

Budgeting How Much Car You Can Afford

So it's time for your first car, or maybe it's just time to replace the current one and you want to do a better job budgeting for what is one of the biggest purchases you'll make in your lifetime. Either way, you've come to the right place because what you don't want to ever do is find yourself in a situation where you can no longer afford your car payments. CarProUSA Radio Show Host Jerry Reynolds addresses that unpleasant situation here.  One way to avoid that is by understanding all the costs of ownership beyond signing on the dotted line - and making sure you budget for those.  It's more important than ever considering the new 2021 AAA Driving Your Costs study found that the average annual cost of new car ownership is now nearly $10,000.  

How Much Car Can You Afford?

Many financial experts recommend spending no more than 10%-20% of your take-home pay on car expenses. A good rule of thumb would be 10-15% of your monthly take-home pay for your car payment, and the rest on ownership costs like those outlined below:

  • Auto Insurance: According to a NerdWallet analysis, in 2021 the national average cost to insure a vehicle is $1,592 a year, but that could vary widely on many factors.
  • Repairs, Including Tires
  • Recommended Maintenance
  • Transportation Costs Like Tolls, Parking
  • Fuel
  • Licensing/Registration/Taxes as regulated by your state

The 10-20% strategy won't work for every budget, so it's important to study your own finances carefully and come up with the figure that works best for you.

True Cost of Ownership

The true cost of ownership can be difficult to tally. Ownership costs vary per car and a lot is determined by whether it is new versus used and how long you keep the vehicle. Where you live and its climate also matters in both maintenance, transportation and insurance costs. Road conditions play a huge role, too. If you live in places with poorly maintained roads full of potholes, you're likely to end up with more flat tires and thus higher tire replacement expenses. Your age and credit score also impact things like your car insurance and loan interest rates, which factor into the equation. That's why there is no magic number that will be true for everyone, and why, again, you should look at your own personal finances, location and other mitigating factors when budgeting.

New VS Used Vehicles

There is also the new vs used debate that many shoppers go through in their thought process. Which one is ultimately the best budget decision? That, too, varies per owner.

Sometimes a pricier new car will be more reliable, which will cost you more every month, but save you in ownership repair costs down the road. Whereas sometimes going with a budget or used model model could save you money initially, but net your higher repair and maintenance costs over time. Researching vehicle reliability is key is the latter case. In terms of new cars, remember that while new cars come with factory warranties, they usually don't cover general maintenance or tire replacements unless you buy an additional maintenance plan in the finance office to cover those costs for a certain time period.

In terms of insurance costs, new cars also typically have higher premiums over used vehicles. 

AAA 2021 Your Driving Costs Study

Here is a general idea of how much it costs to own a new vehicle in 2021, according to the American Automobile Association.

In its 2021 Your Driving Costs study based on 45 models, researchers found that the average cost to own and operate a new vehicle in 2021 is $9,666, or $805.50 per month. The figure factored in the cost of fuel, maintenance, repairs, insurance, license/registration/taxes, depreciation and loan interest AAA says depreciation is the biggest factor,  accounting for 40% of all ownership expenses outpacing additional costs like fuel and maintenance.  Overall the study found:

  • Small sedans have the least expensive overall ownership costs
  • Medium sedans are the most expensive to insure
  • Compact SUVs are the least expensive to insure
  • Mid-size pickups have the third overall highest ownership costs
  • Hybrid vehicles have the 2nd least expensive fuel and maintenance costs
  • Electric vehicles have the lowest maintenance, repair and tire costs. 

See the cost breakdown in the study brochure here.

As always, do your homework before making a car purchase and look at your budget closely. We also recommend checking with your financial advisor to get personalized financial advice.

This article was updated and republished with new information on August 25, 2021.
Photo credit:  gcpics/Shutterstock.com