You've decided that you definitely want to buy a car and you're trying to figure out how much you can afford. As strange as it may seem, the money a financial institution will lend you and how much you can truly afford may be two completely different amounts.
Before you decide to purchase a car, take a look at your budget. If you don’t have a budget, now is the time to create one. How will a new car payment affect your budget? Don’t forget to include the other costs that go along with owning a car. Expenses such as gas, insurance, license plates, immediate repairs, taxes, and ongoing maintenance can add up to more than you're currently spending.
Developing a Budget
- Collect information on how much you spend - Two good resources for tracking expenses are your check book register and credit card statement. For a complete picture, also save all receipts for two or three months when you pay cash.
- Categories - Once you know how much money you spend and where it goes, you are ready to group your expenses into categories. Use our Budgeting Worksheet to decide what categories apply to you.
- Income - Determine what you can realistically expect to earn on a monthly basis. If your income varies from month to month, as a sales person's might, look over last year's income and figure out a monthly average. Try to be conservative when projecting, and be careful about including overtime, bonuses, and commissions that may not happen.
- Project your expenses - Using our Budgeting Worksheet, determine how much money should go into each category to meet expenses. For those expenditures that only occur once or twice a year, like auto insurance, figure out how much money you need to hold back each month so you'll have enough when those bills arrive. Don't forget to anticipate future expenses such as auto repairs.
- Balance your budget - If you think you have a pretty good idea of what's going out and what's coming in, now comes the moment of truth. Use our Current Spending Analysis Worksheet to find out whether you make more than you spend or spend more than you make. If your income is greater than your expenses, fantastic! Now is the time to set up a regular savings plan. If your expenses are greater, don't panic, your situation can be improved by adjusting some spending habits.
- Fine tuning - One of the biggest benefits of the budget process is finding out where you're spending your money. Realize that your newly created budget will have to be adjusted - maybe spending a little less here and there for the first few months until you get things where you want them. Even then, you'll want to review your budget periodically to make necessary adjustments.