Saving for a new car can be a long and arduous process. And with the cost of cars increasing year after year, it isn’t getting any easier to save for a brand new set of wheels. So the question is, how do people afford new cars?
In general, the majority of people cannot afford to purchase a new car outright. In most cases, when you see someone driving a new car, they’re either leasing it or they took out an auto loan to purchase it. In either case, they are making monthly payments on their new car.
Sure, there are a select few individuals that actually pay cash for a brand new car. And in most cases, they worked hard, invested their money well, and thus, have a high net worth, or they patiently saved for a long time.
How Much Should I Spend On A Car?
As a good rule of thumb, the total value of the cars you own should not equal more than 40% of your gross annual income. For instance, if you make $100,000 per year, the total value of your cars should not exceed $40,000.
Additionally, we are huge advocates of paying cash for all your vehicles.
After all, even used cars lose their value. And it doesn’t make a whole lot of financial sense to pay interest on a depreciating asset.
Sure, it will take more time to save and pay cash for your cars, but at least this will minimize your financial downside.
See Also: Do Car Dealerships Accept Cash? (Getting The Best Deal)
Is A New Car Worth It?
Before you start saving for a brand new vehicle, it’s important to ask yourself if a new car is actually worth it.
In most cases, it’s not.
For one, a new car loses its value the second you drive it off the lot–and then continues to do so over the course of time. And unless you’re planning on driving that car for the next 10 to 20 years, it’s a pretty terrible investment.
In fact, if you decide to sell the car within a year or two, you’ll likely lose quite a bit of money.
And secondly, the cost of new cars these days is exorbitant. Even a modestly priced new car can cost upwards of $30,000 or $40,000. And unless you have that kind of money just sitting around, your only option would be to finance it. This means you’ll probably be making car payments for the next three to five years or more. No fun.
So, is a new car worth it? In most cases, no.
Disadvantages Of Buying A New Car
As you’ve probably already deduced, there are quite a few disadvantages to buying a brand new car. Here are a few of the most notable ones:
The Initial Cost
The initial cost of a new car is significantly more expensive than the same model used. In addition to the base price of the vehicle, there are also taxes and fees that must be paid. These can add several thousand dollars to the cost of the car.
The Depreciation
A new car depreciates, or loses value, as soon as it is driven off the lot. In fact, a new car can lose up to 20% to 40% of its value in the first year alone. This means that if you paid $30,000 for your new car, it could be worth as little as $18,000 after 12 short months.
Insurance Premiums
The insurance premiums for a new car are also higher than they are for a used car. This is because new cars are more expensive to replace or repair than used cars.
Vehicle Registration Fees
The vehicle registration fees are also higher for a new car than they are for a used car. In most states, these fees are based on the value of the vehicle. So, the higher the value of the vehicle, the higher the registration fee will be.
Sales Tax
Most states also charge sales tax on the purchase of a new car. And when you’re talking about a purchase upwards of $30,000, that sales tax can add up to thousands of dollars.
See Also: 7 Best Ways To Save Money On Car Expenses
How To Afford A New Car (If You Still Want One)
If buying a new car is something you’re heart is set on, there are a few things we definitely recommend.
Make It A Priority
First and foremost, if you want to buy a new car, you need to make it a priority. This means saving for it ahead of time and not financing it.
The best way to do this is to start setting aside money each month into a savings account specifically for your new car fund.
For example, let’s say you earn $5,000 per month (after taxes) and you want to purchase a $30,000 car. If you save $1,000 per month, then you will have to save for 30 months. However, if you’re willing to sacrifice in other areas of life in order to save $2,000 per month, then you’ll only have to save for 15 months.
Saving for a new car, like any other savings goal, boils down to how much of a priority you are willing to make it.
See Also: 21 Side Hustles That Don’t Require A Car
Save And Pay Cash
If you’re going to take the time to save up for and buy a new car, we highly recommend paying cash for it. This way, you won’t have to worry about making car payments (and paying interest) for the next several years.
And, if you happen to lose your job or experience some other financial setback, you’ll have one fewer payment to worry about.
Live On A Budget
If you’re serious about buying a new car, you’ll need to start living on a budget. This means creating a budget and actually sticking to it.
There are a number of different ways to do this, but we recommend using ta zero-based budget. This means that every dollar you earn is allocated to a specific category, including savings.
By doing this, you’ll be able to see exactly how much money you have available to save for your new car.
Get A Part-Time Job
If you’re really serious about saving for a new car, you may want to consider getting a second job. The increase in income will allow you to save faster and reach your goal sooner.
Sell Your Stuff
If you have any big-ticket items that you no longer need or want, consider selling them to help pay for your new car. This could include things like furniture, electronics, or even a second car.
Start Your Own Side Business
If you have a hobby or talent that others are willing to pay for, consider starting your own side business. This could be anything from dog walking to freelance photography to lawn care.
By doing this, you’ll be able to bring in some extra money to help pay for your new car.
Start A Car Savings Sinking Fund
If you’re not familiar with the term “sinking fund,” it’s simply a savings account that is used to save for a specific goal.
In this case, your goal would be to save for a new car.
To do this, you’ll need to set up a separate savings account (preferably at a different bank than you normally use) and make regular deposits into it.
This will help you to make headway on your savings without being tempted to spend the money on something else that will hurt your savings goal.
See Also: 7 Reasons To Pay Off Your Car Loan Early
Final Thoughts
There’s no doubt about it, buying a new car is a big financial decision. And, unless you have the cash to pay for it outright, it’s not one that should be taken lightly.
Truthfully, with so many great used cars on the market these days, we don’t really see the need to purchase a brand new car. By paying cash for a pre-owned vehicle, you will minimize your financial downside, and protect yourself from a handful of costly expenses.