If buying a home is an American dream, buying a car is an American rite of passage. Whether you choose new or used, for many, purchasing a vehicle is a symbol of freedom. Perhaps that’s why owning a vehicle is so popular in the U.S., since currently only 8.7% of American households don’t own a vehicle.
Vehicle ownership may be a symbol of freedom, but buying a car comes at a cost. Most people need to save and budget for months to afford a decent car. If you’re longing for a new ride but are short on cash, use these three helpful budgeting tips to make room in your budget for that new addition to your driveway.
1. Figure Out Where Your Credit Stands
If you’ve borrowed to buy a car before, you probably have an idea of your current credit score. However, if this is your first vehicle purchase, you may have no credit at all. You can start building credit by getting a credit card to use for small, steady payment increments. Avoid a maxed-out credit card with a 100% ratio, and instead follow FICO’s recommended credit utilization ratio of 30% of your original credit limit. This approach will keep your balance low, demonstrate to lenders that you can reliably pay, and start building your credit to help you secure a good auto loan.
2. Make a Down Payment Savings Plan
The more money you can pay up front for a vehicle, the less you’ll have to spend on interest, and ultimately, the better your car deal will be. Figure out the maximum amount of money you think you can save within your desired time frame, and start setting aside funds for the down payment. For reference, Nerd Wallet recommends putting down 20% of a new car’s price, and 10% for a used vehicle.
3. Construct Your New Budget
With a new car comes a new payment and other related expenses. If you’re looking to take on a new monthly bill for your car, you’ll need to plan your budget in advance to ensure you can swing the added cost. Try using the tried-and-true 50/30/20 budgeting strategy, which allots 50% of your monthly income to needs, 30% of your income to wants and extra expenses, and 20% to savings and debt repayment. Remember to consider wants and needs carefully– you need a car to get to work, but do you need the newest model with the sunroof and fancy stereo? Evaluating what you truly need can help build a budget that works for you, and saving now will help you more easily afford a nicer car in the future.
Buying a new car is exciting, but also frightening. With careful planning, you can reduce your car-buyer’s stress, and confidently head to a dealership knowing exactly what you can afford. Use these tips to save your dollars and enjoy the freedom of a new ride.