Are You Ready for a New Car?

Back in November of 2009, we decided to purchase a new vehicle. We needed something bigger because we did not have a vehicle that would hold our entire family. We settled on a Ford Explorer that had 13,000 miles and we got a great deal on a "semi" used car.

Now, as I mention in The Real Life 101 Handbook, there a many things you need to know before buying a new car. You should use Kelly Blue Book and/or Edmunds to research the true value of the vehicle you want to purchase AND the value of your trade-in vehicle. You need to know what the dealer hold back is on a new vehicle (more details in the book!). Armed with your research, you should negotiate based upon the final price of the vehicle NOT the monthly payments. It also helps to have your own financing secured in advance but you may want to take advantage of what the dealership has to offer. If the dealership does not offer you enough for your trade, you should seriously consider selling your car on your own using Autotrader and Craigslist (this is what we did when we bought the Explorer).

But is that really all you need to consider? What about your insurance? Will it change with the "new" vehicle? What about your property taxes? How about setting aside some money for new tires in 2 years or so? These are all REAL costs that are not in your monthly car payment but that you do need to consider to make sure the vehicle will fit your budget.

As an example, let's say you have:

Car payment $ 250.00
Insurance $ 30.00
Property Taxes $ 40.00
Maintenance $ 20.00

Total Monthly Payment: $ 340.00

Now, for your new car, you want to keep your total monthly payment for all the car related expenses around $325.00 and your insurance will go up by $10.00 a month and taxes by $15.00 month. Working "backwards", the monthly payment you should have is:

Total payment $ 325.00
Insurance $ 40.00
Property Taxes $ 55.00
Maintenance $ 20.00

Total Car Loan ONLY Payment: $ 210.00

So, you need to use the Time Value of Money equation to determine what the absolute price paid for the car "could" be at $210.00 per month for the interest rate and loan period you have. It is important that you take some time working through all this math before you go to the dealership so you are confident with your numbers and know when to "walk away" if you can not get the deal you need.

Some of you may be asking why I included $20.00 a month for maintenance. This is a "round" number to use that will save you $240.00 a year for things like new tires, brakes, oil changes, and other "routine" maintenance. Other than the oil change, you will not have these expenses every year but building those costs into your monthly payment insures you have the money saved when it's time for those items. It can also be helpful for the unexpected; things that break on the car that are "unusual" but happen.

So before you get caught up in that "new car smell", do your homework, know what a "reasonable" price is for the car you want, know what you can really afford and be sure to have a little "extra" set aside for the unexpected. Following these simple guidelines will keep you happily on the road with your overall budget intact!