Aside from a mortgage (which thankfully, I don’t have yet) and student loans, the next big debt that a large number of adults take on is a new car. With more Americans finding it difficult to save up enough money just to cover a few months of expenses, most car buyers choose to take on auto loan debt as the default solution, without even considering (or more likely, keeping a blind-eye to) other options.
Point in case: Me.
My Auto Loan Nightmare
My first experience as a car buyer was actually pretty disciplined from a financial standpoint. Finding a car that matched my personality was just as important to me as reliability, longevity and price; after a few months of research, I knew exactly what I was looking for:
- Mazda Miata (any model year)
- Odometer at under 80,000 miles
- Overall good body condition
- Mechanically sound
How to Budget for Your Next Car
When I decided to finance a new car, I made the fatal error of only looking at my monthly income and estimated payment. I crunched the numbers and somehow reasoned that I could afford to pay up to $500 per month on a car loan.
At no point in the process did I stop to consider, “Yeah, I could… but should I?”
Dave Ramsey argues that the total value of your vehicles (including cars, motorcycles, boats, etc.) should not equal more than half of your gross annual income.
“You are not wealthier by having a nice car and a big loan. If anything, you are poorer,” proclaims Ramsey.
Furthermore, Ramsey recommends that drivers purchase a beater car for a small cost of $2,000 cash, with the expectation of driving it for 10 months. The money that would have gone to an auto loan (in my case, $400 per month) can then be set aside for your next car purchase, which after 10 months, will be $4,000. On the other hand, if the $2,000 car is still running strong, continue saving to be able to buy your next upgraded vehicle in cash.
Ultimately, Ramsey poses the question to his followers: “What could you do with that [$400] if you weren’t paying for the car every month?” His answer — “anything you wanted!”
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