Guide to Buying a Car

By Roshan Pourghasemi

In this article, we’ll cover:

• What to look for in a reliable car

• Calculate how much car you can afford (rule of thumb is 4/10/10: finance for 4 years, pmt is <10% of your gross income, plan to drive the car for 10 years)

• How much should you have saved for repairs/maintenance?

• How to calculate the amount you’ll need annually for repairs/maintenance

• Should you buy or lease? When is either the more appropriate option?

Building your Budget

Like houses, many Americans overestimate their budget and end up purchasing cars that are way too expensive. To avoid this, we should follow the 20/4/10/10 rule. Although the rule is simple, it is robust enough to work for most families and takes a lot of the guesswork out of car buying. Of course, if your budget doesn’t allow you to use 10% of your gross income to finance your car, adjust it accordingly to fit your needs.

Someone making the American median annual income of $67,500 could afford to spend $675 on their car expenses every month and should aim to pay off their car in 4 years.

Reliability and Maintenance

Before we can talk about budgeting to account for repairs and maintenance, we must pick out a reliable car in hopes of minimizing those headaches. The best way to save money when buying a car is to buy used, as cars depreciate in value quickly. However, buying a used car also adds new factors to consider, like accident and maintenance history.

A great place to start when looking for reliable used cars is this ranking based on automotive journalists and quantifiable information conveniently done for you. Some cars tend to be associated with reliability, even when they’ve gone for hundreds of thousands of miles. Of course, you should try to get a car with the least mileage, but cars like the Toyota Camry and Honda Accord are known for lasting. When looking through online rankings and comparing cars, keep in mind you and your family’s needs. For example, if you’ve got kids to take to soccer practice all the time, a tiny Miata is probably not the best choice. You should consider size, performance, fuel economy, safety ratings, and cost to insurance to find which car best fits your needs.

Another option is to shop for certified pre-owned (CPO) cars, as they have warranty coverage. They offer some of the used car affordability plus the manufacturer backed warranty. Often, they are cars returned at the end of leases or cars that the staff used. CPO cars are nice because they are rigorously checked and refurbished and fall under the warranty of the manufacturer, but these perks do come with an increase in price.

If you decide that you don’t want to go for a CPO car, you will have to do the background check of the car yourself. First, you could run a background check on the vehicle's VINto see the car’s accident history. Also, you should inspect the car thoroughly and take the car to a mechanic to run a deep inspection for potential faulty parts. Make sure to do your inspection on a flat surface and in broad daylight to ensure that you minimize hidden faults in the car’s body or machinery. This article goes more into detail on what things you should look for when inspecting a used car.

Even after thorough inspection and purchase, some faults may find their way through. In order to combat that, everyone should allocate part of their monthly auto expense budget to maintenance/repairs. Your vehicle’s owner manual, which you can find online if you have to, will lay out how often your vehicle should be inspected. Make, model, and condition of your car will all affect how much money you have to put aside for repairs. This is a reason that many people who buy luxury cars go into debt, as they don’t account for the steep repair costs associated with them. The most common car maintenance service is an oil change, which you’ll want to do every 5-10,000 miles. Other forms of maintenance worth considering are tire changes, rotations, alignments, filter changes, and even spark plug replacements.

The typical cost of an unexpected repair is $500 - $600. Based on these numbers, AAA recommends saving $50 a month for a total of $600 a year.If you want a more precise estimate, Edmunds has a cost calculator based on the make and model of your car. Saving this money doesn’t mean you’ll use it right away. Furthermore, if you had repairs last year, you can use those costs to inform how much you save. Still, you may go a year or two never using any, and then get hit with a $1,000 repair out of the blue. It’s always good to be prepared.

The table below shows a breakdown of purchasing a car and its associated costs based on the median US annual income of $67,500.

Buying vs. Leasing

When you’re looking for a new car, chances are you have to decide between buying and leasing. They both come with their own pros and cons, making this a tough decision for buyers. When you buy your car, it comes with high monthly costs, but you get to own an asset - the car. Leasing, on the other hand, has lower monthly costs, but you are required to make monthly payments until the end of the lease term. To decide which route is best for you, we should look at the benefits to each method.

You should weigh the pros and cons and decide which option works best for you and your family.

Key Takeaways

• The 20/4/10/10 rule is a great way to budget for a new car purchase. Put a 20% down payment on a 4 year loan, spend 10% of your monthly income on all car expenses, and plan to drive the car for ten years.

• Save $100 every month of maintenance and repairs.

• Buying a used car is much cheaper than buying a new one.

• Certified pre-owned cars are a great way to ensure that the car you’re buying doesn’t have any chronic problems.

• Make sure to do your research if you’re buying used from a non-trusted party.

• Buying and leasing both of pros and cons. Take a look at the bottom of this article for each and decide which best fits your needs.