How to Prepare Yourself Financially for Owning a Car

For me buying a car means accepting responsibility. There is more to it than just driving around. You have to take care of the vehicle to give you the best value. Neglecting your obligations can mean wasting your money. What you want is to get the most out of your investment. And yes, for me and most of us, a car is considered one. For most families, including families of one, a car is much more than a depreciable asset.

Your vehicle is your gateway to freedom. It does more than get you from point A to B. It facilitates access to fresh, healthy food, on-time appointments, and the ability to earn income. Your car is your wings to the world. With something as vital as your means of transportation, it is crucial to ensure that your vehicle’s maintenance is at the forefront of your mind. What works for me is budgeting for my necessary car costs, expected but unknown car costs, and unexpected expenses.

When it comes to purchasing a vehicle, I find it essential to consider all of the costs that will eventually come into play during the vehicle’s life to get a true sense of the expected financial burden. I say financial burden because while a car may be a blessing, it can also be a burden.

Expected Car Costs

To financially prepare yourself for buying a car, you need to know what you will be spending first.

Fuel Expenses

Unless you decide on an electric vehicle, you should expect to pay for gas. It’s one of the most basic expenses for our vehicles. AAA estimates that the average 2021 model car costs 7.79 cents per mile. The average round-trip drive to work is roughly 40 miles. Depending on commuting distance, you can expect to pay about $3.12. Of course, that’s before factoring in the rising cost of gas.

Because I work remotely but drive a lot on the weekends, I typically budget only $200 a month for my gas expenses. Sometimes, I have money left over, which I will then save for road trips and months when I drive more often. You can get a more accurate idea of your monthly fuel expenses by downloading an app like Drivvo.

Maintenance

Remember that Drivvo app that I mentioned before? You can also track your historical car care expenses to get a monthly breakdown of what you spend on your car. As an employee of Automoblog, I know how important it is to take care of your vehicle’s maintenance. I’ve also been young and neglected my vehicle’s maintenance to my detriment.

You should find a mechanic shop that you trust in your neighborhood and go to them to have your vehicle maintained. If something goes wrong with your vehicle, you will trust their expertise on your specific vehicle.

Auto Insurance

Most states require you to only have liability insurance for your vehicle. Auto liability coverage pays for property damage and injuries to another person caused by an accident that you were at fault. This type of coverage is typically broken down into two parts. Bodily injury and property damage. Property damage pays for damage to another persons property and bodily injury pays for those persons injured in the accident.

This is the bare minimum insurance that you need in order to drive your vehicle.

Registration and Fees

State regulations require vehicles to be registered. That data is used for tax assessment or even tracking down a criminal. It is an essential requirement for every car owner.

The cost can vary from each state but generally is around $40. You will need to renew the registration regularly. Again, that depends on where you live, but it usually is on an annual basis.

Expected but Unknown Costs

Another item that I attempt to budget for is expected but unknown costs. I budget for these items in different ways. As I mentioned earlier, I have a monthly budget for fuel expenses and anything left over gets saved for overages for months where I spend more, like months where I go on road trips and vacations. Here are some other expected but unknown costs that should be considered when thinking about owning a new vehicle.

Car Repairs

Eventually, even the best-maintained vehicle will need repairs. One way to prepare for this is to create a fund for your eventual car repairs by putting aside an amount on a monthly basis for those repairs. According to How Stuff Works, it can cost about $5,200 for repair and maintenance costs for a vehicle over its lifespan of 120,000 miles. If you drive 12,000 miles a year on a new car, that’s $520 you have to save a year.

However, some car repairs can cost much more than the $520 you will have saved each year. Things like transmission replacement can cost upwards of $5,000 not including taxes and fees. If you don’t have the extra funds for this kind of repair, this can become a major financial setback for your family. This is why I choose to get an extended warranty for my used car. Buying an extended warranty for your used car can help offset those costs by covering you in case of those expected but unknown costs that you just cannot budget for at the moment.

Unexpected Costs

There are of course, unexpected costs that are associated with owning a vehicle. In my opinion, the most important unexpected cost is automotive accidents.

Full Coverage Insurance

The most important unexpected cost as a driver are accidents. While you are only legally required to purchase liability insurance. It is a good idea to have full coverage insurance. This type of insurance is also known as comprehensive coverage and collision coverage. Comprehensive coverage covers the cost of damages to your vehicle in the case of an accident that isn’t caused by the collision. Collision coverage covers damages that happen because of an accident. For example, if your car is stolen or damaged by a hurricane, comprehensive coverage will protect you from financial losses.

GAP Insurance

GAP or guaranteed asset protection insurance is another good coverage to have in case of an unexpected problem. It can save your from financial ruin in case of a collision or theft of your financed vehicle.

GAP insurance pays off the remainder of your auto loan if you are “underwater” on your auto loan at the time of the vehicle loss. This is a great financial investment if you do not have the liquidity to cover the loss that your financing company might take if your vehicle is rendered a total loss.

Financial Tips for Buying a Car

It is easy to lose money when buying a car. If you do not plan well or know what you are doing, you could pay way more than you should. Here are a few tips on how to manage your car finances.

Choose a Car Wisely

There is an abundance of car brands and models today. Each one is made for a specific purpose or audience. The best one is not always the most expensive. What matters is if they fit your needs and requirements.

A 7-seater SUV could give you the best value for bigger families. Small sedans are best when you are conscious of your budget. Constantly lugging around large equipment? A pickup truck would fit your needs.

Do Your Research

Anyone who plans to buy a car needs to do a lot of research before stepping into a dealership. Once you have a general idea of what you need, it is time to look at the different offerings from various manufacturers.

You can use the internet to look at their official websites to get a good idea of what is available. Take note of the features you deem as non-negotiable. Heated seats, parking sensors, and Apple CarPlay or Android Auto are examples of sought-after car features.

By knowing what you want, you can enter a dealership with a purpose. You are there to find out more about the car you have your sights on. Do not get distracted by the bells and whistles. Stick to what you want when going into a dealership.

Compare Different Dealerships

You do not have to stick to the first dealership you walk into. Ask the questions you need to and go to another dealership. Ask the same questions and take note of their answers.

Once you get home, compare the notes you got from the different dealerships you visited. That allows you to find the best deal available.

Buy Brand New or Used?

There are pros and cons to both brand-new and used cars. For the former, you can expect:

• A wider selection.
• More flexible financial rates and offers.
• Modern tech features.
• Manufacturer warranty.
• Peace of mind.

Of course, brand-new is more expensive. On the other hand, going for a used car:

• Saves you money.
• The bulk of depreciation has already passed.
• Lower insurance premiums.

Buying a used car is financially practical, but you have to know what you do. You will need to inspect the vehicle to ensure that it runs properly.

Cash, Loan, or Lease?

You have three main financial options when buying a car:

Buying in Cash

If you can afford it, buying a car in cash is best in terms of cost. You avoid the interest payments that add to the price of the vehicle. Plus, dealers would give you the highest discounts when you buy in cash. You also get to save on other processing fees involved in applying for a loan.

Unlike mortgage and student loan payments, an auto loan is not tax-deductible anyway.

Buying on a Loan

The most common way people purchase a car is through a loan. The basic principle is that you pay a fixed down payment on the price of the vehicle. The balance is paid in equal amounts every month throughout a fixed period.

Here is a sample computation:

While the monthly payment seems appealing, the total interest you pay will be several thousand dollars. That does not include the loan processing fees.

You should get a pre-approved loan before shopping for a car. That uncovers any potential problem with your credit, and you know how much you can spend.

Leasing a Car

For some people, leasing a car makes more sense financially. You rent a car for a fixed amount of time from the dealer. The idea is that you pay for what you use rather than buying the vehicle itself.

You can lease a car for two to five years. Other dealers can extend short-term leasing but to get the most out of it, you would want to sign up for about three years and 36,000 miles.

There are several advantages to leasing, including:

1. Less cash is needed to drive the car.
2. Lower monthly payments.
3. Lower maintenance cost.
4. You can get a new car every few years.
5. You can purchase the car at the end of the lease.

Once the contract is made, you return the vehicle to the dealer for inspection. They would check if you exceeded the mileage limit and charge you for certain damages or repairs needed.

As good as a new car every three years may sound, there are several disadvantages to this, including:

1. You pay more to drive a vehicle in the long run.
2. It is difficult to cancel the contract if something happens.
3. There is a limit to the mileage.
4. You cannot customize the vehicle.
5. Good credit is required to lease a car.

The biggest downside is you do not own the car. Inherently, that has limitations.

Preparing to Buy a Car

Prepare yourself financially before buying a car. Whether you need to earn or save more, here are tips on how to manage your money for your car:

Set a Budget

If you plan to buy a vehicle with a loan, getting pre-approved gives you the budget you can use. You know you cannot go over a certain amount, which is very useful in shopping for a car. Take the time to save money to make a larger down payment. Try to target at least 20%.

If you plan to pay in cash, you should put a ceiling on the budget. That way, you do not go overboard with the purchase.

Use Automated Savings

Saving money is a habit you develop. It can take time to instill the discipline to build that. There will always be a temptation to use your money on something else.

You could use automated savings apps. All you have to do is set it up, which will put away a certain amount of money regularly.

The app provides a digital solution to your spending troubles.

Dedicated Car Account

Open a bank account solely for your car expenses. That separates your money based on its purpose. It helps you mentally to manage your money.

You can continue the dedicated account after you purchase your car. All the money in the bank account is for the monthly payments, insurance premium, maintenance, and other costs discussed earlier.

Conclusion

Financial preparation is key to owning a car. You do not want to get buried in debt because of a single purchase. Do your research, be smart, and do not go overboard with your decision-making.

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