How much car you can afford can be a complicated question. The sort of car you can afford may be something a bit more sporty than you expected. This might not be the case, too. In this writing we'll go over a few factors you should take into account as you consider the purchase of a vehicle.
The following factors should give you a good foundation to determine what kind of vehicle you can afford:
- General Income
- Existing Debts And Recurring Living Expenses
- Opportunity Cost: Can A Vehicle Provide You More Value?
- Potential For Trading Up Equity: Risky, But Not Impossible
How much do you make on average? A vehicle will be a huge chunk of your earnings the year you buy, if you buy outright. If you finance it, then you will continue to see a large cost until you've paid the car off. So what can you afford? How much discretionary income do you have? Even if you don't have the means, there are loan options; but these are going to put you "on the hook" longer.
If you finance a car for $30k with payments at $500 a month, then you're looking at sixty months of payments. If you were making $20k a year, then $6k of our income just disappeared. With rent at $1,000, now you've only got $2k to show for the rest of the year; can you live off that much, and cover incidentals? Probably not; you'll likely have to get a loan, and then you've over-extended yourself.
However if you had the same bills, but were making $30k a year, then you might be in a position where you could afford to take on this sort of expense. However, given that a new car you finance costs you $6k a year in payments at $500 a month, you might want to instead save up your funds and buy a used vehicle outright. If you get more than a year's use out of it, you would save money in that situation.
Existing Debts And Recurring Living Expenses
Beyond annual income, you need to know what sort of expenses you're on the line for regularly. Rent, student loans, credit card debt, living expenses, charity, welfare for family--these sorts of things can eat up your paycheck quick. Know what your costs are every month, and factor that into your decision regarding the kind of car you buy. Anyone can afford a cheap pre-owned "beater" of a vehicle. If push comes to shove, you can go with the cost-effective option.
However, if you can afford it, it could be worthwhile for you to quit eating out for a few months, tighten your belt, and tread water until you're at a point where you've got discretionary income again. Vehicles do bring value which is considerable to the equation. You could accrue more value through utility than you lose financially, if you need the car bad enough.
Opportunity Cost: Can A Vehicle Provide You More Value?
An opportunity cost is the loss of some value you would have acquired by not going one way. Sometimes you lose opportunity by purchasing a vehicle owing to increased financial responsibility. Sometimes you lose opportunity by not buying. Let's consider a brief hypothetical.
Do you have to take a bus to work every day? That may only cost you a few hundred dollars a year, but it could add one or two hours to your daily commute. In a five-day work week, that's five to ten hours you just lost. In a year, that's 260 to 520 hours lost. What is your time worth? Is it worth $20 an hour? If it is, then the bus loses you $5,200 to $10,400 in time, plus around $100 to $200 for the annual ticket.
If you can buy a used car for $5k, and that car cuts that commute down to twenty minutes a day, then you've saved 173.33 to 433.33 hours a year, or $3,467 to $8,667 when you round up the change. Time is all-important, and there's a lot you can do with an hour. Just because the savings here are collateral doesn't de-legitimize them. A car can definitely be worthwhile as a time preservation device, and in that sphere alone it can more than pay for itself inside a few years. However, if you're in such a public transit situation, you might want to go with an older car rather than a newer one until you've managed to get a bit more available capital.
Potential For Trading Up Equity: Risky, But Not Impossible
You might be able to make more money with a used vehicle. Say you buy a used RV at interest in Wyoming and sell it for twice the buying price out in California. You pay off what you owe in cash to the dealership, saving hundreds in interest, and then you can turn the profit into a better vehicle or RV.
With small RVs, this was a great way to make a little money up until March of 2020. As things stand now, this particular tactic isn't what it used to be; but there are still ways to make money with new and used vehicles, even before you've totally paid them off. So if you've got an opportunity, even if it overextends you for a few months, it could be worth it. Even so, this avenue is risky.
Making The Best Choice Based On Your Personal Situation
Taking risk isn't always the best idea, sometimes it is. Whenever you buy something big like a car, you're taking a small amount of risk. As you buy and sell vehicles, you'll become more comfortable doing so, and learn where both dangers and profits are hidden. So know your financial state, know your bills, factor in the cost of opportunity, and weigh worthwhile risks. After doing that, you'll be in a good position to determine the level of luxury you can afford in your vehicle.