Just few years back, a small amount of most Americans’ paychecks went to car costs – loans, gas, insurance… Now, with the ever-increasing cost of vehicles, most Americans find themselves spending significantly more of their take-home pay just to keep up with car costs. New car ownership comes with an ever-climbing price tag and this is reshaping how we budget and spend. Read on for tips on how to take back control.
Crafting Your Car Payment Plan
Adopting the 50/30/20 rule for your overall budget can be a game-changer. If you’re a W2 employee on a fixed income, here's how to align your take-home pay across three vital spending domains:
50% for necessities like housing, sustenance, and transit – encompassing your monthly car payment and related vehicle costs.
30% for indulgences such as leisure, exploration, and nonessential items.
20% for building savings, erasing credit card debt, and fulfilling long-term financial goals.
Within this framework, a monthly auto loan payment typically falls into the "necessities" column.
Suppose you're eyeing that car purchase, which may be absolutely necessity for daily commutes or school routines. But what happens if you just have to have a Tesla, or an Audi? You might consider allocating some of your payment to the "indulgences" segment.
However, if you take from one pot, it’s got to come out of another, so the crux is achieving equilibrium – your entire budget harmonized. A strategic trim in some areas might grant leeway for channeling more than 10% of your take-home pay into your car payment, should you choose. The key here is, be careful to not take 10% from your Needs budget, but not make any changes to your Leisure budget.
What about financing, and what if a car payment doesn’t fit your budget?
Exploring Alternative Paths:
Let’s say you have diligently restructured your budget and meticulously shopped for loans, yet an affordable car payment remains out of reach. What now? There exists a few alternative avenues to navigate:
**Shrink the Borrowing Scope:** Venture into the realm of lesser borrowing, where reduced commitments translate into a more palatable car payment. This might entail opting for a more modest vehicle or accumulating ample funds to execute a heftier down payment. Try leveraging online pricing guides like Kelley Blue Book and Edmunds to ace the trade-in game.
**Timing is Everything:** Should the prospect of postponing your car purchase be feasible, you might find yourself better poised to secure a manageable car payment. In today's era, as car prices and payments ascend, the vehicle affordability index from firms like Moody’s Analytics suggests that the average monthly payment has surged beyond $700. Delaying your purchase might just be a strategic move, anticipating an eventual fall in car prices and accompanying payments.
**A Pathway to Refinancing:** If circumstances paint you into a corner where a high monthly payment is your only resort, remember that a future reprieve could come in the form of refinancing. Especially for those grappling with less-than-ideal credit, the key lies in establishing a record of six to twelve months of punctual loan payments. This commendable financial behavior might unlock the door to refinancing, allowing for a reduction in interest rates and consequently a lighter monthly burden.
If you think it’s time for a new car, and you’re faced with scary-high prices and interest rates, take a breath and try leveraging one of these alternative paths.
Happy shopping!