- The right car should fit the needs of your family for years to come
- Whether you pay cash or finance, buying a car affects other areas of your financial plan
- Doing your research before hitting the car dealership can save you thousands of dollars and help you avoid dealership sales tactics
- Making the right decision personally and financially will have you riding in style for years to come
Goodbye sports car and hello minivan! All kidding aside, what you look for in a car changes dramatically when you have a family to consider – safety features, functional for everyday use, friendly to your budget, and one that can meet the needs of your family for years to come. Here are three steps to navigate the decision with confidence.
Define What Your Family Needs In A Car
Before you head off to the dealership, clearly define the type of car that is right for your family. If you go car shopping first, you will inevitably fall in love with the car that has all of the bells and whistles and a much higher price tag.
Start with creating two lists. The first list should include the most important items – safety features, storage space, good gas mileage, maybe a hybrid or electric engine. The second list should be the nice-to-haves like the panoramic sunroof or the fancy tech package. Keep these lists handy when you go to price the car online (more on this below).
As for the type of car, here are a few questions to consider. Is it just the family car or will it be used for commuting as well? Who will be the primary driver? How long will you drive it? Would you consider a used car if you are a bit more budget conscious? Cars are not good investments and you want to buy a car that you can drive for a long time.
Determine How Much You Should Spend
The all-in cost of the car - When buying a car, focus on the total cost of the car and not just the monthly payments. A $40,000 car is still a $40,000 car no matter how long you pay for it. The trick with financing is that an extra $5,000 or $10,000 is only $100 or $200 more per month which makes it feel more budget friendly. But you are eventually paying the full price.
A good way to keep your car budget in check is to think about the other ways you can use the money you don’t spend to boost your savings for another milestone.
Let’s look at an example:
After shopping for a car, you decide to upgrade to the nicer model and add a few optional packages to the car that increase the purchase price by $10,000.
If, instead, you took that extra $10,000 and invested it in an education savings account for the next 17 years and earned a 6% rate of return, you would have almost $27,000 saved for college.
[Investment performance is not guaranteed. Investing involves risk.]
Finance or pay cash - It’s rare that people can drop $30,000 to $40,000 cash, or more, for a new car. If you don’t like debt or paying interest, you need to save accordingly. For most car buyers, a healthy down payment and a modest monthly payment are the right call.
The right monthly payment - The rule of thumb for a car payment is to spend less than 10% of your pre-tax income on the monthly payment. However, rules of thumb only get you so far. You need to look at your other monthly debt payments and savings goals to get a better idea of what payment fits your overall plan.
How much to put down - You typically want to put 20% down although it’s not required. A larger down payment can have several benefits.
- A lower monthly payment
- A lower interest rate
- You will pay less interest over the life of the loan
- You offset the initial hit of depreciation
The right car insurance - Don’t go with the cheapest policy. You need to find the right coverage for a fair price. Shop the insurance with a few companies including the one you use for your current home as they may give you a discount for keeping all of your insurance policies with them, also known as bundling.
Follow These Smart Car Buying Tips
Look for a non-dealer car loan - Talk to your bank or credit union about your loan before you go car shopping. While dealerships will offer you financing, you can likely get a better loan, with a lower interest rate, elsewhere.
Check your price points - Shop online before heading to the dealership to get a sense of the price tag. Remember the exercise of listing your wants and needs? You may find that a few of those nice-to-haves increase the price rather significantly. That $40,000 car fully loaded may run you $55,000.
Test drive, test drive, test drive - Always test drive a few cars to determine which one is best for your driving preferences. For new parents out there, bring a baby seat to the dealership as well. You want to make sure it’s easy to get in and out.
A car is a big purchase both financially and for your family. If you follow the steps above you can navigate the process with confidence and put yourself in the driver’s seat of the decision and the best car for your family.
Buying a car is a big financial decision that will affect other facets of your life. Financial planning, as it should be, can help with every decision you make that money touches, big and small. To start planning for your family’s future, schedule a free introductory call with a CFP® Professional at Facet Wealth today.