Dreaming of a new car is often the first step towards owning one. But before you can collect the keys and drive off into the sunset, you need to figure out the costs. If you’re asking yourself, “How much should I spend on a car?”, it’s an important question to explore.

Determining how much you should spend on a car depends on several factors. It’s helpful to start your car-buying journey by understanding the true cost of purchasing and owning a vehicle.

The total purchase cost of a car usually extends beyond just the sticker price—the amount the seller is asking for the vehicle. Although the sticker price is typically the largest expense and may be negotiable, there are other costs to consider. These include sales taxes, vehicle registration fees, car insurance, and financing charges, all of which contribute to the overall cost of buying a car.

If you plan to finance the vehicle, consider these questions:

  • Are you willing and able to make a down payment? A larger down payment reduces the total amount you need to finance.
  • What financing term suits you best? A longer term means lower monthly payments but higher overall interest costs.
  • Do you have a car to trade in to offset some of the purchase cost?

These questions are more relevant if you’re buying from a dealership. If you buy from a private seller, you’ll likely pay in cash, which differs from making monthly repayments. Paying in cash might also affect how much you’re willing to spend on the car.

Once you’ve purchased the vehicle, keeping it in good working order is crucial. Different types of vehicles come with varying costs.

For example, owning a 10-year-old truck for long-distance driving is quite different from running a brand-new electric vehicle primarily used for city driving. Smaller cars generally cost less on gas (depending on your driving distance), while some makes of vehicles may be more expensive to repair for similar issues.

Routine maintenance, such as oil changes and annual inspections, are additional costs to consider. Don’t forget about car insurance, which is another significant expense.

If you buy your car in a different state from where you plan to register it, there are additional logistical considerations for transportation and registration.

Costs may vary depending on the states involved and whether you’re purchasing from a dealership or a private seller. Some sellers offer delivery across state lines, but this service typically incurs an extra fee.

Budgeting is an essential part of buying and owning a vehicle. Understanding your current expenses and how a new car will impact your monthly finances can help determine how much you should spend.

Monitoring your income and expenses over a month or two can provide valuable insights into how much you can realistically afford to spend on a car. This real-time tracking can reveal spending patterns you might not have noticed otherwise.

To assess your spending more effectively, divide your expenses into essential and non-essential categories:

  • Essential spending includes groceries, rent or mortgage payments, utilities, and other necessary expenses.
  • Non-essential spending encompasses dining out, entertainment, and other discretionary expenses.

Additionally, expenses can be classified as fixed or variable:

  • Fixed costs are consistent month-to-month, such as rent or mortgage payments.
  • Variable costs fluctuate, like entertainment or clothing purchases.

Another method to budget for a car is by analyzing your debt-to-income (DTI) ratio, which is the percentage of your monthly income that goes toward debt repayments, including your mortgage, credit card, and student loan payments.

As a general rule, a lower DTI ratio indicates a greater capacity to afford car payments relative to your income.

Here are some additional tips to help you determine how much to spend on a car:

Establish your car budget before you start shopping. This way, you can find a vehicle that fits within your financial limits rather than choosing a car and facing potential disappointment if it exceeds your budget.

Cars are designed to be appealing, from sleek sports sedans to rugged SUVs. However, it’s important to differentiate between what you need and what you want. Do you really need that moonroof or premium sound system? Being realistic about your requirements can help you choose a car that meets your needs without straining your finances.

A car payment calculator can be a valuable tool to estimate your monthly car payments for different scenarios. By inputting the amount you plan to finance along with other basic details, you can explore various monthly payment options based on different loan terms.

Consider getting prequalified for auto financing. This step can provide a clearer estimate of the financing terms you might be eligible for, helping you set a realistic budget and giving you more confidence as you negotiate your car purchase.

Deciding how much to spend on a car is a nuanced decision that depends on various factors, including your financial situation, the type of car you want, and your preferred payment method. With thorough research and careful planning, you can find a car that suits your needs and budget. Once you’ve made your choice, you can turn the ignition, shift into drive, and enjoy the journey in your new vehicle.