Your car is one of the most expensive items that you can purchase. In fact, it can suck you into financial problems if you’re not careful. The problem is that it’s a necessary purchase since you need it to commute to work, go on road trips, and run your daily errands. Of course, it certainly has to come with a price tag since you need it every day.
Fortunately, there are multiple ways which can prevent your car from becoming a money pit. We’ve rounded up some of the top tips that you can use to make your car ownership as cost-effective as possible.
Get an Extended Car Warranty
Whether you purchase a new or a second-hand car, a car warranty can protect your purchase. A warranty insures the majority of your vehicle’s parts in the unfortunate event that something goes wrong. This protects you from the cost of any unforeseen failures.
An extended warranty is helpful, especially if your car’s manufacturer’s warranty has expired. Rather than paying the entire car repair cost out of pocket, your responsibility would only be to pay for the deductible – if you have one. The onus will be on your warranty provider to pay for the rest, provided the damage is covered in the service contract.
An extended warranty is comparable to your auto insurance policy. While you don’t like paying for it, it certainly comes in handy when you need it.
Buy A Car Within Your Budget
It’s easy to over pay when shopping for your car. From classic models to stylish sports cars that glitter in the showroom, many car shoppers end up with cars that exceed their monthly budgets.
If you consider a car as a means to take you from point A to point B instead of a status symbol (and you should), you should only use 10-15 percent of your yearly income to buy one. So if your salary is the average annual US salary of $53,490, your car budget comes in at around $8,000.
Given that most brand new cars might exceed your budget, the best alternative is to consider the used car market. You can find a range of second-hand cars with reasonable mileage and in tip-top condition for less than $8 grand. Stick to your guns and negotiate.
Yes, it’s tempting to blow your budget to find a “better” ride. However, keep in mind that the purchasing price isn’t the only expense of car ownership. You must factor in insurance premiums, fuel costs, repairs, and preventative maintenance. Take into account your yearly income when planning for your car’s budget, and don’t overspend! Otherwise, you may run into financial difficulties a few months later.
Budget for Expected Maintenance
Cars require repairs and preventative maintenance, and most of the time it finds you unprepared. If you’re living on a tight budget, an unexpected repair cost may leave a hole in your pocket. Lack of a budget for expected car maintenance will have you forgoing the much-needed tune-up. In turn, you run the risk of incurring further damage resulting in costly car repair bills in the long run.
It’s prudent to set aside a car maintenance budget that covers any anticipated costs. Below are a few tips to help you create a car maintenance budget:
- Gather all your car maintenance records for the past year. These include your maintenance receipts and checkbook register for things such as oil changes, tire balancing, wheel alignment, brake pads installation, and so on.
- Add all the receipts to find the cumulative total for your maintenance during the past year. Divide the total by 12 to find your average monthly maintenance cost. Say you spent $1,000 in the last 12 months, your monthly car maintenance budget should be $83.
- The existing condition of your car will dictate how much budget you should put aside every month. Older cars probably will require more ongoing maintenance than newer models.
- Have a separate account for your car maintenance funds. Don’t mix these funds with other money. They are specifically meant for car maintenance. Ideally, you should keep your budgeted amount in a savings account. Top up the account every month, so you have cash available when repairs and maintenance come knocking. This should be in addition to your emergency fund!
Don’t Take a Long-term Vehicle Loan
The average auto loan amounts are skyrocketing, according to data from Experian. The typical loan for brand new vehicles exceeds $30,000, while the auto loan for second-hand cars is $19,329. What’s even more worrying is borrowers are remaining in debt longer.
Why are car owners taking such huge loans for a longer duration? They often pay attention to the monthly payment and not the total sum for the entire loan duration. Hence, clever sales agents throw around long-term loans with low monthly payments. By doing so, they can sell a high-priced car for an attractive commission.
You need to think twice if you’re contemplating taking out an auto loan of five years or more. This is one of the worst financial decisions that you can make. Before taking a long-term vehicle loan, consider:
For the first five years, a car loses up to 25 percent of its value each year.
- You’re still paying for your loan as the car depreciates. So if you need to sell the car within the first few years, it may run the danger of owing more than the actual value of the car.
- You may not really want to keep your vehicle for more than five years.
- You end up paying more for your vehicle over the duration of the loan.
A long-term car loan makes sense if you have a good credit rating. The carmaker may offer a good deal with low-interest rates. Otherwise, keep your car loan repayment period as short as possible.
The Bottom Line
Your car doesn’t have to be a money pit. There are many things that you can do to help you steer clear of financial difficulties associated with car ownership. A good place to start is getting an extended warranty to save you from the cost of high repair bills and setting aside money for expected maintenance. You also need to avoid bad habits such as taking a long-term loan and buying a car that’s too expensive for your monthly budget.
This was very beneficial. My question is how long do you keep putting money into an older vehicle? My wife and I spent nearly $8,000 over two years to keep our van running; and that had to be on credit card. UGH!! Yes, not the smartest move. But we wanted to not have a car payment. But we did. Since this happened 11 years ago, my goal is not to repeat this. What advice would you suggest? Thanks for allowing me to ask this question.
I would caution against buying a warranty. The repair shops will tell you they are problematic when the shop needs to make a claim. Some warranties even contain weasel word language which forces the shop to use used parts. So your transmission blows and you have to replace it with a used transmission? Yikes!