How much car can you afford?

Whether you have decided to buy a new or used car or go the leasing route you still need to decide how much you can afford to spend. The rule of thumb is that the payment (including interest) associated with your car should not exceed 20% of your monthly take-home pay. Remember, buying a car is not an investment, it is an expense as its value continues to decline over time.

When calculating how much you can afford, there are additional expenses to remember including depreciation, insurance premiums, fuel costs, maintenance and repairs. The average cost of owning a car, excluding financing and depreciation during the first five years was about $145.00 per 1,000 km. Think about how many kilometers you drive each year and make sure you consider this when you are deciding what you can afford. Take the total number of kilometers and divide by 1,000 (15,000 km/1,000 = 15). Take this amount and multiply by $145.00 ($145.00 x 15 = $2,175.00). This is the amount it costs to run your car for the year. If you divide this by 12, you can get the monthly cost ($2,175.00/12=$181.25).

How do you go about calculating what you can afford?

Start by taking our Financial Flexibility test. First calculate your current monthly financial payments, excluding your mortgage/rent and place yourself on the Flexibility Scale. Now add in what you expect to pay in car loan payments. Is adding an additional 20% of your take-home pay in car payments putting you on the wrong side of the scale? If it is, you need to lower the amount you can afford to pay in monthly loan payments. Once you have figured out the payment amount that you can afford, it is time to check your cash flow.

Move on to the Financial Cardio test and include your car loan payment and the monthly cost of operating your car when completing the test. Are you in a healthy position at month end? Are you able to maintain savings goals? If so, then based on the monthly payment amount you can determine, with the help of your financial advisor, what amount you can borrow.

Not sure where to start or just need some help figuring out what all of this means to you financially – come in, give us a call or drop us a line at memberassistance@mycreditunion.ca – we’ll show you how!