What Do You Need to Budget For When Buying a Car?

Buying a car is sometimes a stressful experience. For most people, a vehicle is among the most expensive assets they purchase. 

However, cars are essential for most people as we cannot move around without a car. Therefore, one has to buy one, meaning you should be careful not to pay unnecessary costs for an already pricey necessity. The key to not overspending on a vehicle is creating a wise budget and sticking to it.

The following are things you should budget for when buying a car.

1. Car Insurance Premiums

Drivers need to carry liability insurance in almost all states. But, many drivers opt for comprehensive collision coverage for additional protection. The typical car insurance policy in the U.S costs $1,483 annually or $124 monthly in 2021. 

Car insurance premiums depend on your car, your driving history, your age, selected coverage options, and the number of miles you intend to drive. The kind of car you buy also affects the amount you pay on insurance. New and more expensive vehicles are typically costlier to insure. Conversely, used cars that are not worth much money generally have cheaper insurance rates.

However, rates may differ significantly based on your individual circumstances. For instance, a 20-year-old driver with a clean record will pay much less than a 40-year-old driver with multiple accidents on their record.

2. Protect My Car Maintenance Plan

In addition to buying car insurance premiums, you may also need to purchase a Protect My Car (PMC) maintenance plan or vehicle service contract. This plan provides warranties and maintenance for drivers who want to protect their cars. The plan ranges from basic coverage to coverage for vehicles with no more than 125,000 miles. 

PMC is among the few extended car warranty companies with a maintenance plan option for high-mileage and older vehicles. You can purchase a PMC plan in all the states except Washington, Oklahoma, Missouri, Hawaii, California, and Alaska.

Protect My Car costs are usually slightly above those of their competitors in consideration of the overall price tag of coverage. But, the monthly payments are the cheapest in the warranty industry. These costs range between $58 and $79 per month for an unlimited mileage warranty.

3. Your Income Level

The amount of money you make annually or monthly greatly affects how much car you can afford. It’s advisable not to spend more than 10% of your gross annual income on a vehicle, including the cost of financing, insurance, and maintenance.

For example, if you earn $50,000 per year before taxes, you shouldn’t spend more than $5,000 on a car. If you’re looking to finance a vehicle, this rule of thumb means you shouldn’t be spending more than $500 per month on car payments, including interest and insurance. 

4. Financing

You may opt to finance your car purchase with a loan. When applying for a loan, lenders evaluate your application and credit score. 

After approval of the loan, the lender sets the interest rate, which helps determine the repayment amount in consideration of your credit score. Your interest rate may also impact your total repayment costs and monthly payments.

5. Maintenance Fees

While repairs may be nothing to worry about with a new vehicle, every car needs maintenance. If you buy an older car, it will require new tires or a tune-up. 

Generally, a vehicle uses about nine cents per mile in maintenance costs. If your average distance per year is 12,000 miles, expect to incur approximately $1,080 annually on maintenance.

6. Fuel Costs

Fuel is one of the most significant expenses when running a car. The cost of gasoline has been volatile in the past decade, and has been on a slight incline in the past few months due to the war in Ukraine.

The average price of a gallon of regular unleaded gasoline was $2.60 as of March 2021, with that price rising to over $4 per gallon in 2022. Still, you should know how much you spend on fuel each month to ensure this doesn’t put a strain on your budget.

7. Depreciation and Taxes

When buying a new or used car, you need to factor in depreciation and taxes into your budget. Depreciation is the difference between the original value of the car and its value after some time.

The average new car loses 20% – 25% of its value in the first year and 10% annually for the next four years. So, if you’re buying a $20,000 car, it will be worth $15,000 after one year and $10,000 after five years.

Most states charge a sales tax on vehicles bought within their borders. The rate may differ depending on your state and county of residence. For instance, buyers in Colorado pay a 2.9% state sales tax and a 0.5% to 4% excise tax on the purchase price of a vehicle.

8. Registration Fees

When you buy a new or used car, you need to register it with your state’s DMV. The registration process requires an application, proof of insurance, and a vehicle title. You will also need to pay a registration fee, which may be a one-time charge or an annual fee depending on your state.

The average cost of registering a car is $100 but may be as high as $500 in some states. For instance, the annual registration fee for vehicles in California is $86, while the one-time registration fee in Florida is $225.

9. Miscellaneous Car Costs

In addition to the costs mentioned above, there are other miscellaneous car expenses that need to be considered when creating a budget. These include:

  • Parking fees
  • Tolls
  • Roadside assistance
  • Rental car insurance
  • Gap insurance

These costs can add up quickly, so it’s important to factor them into your budget.

10. Emergency Fund

Last but not least, you need to have an emergency fund set aside for unexpected car repairs. Even if you have a new car with a warranty, there’s always the chance that something could go wrong.

According to a study by AAA, the average driver spends about $1,000 per year on car repairs and maintenance. An emergency fund will help cover the costs if you can’t afford to pay for repairs out of pocket.

In Conclusion

Buying a car is a big financial decision, and it’s important to create a budget that works for you. By taking into account all of the costs associated with car ownership, you can ensure that you can afford to keep your new ride on the road.

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