A car shouldn’t be an impulse buy at the cash register – especially if you are in your 20s, and it’s your first time. It can be overwhelming to add a set of wheels to the challenges of starting a career, making a home and building relationships. We’ve interviewed personal finance expert and blogger at Money We Have Barry Choi about whether or not buying a car is a worthwhile idea.
Shoring up your finances can be a challenge in your 20s with multiple jobs, entry-level salaries and low job security. Choi says the first question to ask yourself is “how badly do you even need a car?” Cars are expensive and they only depreciate in value, so you want to make sure it’s absolutely necessary.
The next question Choi suggests asking yourself is, “Can you even afford it?” There’s gas, insurance, maintenance and potentially a loan to consider. Choi advises you to “know your numbers in advance and stick to them,” because dealers can make anything look affordable with loans.
Your Monthly Expenses
Organizing your expenses is worth the effort because it will help figure out where your cash is flowing. Barry Choi’s best advice is to have a budget. He suggests that people new to budgeting can “start by tracking all expenses for a month or two.” From this vantage, you’re in a good place to “create a realistic budget by making adjustments to your spending and prioritize saving.”
Whether or not you’re saving for a big purchase like a car, a budget is a good habit to have. It’ll help you avoid overspending and debt while growing your savings.
Your Disposable Income
Once you’ve decided where the bulk of your paycheque is going, disposable income is there for you to enjoy what you’ve earned. But how should it be added to your budget?
Choi says that “having disposable income as part of your budget is a smart move.” When clearly defined, you are able to see how much income is available after meeting your savings goals. However, Choi cautions that while you shouldn’t feel guilty about spending the leftovers, you must also realize that “saving 10 per cent of your income isn’t really enough anymore.”
The Car Purchase
Lots of 20-somethings are just beginning careers, so they don’t have a lot of money and many still live with parents. It’s not the most financially-ideal situation to buy and maintain a car.
Barry Choi addresses this problem logically, saying that if you “can keep all your car costs under 20 per cent of your take-home pay, then you can probably afford a car.” He attaches a caveat though: you shouldn’t “prioritize a car purchase over your retirement savings or emergency fund.” If you’re able to keep up with your savings and afford a car, you need to stay on top of car payments so it doesn’t impact your ability to get a mortgage later.
The actual price of the car is a huge factor as well. Choi stresses the 20-percent-rule as a good estimate of affordability, but says that you’ll be better off if you can keep costs down as well. Getting a used car (we recommend certified pre-owned) to get you from point A to point B is a good choice because you’re likely paying the lowest amount that you possibly can.
The Cost of Owning a Car
The costs unrelated to purchasing the actual car can add up – quick. There are monthly loan payments for financing a car, but there’s also gas and insurance, and maintenance like oil changes and tune-ups. What’s the first step in getting these figures to add up?
Choi recommends calling insurance companies about the car models that you’re interested in; knowing the costs may help narrow choices. He notes that “gas shouldn’t be too hard to figure out based on how often you plan on driving.” Maintenance is harder to estimate, Choi says, because each car is different, but he suggests the autos.ca forum for insights.
Cutting Certain Expenses
Even after budgeting, you might find money is still tight. One solution is to cut certain expenses to be able to afford the more essential things.
Choi says that common culprits can be reduced: eating out, entertainment and shopping. He also reminds that there are monthly reoccurring expenses that can be cut or adjusted, like a forgotten magazine subscription or a cell phone plan downgrade. As well, you can look at fees that you shouldn’t be paying, like ATM fees or avoidable penalty charges.
Affording a car can be determined by a simple equation, but in order to make your finances work, you need to consider your lifestyle and needs, and that makes buying a car a very personal decision.