Over the past few months, and the past couple of weeks in particular, my wife and I have been in the process of buying a car. It’s been a long and at times painful process, but just this past week we made our final decision and within the next couple of days we’ll be heading home in our sweet new ride.
We learned a lot from this experience. Neither of my wife nor I had ever been through the process of buying a car before, and other than deciding to have a child this was the biggest financial commitment we have made together. We definitely made some mistakes along the way, but I think in the end we did enough right to come away with a purchase that fit pretty much everything we were hoping for when we started out.
So, over the next few weeks I’m going to be writing a series on the lessons we learned from going through the car-buying process. My hope is that you can learn from us and use some of our experiences to improve your own purchase when the time is right.
Setting a budget
When it comes to buying a car, I think it’s important to go into it with two numbers in mind:
- How much you want to spend.
- How much you can spend.
In both cases, I want to be clear that we’re talking about the total price of the car. If you’re paying cash, that includes the purchase price PLUS all taxes and fees involved, which can be significant. If you’re taking out a loan, that also includes interest paid over the life of the loan. When you start talking to dealers and evaluating options, you want to be comparing apples to apples. If you’re not talking about the full price with everything included, you don’t have a fair comparison.
To answer #1, how much money you want to spend on a car, you have to evaluate this purchase in the context of your other financial goals. Hopefully at this point you’ve already set up a budget, you’ve started saving for retirement, and you also have dedicated savings for expected but irregular expenses like home maintenance and gifts. With those things in place, you should be able to come up with an ideal total purchase price that will best facilitate your progress on all of your goals.
To answer #2, how much money you can spend, you will look at things slightly differently. Whereas #1 gets you an ideal amount you would like to spend, #2 is determining the absolute maximum. As in, you can’t spend more than that amount without raiding your retirement, your emergency fund, or without sacrificing important financial cornerstones like insurance. This answer sets the limit that you truly can’t go above.
I think it’s important to know both of these amounts because while you will ideally end up close to your answer for #1, you will learn much more about the different options available as you go and without #2 you’d be missing out on both flexibility to adapt to your options and on the protection of having a hard limit. Both of those things will be valuable tools as you go through the process.
To give you an example from our own situation, we had an amount of money we’d been saving as kind of a mixed house down payment/car fund. Our ideal amount, our answer #1, was around half of that total savings. But we also knew that if we really felt like it was the best route, that entire savings amount was available to us without sacrificing either our financial security or our biggest long-term goals. Having that flexibility and that hard cap was helpful.
Setting a timeline
This is something I didn’t do well at the start and it ended up getting me into a little bit of trouble. Know when you would like to actually buy the car, and set the timeline around that. If your car has died and you need a new one now, your immediate actions will have to be different than if you have a couple of months. Obviously planning ahead and giving yourself some time to go through the process is ideal, but it’s not always reality.
Setting a timeline is somewhat similar to setting a budget. If you haven’t decided on a timeline, you run the risk of either rushing a decision that doesn’t have to be rushed or (like me) procrastinating on a decision that should be made sooner. By understanding the realities of your situation from the beginning, you can put the advice in my future posts into action within a time frame that fits your needs. You’ll know how much time you have to do research, how much time you have to contact and negotiate with dealers, and how much time you have to do your final test drives and actually make a deal. Some of these steps can be shorter or longer depending on your specific needs.
This first step in buying a car is all about setting some boundaries for yourself. Whenever I do this, with anything in life, I find that the process goes so much smoother and gets done much more efficiently than when I just wing it.
Next week we’ll look at how to find the car that fits your needs.