Freedom Life Planning

The Ultimate Guide to Financial Planning

Saving and Budgeting to Buy a Car

In this article, I will go over a savings and budgeting plan for buying a car. When buying a car, there are two kinds of costs to plan for, the one-time expenses and recurring monthly expenses. Failure to properly consider all of these expenses can have a major impact on your savings plan. Keep in mind that in buying a car, you are acknowledging that a large portion of your monthly cash flow will go towards the car. Fully understanding these costs is the first step towards planning and managing them.

One Time Expenses:

Down Payment – How much cash you decide to provide upfront to the car dealer. If you are buying a car privately from someone, this may be the full amount of the car. With a dealer, many may offer low interest rate loans that are more favorable than putting cash down, as you are better off investing that cash for higher returns.

Below is a table showing the required monthly savings amounts, assuming a 2% investment return per year, required for car down payment or cash purchase amount. As this is a short-term savings goal, I do not recommend investing into anything risky that may fluctuate a lot. High interest savings accounts or a bond fund are the best options.

Recurring Expenses:

When considering a new car, it is very important to evaluate the monthly cost of owning it. Even if you’ve saved the cash to buy it, you need to be sure your budget has sufficient room for the added expenses of the car. After home/shelter expenses, car expenses are usually the highest. In general, total transportation expenses should not exceed 15% of your monthly income. If a car is only a vehicle to get from point A to point B, it can be even less. If you are a car enthusiast who enjoys driving and wants to splurge a bit more on a car, it can be slightly higher. Keep in mind however, the 15% guideline is for the total of all car related expenses. Here is a sample breakdown of car expenses:

Car Loan – How much you pay monthly for the car. If you are leasing, this is the monthly lease payment. This is usually the biggest chunk, so it is very important to negotiate a good price. For planning purposes, almost all car dealers allow you to build and price your car model online. Use their calculators to build an estimate. Make sure taxes, delivery and fees are considered. The websites usually have boxes you can tick to include all fees. If you want to be sure that everything is covered, I suggest getting a quote from an actual dealership.

Gas/Fuel – This can be estimated by knowing 3 factors. Average fuel economy of the car you are looking to purchase, your mileage per month, and the average price of gas in your area. Fuel economy is available online for most cars. For the price of gas in your area, use a safe number that it usually doesn’t exceed. For estimating your miles or KMs, determine your distance to work X 40 average commutes to work and back per month. Estimate your weekend/evening driving. Do you take an annual road trip of 1000km? Add this all up and average it per month.

Monthly Fuel Cost (Metric) = Monthly KM/100 * (Fuel Economy in L/100KM) * Avg Price per Liter

Example = 1000 km / 100
* 8.0L/100km * 1.25$/L = 150$ per month

Monthly Fuel Cost (Imperial) = Monthly Miles / MPG * Avg Price per Gallon

Example = 640 Miles / 20 MPG * 3.5$/Gallon = $112 per month

Car Insurance – Another cost that can be estimated is car insurance. By providing the car model that you are interested in, insurance companies can provide estimates of the insurance premiums prior to purchasing. When you are close to finalizing the car purchase, providing the exact VIN# (if known) will allow the insurance company to provide a more accurate quote. If the VIN# is unavailable, be sure to consider all the options and add-ons you’ve put on the car as these are considered in the value. Negotiate insurance rates just before buying as once the car is picked up, you will need insurance immediately and will be rushed to negotiate it.

Maintenance/Repairs – This expense is more difficult to predict, especially on used cars. The first thing to consider is what kind of warranty your car purchase will have. Most new cars have a 3-4 year full warranty for repairs. Some manufacturers offer full maintenance coverage in this period. Check out what is offered on some of the models you are interested in. While maintenance coverage + warranty coverage will cover most car expenses, changing into winter tires or replacing a flat will not be covered. Will you be paying to have the car washed every 2 weeks? This may add another 30$ a month to your car budget.

If you are buying a used car not covered under warranty, be sure to have it inspected by an independent mechanic prior to buying. For used cars or if you are planning to keep your new car outside of warranty, consider some research on the average repair costs for the make and model. This book is a great resource for evaluating potential costs for many models and makes of cars. I highly recommend to read this great reference book prior to deciding on a used car. If you are buying a new car, looking at the latest history of the particular model you are interested in will give you a good idea of the expected maintenance costs.

Depreciation Considerations:

Cars are different from homes. They lose their value quickly. This is called depreciation. If you are leasing a car, the depreciation rate will have a big impact on your monthly payments. If you are buying to own the car, knowing how fast it will depreciate is important for when you plan to sell it in the future. Generally speaking, a car that is more sought after will depreciate slower. This could be due to better styling, reliability or low maintenance costs. Often times the brand has a big impact on the depreciation. An easy way to have an estimate of the depreciation rate of a car is to use the build & price tool on the website. Choose the lease payment calculator and look for the residual value that is posted. You can compare depreciation rates for different makes by checking what percentage of the original price that the residual value works out to for an equal lease period (i.e. 48 months). The higher the percentage of total price that the residual is, the less the car is expected to depreciate by the manufacturer. As they stand to lose out if they get this amount wrong, they certainly put a decent effort into researching it.

Taking the time to review all the considerations in this article will help you properly plan for the expenses related to buying and owning a car. Don’t let there be any surprises!

Leave a Comment