You just graduated college, got your first real job, and you have never seen paychecks that big before. You think now is the time to get the "fun car" you have been dreaming about. But maybe spending a good chunk of your paycheck on a car note isn't the best idea.
I get it, you don't have any kids or any major responsibilities. Your expenses aren't that bad. I did the same thing; as soon as I got a good paying job I ordered a brand new 2004 Mini Cooper S, paid sticker price for the damn thing too. Because I was young and had limited credit, I got whacked with a high interest rate and was carrying payments of about $425 a month.
I got by just fine and made my payments, but several years later when it came time for me to buy a house, it would have been nice to have more money in the bank for a down-payment. Now had I been satisfied with my paid off, 95' Prelude Si I could have banked 3 years of those $425 payments and had over $15,000 to use towards my home loan. I was shortsighted about my money. I'm going to encourage all of you not to make the same mistake.
So before you go shopping for that new car, do a budget and consider the following:
Basic Expenses - Add up your rent, utilities, cell-phone bill, food expenses, and see how much of your paycheck is getting eaten up by these things. You may want to consider some lifestyle adjustments to manage these costs.
Current Debt- Got student loans? They will haunt you for a long time, and impact a little thing called "debt to income ratio" and this will effect your ability to get approved for loans in the future. I know the numbers are overwhelming, but the sooner you start paying these loans down the better. Also, watch out for credit cards. They would love for you just to pay the "minimum balance" and keep you in the cycle of paying interest and fees. Like it or not you have to play the credit game, play it wisely.
Health Insurance - I'm not here to get into a political debate about Obamacare. However, most of you in one form or another are going to have to pay for health insurance whether it be a percentage of your employer health care plan, or purchasing something from the Affordable Health Care Act. Either way, you need insurance. I know you are young and you think you are invincible, stuff happens, hospital visits are really expensive.
Emergency Fund - How much job security do you have? If you got laid off tomorrow would you have enough money to cover your expenses for 3 months? I know your grandmother always talked about saving for a "rainy day." She was right, you should be stashing some cash away just in case. The last thing you want to be doing is living off of credit cards to feed yourself.
Long term/Retirement savings - I know retirement is a really long ways away, but the only person that is going to save for retirement is you. I would assume social security will be all dried up by the time you hit old age. If it is there great, but plan for the worst. The earlier you start saving/investing the more you can use the magic of compounding interest and so you can live comfortably in your golden years.
I really try to not lecture people on how to spend their money and just give car buying advice on how to choose the right car or how to get the best deal. I've noticed an alarming trend especially among young people coming out of college, they want to spend way too much of their income on a car. Before you sign that new car loan, really take a hard look at your short term and long term financial goals.
If you have considered all these factors, are confident you have your financial plans in order, and still have enough left over to get that new car, then go for it. A good rule of thumb is to not spend more than 20-25% of your net income on a car payment, but from a financial standpoint, less is better.
The problem is many younger folks are only looking at their income from a short term perspective. I will say that if your employment is part-time and/or not a source of steady income, then you definitely should not be new car shopping. Do you have a paid-off car that is working fine? Maybe best to keep it. Do you need a car? Consider some inexpensive alternatives for the time being.
If you have a question, a tip, or something you would like to to share about car-buying, drop me a line at AutomatchConsulting@gmail.com and be sure to include your Kinja handle.