6 Financial Steps to Buy a Car

By Kent E. Irwin

Besides the purchase of a home, automobiles are the second most significant purchase that consumers make. Acquiring knowledge and skill in making excellent automobile purchases will contribute to helping you reach your other financial goals.

Step 1: Review Your Financial Plan

Before you even think about the purchase of a car, you should look at your entire financial picture, your comprehensive financial plan. The purchase of a car affects not only the amount of money that you currently have in savings and any investments you may use to buy the car, but any differences in payments (such as maintenance, gas, insurance and repairs) will affect your budget each month and possibly for years to come. Of all your purchases, cars rank second to homes in their affect on your ability to reach your other financial goals.

Start by looking at your financial plan. If you don’t have a financial plan, you can start an eFinplan financial plan today. The decision to purchase a car should not be made in a vacuum, it should take into consideration all of your financial goals and responsibilities. When you purchase a car, you should understand how it will affect your other priorities. If, over time, the car will cost you less than you can afford then you will be able to get out of debt sooner and perhaps retire sooner than you planned. Proper planning regarding the purchase of a car might mean the difference between being able to afford a vacation instead of staying home or, worse yet, charging it and going on vacation anyway.

As with all financial decisions, the decision to buy a car should be a component of the overall written plan that you have made for your future. When you do a budget on your eFinplan financial plan, you will be able to see your gross and net income, and then estimate how much you have left over to invest.

Now that you have reviewed your financial plan, consider what buying a new car might cost you.

Step 2: Examine Financial Aspects of Car Purchases

1. Insurance: Compare how much are you paying for insurance for your current car versus a new one. Discuss the cost to insure potential cars with your insurance agent before purchasing.

2. Fuel: Evaluated how much will your fuel budget be for the new car? Remember, the EPA average miles per gallon for cars prior to 2008 (when they revise the calculation method) are off by approximately 15–20%.

3. Car Payments: Consider the cost of monthly car payments and calculate how much the new payment will reduce the amount of money that you have to save or invest, reduce debt or be applied toward other priorities in your financial plan. Monthly payments can easily be calculated by using free payment calculators available on the internet.

4. Regular Maintenance: Estimated costs should be available from new car dealers for each model and each year of ownership.

5. Repairs: If you are buying a used car, use the internet to research approximate costs for repairs for each year that you plan to own the car. The repair and parts industries keep this data, and a good repair facility should be able to help you ballpark the cost after they inspect the vehicle.

6. Duration of car ownership: Make sure your plans include how long you will keep the car. This should help you avoid making rash decisions about new car purchases. For instance, your plan may involve buying a new car when your child is in middle school, paying it off during their high school years, being free of car payments during their college years, and perhaps purchasing a new car to keep during your retirement.

Once you have all of this data, update your eFinplan financial plan. You can use the ‘what-if’ scenarios to see how a car or any other major purchase will affect your overall financial plan both now and in the future. Don’t forget to make changes to your financial plan after purchasing a car.

Step 3: Select an Auto Type that Meets your Specific Needs

In step two you determined the monthly amount that you can afford for insurance, gas, maintenance and repair, and how this purchase will affect your overall financial plan. The next step is to decide what type of car you should purchase. This is where most people slip up and make a bad decision. They have a general idea of the car that they want, and they go to the dealer, with little or no research, and buy a car. When the car purchase is emotional, and it often is, bad decisions can happen; they may be impossible to reverse and may affect your overall finances for years to come.

I have known too many people that buy a car they thought they wanted, but it ended up being a mistake. I’ll use a buddy of mine for an example, since I am too embarrassed to tell you how many transmissions I put into my high school Chevy Camaro. My friend always wanted a nice pickup. He worked in an office and has no need to move cargo (except when I borrow it for my yearly load of mulch). The amount of money that he spent in gas was 60% more than a typical car. In addition, he has young children, so the truck was impractical for family outings. Finally (regrettably for my yearly gardening), he sold the truck and bought a minivan. In the long run, he paid more for gas with the pickup and he now has a higher van payment. The good news is he is driving their older Honda Accord to work, getting nearly 30 miles to the gallon, and the van they purchased gets better gas mileage than the truck and is more practical for a family.

What do you want in a vehicle? Consider the following:

1. Safety: Is safety a key concern, such as collision or airbags and size of the vehicle?

2. Cargo capacity: Do you need a large trunk or cargo space?

3. Interior space: Are you a large person, or do you have a large family?

4. Miles-per-gallon: Do you want a high mileage or hybrid car to cut down on vehicle emissions, or to save on gas?

5. Domestic or foreign: Do you prefer a domestic manufacturer? If not, is it important whether the manufacturer is European or Asian?

6. Luxury level: Do you prefer regular or luxury? Are those preferences for car interior, exterior, or both?

7. Four-wheel drive: Do you live in an area where the roads and weather make having a four wheel drive vehicle beneficial?

8. Business: Are you in business where the type of car you drive makes a difference? For example, realtors often find it important to have a nice large upscale car to take clients around in.

9. Car people: Are you a car/truck guy or gal, and just love driving a particular brand or type of car? I am asking this question as a man who receives a phone call from my wife each month when the current issue of ‘Car and Driver’ is delivered. I understand the thrill of driving a great car and the agony of driving a rust bucket. If you are a car nut like me, and you have a limited budget, you may be more vulnerable to making a mistake. You may need to read this article several times to put financial planning issues above your emotions.

10. SUVs: Some consumers purchase an SUV without fully educating themselves about possible additional costs. These vehicles are extremely popular because of perceived safety, image, great visibility, cargo capacity, and comfort. However, cars sometimes surpass the crash test standards of SUVs, and SUVs are more difficult to maneuver in emergencies because of their high center of gravity (which sometimes results in rollover crashes). SUVs can cause more severe injuries to others driving sedans. These luxury vehicles are more costly to buy, operate (gas and maintenance), and insure. Make sure that you do your research before buying.

Now that you have reviewed your financial plan, thought through the financial aspects of a car purchase, and your specific needs without emotion, you are ready to identify the car that will best meet your needs.

Step 4: Identifying Potential Vehicle Choices

Steps number 2 and 3 should help you narrow the type of car that you will own in terms of price range, vehicle type, and domestic versus foreign nameplate. Now you are ready to pick the best vehicle in terms of the following factors:

1. Description: Compile a description based on Step 3

2. Price: Narrow your search based on your optimal price range (Steps 1 & 2)

3. Research: Gather research information: Use the internet, car magazines (such as Car and Driver [the library usually has back issues; pay special attention to the comparison article to similar car types in a certain price range]), and trips to dealerships.

4. Cost of Ownership: Now that you have your list narrowed down to 2–4 types of vehicles, you probably want to compare the costs of ownership. Obtain the following information:
   1. Routine Maintenance

   2. Gas mileage estimate

   3. Repair estimates

   4. Cost to insure

5. Hybrid Vehicles: Many car buyers choose hybrid vehicles to save money on gas or to emit fewer toxins into the environment. If your decision is based on gas mileage, make sure that you do the math calculations. Hybrids usually cost more than similar cars or SUVs and may take 50,000 to 100,000 miles for the gasoline savings to surpass the additional price of the car.

6. Safety: Last and surely not least, examine the safety ratings for each type of car. It’s important to consider:
   1. Brakes: Compare the distance it takes to stop from 60 miles per hour. The difference in stopping distance can range dozens of feet—which can make all the difference in an emergency stopping situation. Also look for anti-lock brakes.

   2. Crash ratings: Look up the vehicle crash rating on the NHTSA website http://www.nhtsa.dot.gov/

   3. Safety features: Look for other safety features, such as passive restraint and airbag systems.

   4. Handling: This is important to know, because the better a car is at handling and communicating to the driver what is happening between the tires and the road (feedback), the better the car’s ability to assist with accident avoidance and poor weather. Car magazines usually provide this type of information.

Your list should now be narrowed down to a few vehicles, Go take them for a test drive, but before you do, go to step number 5. Remember, having done all of this research you will know more about the car than 75% of the car salesperson. You will be better able to spot exaggerated claims about the car the salesperson might make (this happens every time I talk to an automobile salesperson).

Step 5: New or Used?

Cars depreciate pretty quickly, so it makes a lot of sense to buy a good used car instead of new. This is especially true if the car has low mileage and can be purchased from someone you trust such as a friend or family member, or from a “certified used car” program. However, be careful of the latter since they may charge a premium for this.

Before you begin to look for your dream car you should do your research such as with Kelley Blue Book http://www.kbb.com/ to find the approximate fair price range. Also consider using services like Experian and Carfax to research the title on your car to see if has been in a flood or accident.

Avoid the extra add-on charges, such as gap insurance (your insurance agent should provide this), rust proofing, and extra warrantees. These are usually a bad deal at best, if not simply a rip-off.

Now that you have the price range and have narrowed down the type of car you’re looking for, go to two or three dealers for each car and negotiate your lowest price. I once spent an entire Saturday afternoon driving back and forth between dealerships on opposite ends of town relaying the latest deal from one salesperson to the other. I spent a Saturday, but I ended up with a great car at a great price from the furthest dealership, but used the service department from the closer one.

If you are purchasing a used car, always have the car inspected by an excellent mechanic.

I have known too many people that were lured to sexy used European automobiles, but were not ready for the larger regular maintenance and repair bills that may come with them. Unless you can afford the higher expense, stay away from buying high mileage European cars. Asian and some American used vehicles will generally give you fewer headaches.

Step 6: How to Pay for It? Cash, Financing and Leasing

If after you have you have reviewed your financial plan, and you have determined that you have sufficient reserves to purchase a car with money you have in savings or investments, you now have a choice to make: use your money or someone else’s.  If you can borrow against your home, chances are you can deduct the interest.  If this is the case the net cost to borrow may be less than what your investments are earning. This assumes that your investment’s rate of return is very good and your income tax rate is medium to high.  However many people are more comfortable owning things outright, regardless of the financial advantages. Either way is okay.

If you decide to finance the car, know your financing options before buying. Talk to your bank or credit union, and look on the internet for options. Read the fine print.

Most financial advisors probably advise against leasing; however, I think leasing deserves a second look. From time to time, manufacturers offer extremely low lease plans, with little or no money down, which just simply can’t be beat.  Do not be swayed by flashy advertisements. Read the fine print; make sure you know the details, such as mileage charges and down payments. Do not use leasing to purchase a car that you normally could not afford.

For example, let’s say someone earning $50,000 can afford a payment on a $20,000 car ($522 for 48 months at 8%). However, a car manufacturer might offer a no-money-down lease on a nice mid-size car with a great warrantee for $199 per month for 36 months. The lease would be a better overall deal for short-term cash flow however, they would never have equity and would need to continue making car payments of some kind after the lease expires. For a single person who always wants to have a safer newer car (let’s call him or her “Pat”), this might be okay. But let’s say Pat sees an advertisement to lease a 3-series BMW for $359 per month with $2,500 down. Pat might be able to afford the down-payment and make the monthly lease payments, and would certainly enjoy having a beautiful car. In the long run, though, could Pat afford to purchase the $35,000 car? Probably not. Now Pat has spent $2,500 from savings for a down-payment and has higher insurance premiums.

In order to calculate whether it is better to borrow or lease, and to determine whether borrowing from a home equity loan is advantageous, there are easy to use calculators in “Auto Calculators” section of dinkytown.com.

Other sources of Information

The Federal Trade Commission website (ftc.gov/bcp/conline/pubs/autos/usedcar.htm) provides a lot of useful information about the car buying process in general. Consumer Reports (consumerreports.org/cro/index.htm) provides good data about dependability ratings. If buying a new car, check the internet for used car inspection checklists. I found a good one on MSN at: http://autos.msn.com/advice/articles/aischecklist.aspx.

Summary

It’s worth your time and energy to make educated automobile purchase decisions in line with your financial plan. In the long run, you’ll be glad that you did, since your overall financial health will be affected by these decisions. Making a wise decision will give you greater satisfaction every time you get behind the wheel.

Kent E. Irwin is CEO and founder of eFinplan, LLC. He is also a Chartered Financial Consultant (ChFC), a Chartered Advisor in Philanthropy (CAP) and a Chartered Life Underwriter (CLU). He can be reached at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it . For more information about eFinplan, go to the website efinplan.com.

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