As you progress in your career and start earning more money, it’s only natural to pine for a larger home, fancy electronics, and of course, a brand new car in your garage.
Once you start earning more, it’s easy to start thinking in terms of what you can buy, not how far you can get ahead.
Lifestyle inflation, if left unchecked, can wreak absolute havoc on your finances.
That’s why I always suggest being real about your “wants” and your “needs.” While you might want something your friends have, that doesn’t mean you need it.
Over time, thinking in those terms makes it a lot easier to avoid impulse purchases and really grow your wealth.
Still, the family car is one area where you might actually need to upgrade at a certain point in your life. Try fitting a family of six into a small sedan and you’ll see exactly what I mean. When you have a handful of kids and all kinds of “kid gear” to lug around, you get to the point where extra room becomes a need, not a want.
Here’s the thing: New cars are a major investment.
According to a new study of the automotive market from Experian, the average loan for new cars purchased in the first quarter of 2016 was $30,032, while average loan on all used cars worked out to $20,723. Additionally, the average new car payment was $503 for new cars and $406 for used.
No matter how you cut it, that’s a huge amount of money for any family – and especially a growing family with new babies or more kids on the way. If you want to be prepared, it’s smart to start saving and preparing for this expense as soon as you can.
5 Steps to Prepare Your Finances for a Larger Car
As many people know, my wife and I recently brought home our adopted daughter from the Philippines. Now more than ever, I am so glad we planned ahead and purchased a larger car that can actually hold a family of six!
If you plan to add a family member or fear you will need a larger car in the next few years, here are six steps to take right now:
Step 1: Figure out how much you can actually afford.
If you’re worried you might overspend on a larger car for your growing family, it’s smart to start thinking early about what you can actually afford.
If you’re paying a car payment now, you can use that as a baseline for affordability. Let’s say you’re paying $300 per month on your car now. Could you afford an extra $200 per month to reach the average $503 payment on a brand new ride?
If the answer is no, you should start thinking in terms of what you could feasibly afford today – and what you might be able to afford in the future.
Perhaps you could start saving for a large down payment now, which would make it possible for you to finance just a fraction of the cost of your new car.
Or maybe you want to buy used to keep costs as a minimum. An auto loan calculator can help you figure out how much your monthly payment might be depending on how much you want to spend.
Even better, let’s say you want to save up the cash and pay for a new or used car outright. Although your numbers might not be exact at this point, you can usually get a good idea of how much you need to save each month by doing some basic math.
If you plan to spend $20,000 on a used car in three years, for example, you would divide $20,000 by 36 months to reach $555 – the amount of money you need to save each month for the next three years.
Step 2: Think about insurance, license plates, and maintenance costs.
Depending on where you live, license plates can be outrageously expensive for new cars. And the same can be said when it comes to insuring a brand new vehicle since your rates are based on the replacement cost of your new car.
On the flip side, new cars tend to come with a bumper to bumper warranty. Because of this, you may spend almost nothing on repairs and maintenance for the first five years or longer. If you want to avoid lots of “surprise bills,” in the first few years, buying a new car can make a lot of sense.
Buying a used car will obviously save you money up front, but you may need to pay for more repairs. At the end of the day, you should take all of these factors into consideration as you decide what your car purchase might look like, how much you can afford, and whether you want to buy new or used.
Step 3: Check your credit and look for ways to improve it.
Confession: my wife’s credit score is slightly better than mine. Doh!
We both have excellent credit but after we bought our last car we learned that hers was 10 points higher than mine. And since we’re both competitive she was quick to rub it in my face. J
If you plan to finance your car, it’s crucial to get your credit in tip top shape. By and large, the best interest rates and loan terms go to those who have credit scores in the good or excellent range, which is usually considered any score over 720.
If you’re curious where you stand, you can get an idea of your credit score with a variety of free tools, such as CreditWise from Capital One. The score they provide is updated weekly, and it can still help you figure out whether your credit is good – or whether it needs some work.
If your credit score leaves a lot to be desired, there are plenty of ways to boost your score over time.
Most importantly, you should focus on paying off debt to decrease your credit utilization, pay all of your bills on time, and avoid opening new credit accounts unless absolutely necessary. {Related: How to Raise Your Credit Score 110 Points or More in Less than 5 Months}
Step 4: Start a targeted savings account.
Now that you have a general idea of your credit score and how much you might be able to spend on a new or used car, it’s time to start saving. Even if you plan on financing your car, you’ll need money for your down payment, new license plates, and automotive insurance.
Starting a targeted savings account is a smart first move when it comes to building up the funds you need for your car purchase. By keeping your car fund separate from your other accounts, you can focus on growing your account without being tempted to spend it on something else.
By choosing an online savings account, you can get the best interest rates and make it easier to monitor your progress every day. Once you open a new account, figure out how much you need to save each month to reach your goal and you’ll be well on your way.
Related:
Step 5: Consider a card like the BuyPower Card® from Capital One.
If you are planning on buying a new car to get the best auto loan rates and to avoid maintenance costs, you might also want to apply for the BuyPower Card from Capital One. With this card, you’ll receive Earnings on every purchase that you can redeem towards the purchase or lease of a new Chevrolet, Buick, GMC, or Cadillac vehicle.
If approved, you’ll get 5 percent in Earnings on the first $5,000 you spend every year, and unlimited 2 percent in Earnings after that. Plus, all GM dealers in the nation participate.
As an added bonus, you can combine Earnings with most current GM offers for even more savings. For example, you can use your accumulated Earnings from the BuyPower Card as part of your down payment, but also take advantage of special financing offers and discounts at individual dealerships.
If you qualify, signing up for this card can help you build a savings cushion to use for your new vehicle. Just remember, it’s crucial to get in the habit of paying your balance in full if you want to avoid credit card interest. Also remember, it’s okay to start building your Earnings early – even years before your new car purchase. The more Earnings you have built up, the better off you’ll be.
Click here for more important information about the BuyPower Card from Capital One.
Step 6: Start shopping for a new vehicle before you bring your new family member home.
Once you start saving for a new or used car, you’ll experience a certain level of relief. It’s hard to imagine affording something that is so expensive at a time when your family is growing, but it helps a great deal to know you are finally saving money.
Still, you don’t want to wait until you bring your baby home to find the right car for your family. No matter what, it’s crucial to start shopping before that day comes. If you hurry the process, you’re much more likely to make an impulse purchase or spend more than you planned.
Aside from the home you live in, your car is probably the most expensive thing you own. Take time to research everything your family wants and needs instead of rushing out to buy the first car you see on a whim. Chances are, you’ll be glad you did.
The Bottom Line
Adding a new member to your family may be costly, but the joy babies and children add to your life is truly priceless. Just remember, you’ll always be better off if you start saving and planning for the items your growing family will require over the years.
And the earlier you start saving, the better off you’ll be.
Thank you Capital One for sponsoring this post! This is a paid endorsement. All opinions are my own and were not directed by Capital One. Click here for more important information about the BuyPower Card from Capital One.
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