Buying a car in your 20s is probably one of the first, important, exciting, and empowering decisions that we can make. However, managing your expenses during your 20s is HARD. We all want to party, go on shopping sprees, travel, eat at nice restaurants, etc. We have worked very hard for our money and truly believe that we should reward ourselves for our hard work. Rewarding yourself is not a bad thing, but thinking about the overall picture might help you to save those extra dollars and put them where they are needed most.
It’s not a matter about whether you should or shouldn’t treat yourself to something nice, but whether you are in a good place financially to purchase a vehicle. You need to remember that when you buy a car, you are not only obligating yourself to making monthly car payments, but you are obligating yourself to paying for other expenses such as gas, insurance, tires, and maintenance.
What is the best way to go about purchasing a car?
There are many ways to purchase a vehicle these days. You can buy it in cash, lease it, or finance it.
Leasing can be compared to renting the vehicle but on a longer term. I would like to note that I am not against leasing as a concept. However, while in your 20s it might not be a luxury that you can afford and could be a considered a waste of money. After your term is over, you don’t own the vehicle, you paid thousands of dollars and end up with no assets. In a lot of cases, you do have the option to purchase it at the end of your term. This is why I personally would not recommend it.
The other option that is available to you is to purchase the vehicle in cash. While you do end up with an asset right away, I wouldn’t necessarily say that this is the best option either. Let’s exclude the negative thoughts of “What if the last owner didn’t maintain it properly? What if it breaks down? What is it’s too old?” The two biggest disadvantages of buying a car with cash is that you lose the potential to steadily build your credit for when you need to request a large loan and you have to spend a large amount of money right away. Your 20s is probably going to be one of the most dynamic decades of your life. You will get jobs you want, jobs you don’t, have unexpected expenses, want to travel, but it is always smart to have a little extra cash in your savings for emergencies rather than using everything you have saved up to purchase a car.
Financing comes with payments and you will probably have to pay some interest rate but the biggest advantage of financing is that your money is working for you. I am not talking about when banks say that they will help you double your money by investing with them, because that is not true and it’s definitely not the case here. Vehicles are depreciating assets. That is something everybody knows, accepts, and learns to live with. But if you are going to have to buy an asset that will depreciate over time, why not use that as an opportunity to build up your credit so that you can benefit from having made that purchase in the long run? Play it smart! Finance something that is affordable with low insurance cost and gas efficiency. Make any payment that you have committed to on time. Doing this could result in the approval of a house loan later down the road. If you want to learn more about financing opportunities available for you apply here.
How do I know if I can afford it?
The best way to go about this is by making a full list of ALL your income sources and ALL your expenses. After you have done that, you should also try to estimate vehicle related costs that you will be responsible for. I have listed some examples of revenue, general expenses, and car related expenses.
- Student loan
- Family Allowance
- Government Assistance
- Student Loan Payments
- School Payments
- Phone, Cable, and Internet Bills
- Gym Membership
- Personal Care
Car Related Expenses:
- Winter Tires
- Car Washes
After you have worked on how much you are spending each month, add up your general expenses and car related expenses. Then calculate your revenue expenses. If you have a positive number at the end, then you are probably in a good place to finance a vehicle.
If you find your expenses to be too high or if it seems off, try using the 50/20/30 rule. 50% of your income can be allocated towards essentials, such as housing, food, transportation, clothing (only essential), and utilities. 20% of your income should be set aside for financial obligations, such as emergency savings, retirement, and debt reduction. The last 30% of your income can be put into personal choices. The 50/20/30 rule is not a rule that must be followed rigidly, but rather a guide to help you appropriately manage your spending.
I can afford my vehicle, what should I do next?
Secure a meeting with a financial specialist who can help you find financing options local to you free of charge. Fill out a short application here. You will get a call back in less than 24 hours by a financial specialist who will be able to guide you through the process and get you free quotes on any car, truck, or SUV that you want to drive and answer any questions you might have.
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