®

CAR BUYING GUIDE

Scared your clunker is on its way out?

Feel like kicking some tires?
Interested in a test drive?
Want some new wheels?
Shopping for a new car?

READ THIS FIRST.

About This Guide
Cars! Love them or hate them, a car is a necessity for most Ameri-
cans. And for those of us who need one, it’s often our largest monthly
expense after our home.

Because you will spend so much money on you car – not just buying it
but fueling it parking it and maintaining it – take the time to buy the
right car for the right price.

The most money-savvy thing to do is to buy a simple used car with

100 percent cash you’ve saved up. You’ll save thousands on deprecia-
tion and finance charges.

That said, I realize that sometimes you need a car but don’t have cash
saved, so you’ll need to get an auto loan. I also realize that some peo-
ple will buy new cars despite all advice to the contrary, so there’s no
judgment.

Whatever car you’re looking at, the following articles will help you get
the best deal possible, hopefully pocketing you a few hundred dollars
that you can use on other stuff – like gassing up your new ride.

Many happy miles,

Dave Weliver
Founder, MoneyUnder30.com
What’s Inside:
Get the Best Deal on a New Car
with One Simple Email
Learn how to send one simple email that will have car dealers scram-
bling to give you the best deal on a new car.

Auto Financing for Smart

Shoppers (That Means You)
If you have to borrow money for a new car, get a car loan the smart
way. Put money down, and shop for rates! Check auto loan rates
with your local bank or credit union before applying for credit at the
dealership.

How to Ensure You Get A Fair

Deal On Your Trade-In
Tom works in the car industry and has deep insight into how cars
are bought and sold, and how you can save money (and have a better
experience) in almost any car-buying situation.

How Much Should You Spend

on a Car in Your 20s?
Find out how much you should spend on a car in your twenties and why
— unless cars are your absolute passion — it’s probably way less than
you think.

1
 Get the Best Deal on a New
Car with One Simple Email
By Tom Niejadlik
How can you get the best deal on a new car? Learn how to send one sim-
ple email that will have car dealers scrambling to give you the best deal
on a new car.

A s somebody who makes a living running a profitable car busi-

ness, I argue it’s not always a good idea to grind car dealers into a
bare minimum, below-invoice price on your next new car.

That said, I’ve seen every type of negotiator walk through my show-
room doors over the last 15 years. I know what it takes for someone to
walk out with a smoking deal — how to get the best deal on a new car
possible. And today, I’m going to share with you what really works:
from research to financing to one simple email that will get dealers
scrambling to give you their best price.

How to research the best new car deal

It starts with research. You can’t walk into a dealership with the Kelly
Blue Book app on your phone and expect to have everything you need
to get a deal. Savvy buyers do most of the legwork from the comfort of
their couch before setting foot in a store.

You want to settle on the specific make and model car you want to
buy before negotiating price. Don’t skip this part! Buying the right
Buying the
car is as important if not more important than the deal you get. You
right car is as
have to live with the car for the next several years. Buy the wrong car
important if not
and you’ll forget about “what a deal you got” as you sputter joylessly
more important
around a curve or – worse – wait for the tow truck on a cold winter
than the deal you
night.
get. You have
to live with the
Visit a few showrooms for vehicle presentations and test drives. Be
car for the next
very clear to the sales consultant that you are just test-driving and
several years. are still considering several models. A good salesperson will still try
his or her best to sell you then and there, but chances are you’ll get
a half-assed presentation and no bothersome follow-up calls. If you
do get a call, you can politely dismiss it saying you’ve decided to go a
different direction.

Once you’ve decided on the car you want, begin comparing ap-

2
 ples-to-apples pricing at different dealerships. Do more research.
RESEARCH TOOLS
These sites are great for find- Find the dealers that sell this model. Visit their websites. Research
ing cars that might interest online reviews of these dealers on sites like Google, Yelp, and Dealer-
you, along with ratings and
reviews: rater so you know what to expect from each dealer when it comes
Edmunds.com time to negotiate. Next, head over to the manufacturer’s website. Take
KBB.com
ConsumerReports.com
in the info on any specials, rebates, and financing incentives. Last-
ly, jump onto a third-party consumer website like Edmunds.com or

PRICE SHOPPING TrueCar.com to gather their pricing information.

Use these sites for finding the
market value for your car
along with average list price
Understanding new car market conditions
from local dealers:
TrueCar.com Now that you have a ballpark figure for what you should pay for your
CarGurus.com
car, it’s time to factor in the current market. Dealers have expensive
software and auction results that provide up-to-date market data, but
consumers will have to take a more manual approach.

Your goal is to determine the level of demand for the model car you
want to buy. Drive onto the lot of your local Chevrolet or Toyota deal-
er and glance over the inventory. You’ll see larger volumes of Silvera-
dos and Malibus compared to Corvettes. There will be more Camrys
and Rav-4s than Land Cruisers.

If a certain model You’ll see the bread-and-butter cars with over twenty in stock and
is selling fast, the lower demand and lower supply models. Your goal is to figure out
a dealer has how eager the dealer is to move the particular car you want. If a cer-
little incentive to tain model is selling fast, a dealer has little incentive to negotiate. If
negotiate. not, the dealers may be eager to do whatever it takes to get the car off
the lot.

Getting the best new car financing

It’s a myth that you have to go to your local bank or credit union to get
the lowest interest rates. Dealers send multiple “deals” to a variety
of lenders everyday and they have a lot of flexibility around who gets
approved and for what rate.

Before you get all nervous that a dealer will try to give you a higher
APR than you could get elsewhere, remember: A dealer’s main pur-
pose is to sell you a car. Making a profit on the financing is “plus busi-
ness”. The dealer would rather offer you financing at the “buy rate”
and earn a “flat”. The “buy rate” is the percentage the dealer pays for
the money and a “flat” is the flat fee paid to the dealer if the money is
lent with little or no markup.

3
 If you come prepared with the rates local banks are offering, you can
usually leverage an even better financing deal at the dealership. The
key is to know your credit score and what tier that puts you in. Be
honest about what sort of rates you have found and qualify for else-
where because the dealer can call your bluff – they have a little book
with competing lenders’ rates!

EXAMPLE MESSAGE The single email that’ll get the best deal on a new car
To: Tom’s Dealership
Subject: 2008 Ford Focus Now it’s time to put it all out there. With a list of dealers that have the
car you want, you are going to craft an e-mail that puts you in the driv-
Hello,
er’s seat. Don’t do this through a contact form on their site unless you
I’m looking for a 2008 Ford
Focus. I have test driven can’t find a salesperson’s email address. You want the dealers to see
this vehicle and currently whom else they are up against, so make sure all the dealers’ names
looking for the best deal
before May 28th.
are visible in the CC line.
The Focus I’m seeking
must have a manual THE E-MAIL NEEDS TO INCLUDE
transmission and a
sunroof. Snow tires and 1. The fact that you’ve selected a vehicle you
a built in navigation are
want to buy and you have already test driven it
nice, but it won’t be a
dealbreaker if they are not at a local dealer.
included.
2. That you are ready to buy and want to take
I understand your
dealership is currently delivery of this new car by a certain date a few
offering cash bonus on days out.
trade-ins. I would be
interested in this offer, as 3. The options you must have and any that are
well.
flexible.
I am pre-approved with my
bank, but I would prefer 4. That you’re aware of all the costs associated
to finance through you
to make the transaction with the invoice and options.
easier.
5. Any programs like loyalty or dealer cash you
Please let me know your
best offer by tomorrow found in your research.
evening. I will be ready
to provide a credit card 6. That you are pre-approved for financing but
deposit to secure a deal. would rather finance through the selling deal-
Thank you. er just to make the transaction easier.

Now, here’s the cherry on top: Give the dealers 24 hours to respond
with their best offer and tell them you will give a credit card deposit
over the phone to secure the deal. Hit send.

What to expect from dealers

As a dealer, I hate emails like this. I know it’s going to be a long shot

4
 and a loser deal, but at the end of the day, dealers need to sell units, so
the smart ones will respond. (Don’t be surprised, however, if out of 10
dealerships only 6 or 7 write back.)
Dealers do have
quotas, and you You will get some competitive quotes. Depending on supply and de-
are more likely to mand, you could see some invoice or under-invoice deals. Just don’t
get the best deal expect any special treatment from the dealer with the lowest price.
on a new car on
the last two days What you might do is send the email to every dealer except your local
of the month. guy. Preferably the one where you did your test-drives. Then, take
your competing quotes there.

Why? Dealers are territorial. We pay attention to where you live and
where you bought your last car. We take it personally if you didn’t buy
it from your local dealer. Manufacturers and dealer managers pay
attention to something called a cross-sell report. It tells exactly which
dealers are strong enough to keep their local buyers local and also go
after customers outside of their own territory. Lose too many of your
own local customers and it doesn’t look good. This report puts cer-
tain dealers above the rest in very black and white terms. So a smart,
reputable dealer will do whatever is necessary to earn your business
and keep you local. Keep that in mind before abandoning your local
dealer for a low quote two hundred miles away.

Timing is everything. Dealers do have quotas. If you’ve followed the

steps I’ve outlined and all else is equal, you are more likely to get the
best deal on a new car on the last two days of the month.

Finally, treat the dealer the same way you want to be treated. If the
dealer isn’t being nice or you feel taken advantage of, go elsewhere
fast. Please, just don’t take out frustrations with that last bad car
dealer on the next guy.

5
 Auto Financing for Smart
Shoppers (That Means You)
By David Weliver
If you have to borrow money for a new car, get a car loan the
smart way. Put money down, and shop for rates! Check auto loan
rates with your local bank or credit union before applying for
credit at the dealership.

F requently, I write about the common mistakes we make when

buying a car. One of those mistakes is overlooking the importance
of the auto financing in the overall cost of your new car.

One example I’ve provided is if you are buying a new Honda Civic, the
If you’re willing to difference between “sticker price” and the dealer’s invoice price (what
negotiate the price the dealer paid for the car) is about $1,500. If you negotiate well, you
of the car, you could save $1,000 or more on the price of the car. If you then finance
shouldn’t ignore the car for four years at 6% with nothing down, you’ll pay over $2,000
the rates and terms in interest. Financing the car for three years at 4% with a $1,500 down
of your financing. payment, however, can save you over $1,000.

I made this mistake the first time I bought a car many years ago and
vowed never to do it again. I posted some of this article based on my
personal experience a couple years ago, and have vastly enhanced it
for today. If you’re in the market for a new car—don’t wait until you’re
in “the box” (what some dealers call the offices where you finish the
paperwork) to think about your financing.

Auto Financing Tips

Cars aren’t investments. Quite the contracy, cars depreciate like cra-
zy. For this reason alone, it’s not smart personal finance to pay inter-
est on a loan to buy a car. What happens in many cases is the value of
the car drops faster than you repay the loan leaving you upside down
or underwater (when you owe more on the loan than the car is worth).

What the That said, many of us need cars to get to our jobs and don’t have the

dealerships will cash lying around to buy a reliable ride. So we get a car loan. That’s

tell you can afford cool, but of course there’s a difference between using a car loan wise-

and what you ly and using it to buy a lot of car you can’t afford. I have the credit and

should spend are income to go out and get a loan for a BMW M3. And I would love that

two very different car. But that doesn’t mean I should get it. What the dealerships will

things. tell you can afford and what you should spend are two very different
things.
6
 So whenever you finance a car, you want to think about it not just
from a monthly payment standpoint (how will this $350 payment
affect my monthly expenses) but also from a total cost point of view.
Here’s what I recommend:

Understand Your Credit!

If there’s ever a time to check and understand your credit report and
CHECK YOUR SCORE credit score, it’s before you get a car loan.
I frequently recommend
these resources for checking
your credit score. Here’s the deal: unlike mortgages or a credit card, you can usually
CreditSesame.com get a car loan even if you have pretty bad credit—you’ll just pay (a lot)
CreditKarma.com more. The reason? It’s relatively easy for the banks to repossess a car
if you don’t pay.

But if you have shaky credit, you’re likely to be excited to get a loan at
all, so you’re not going to want to ask if there’s a lower rate available.
Dealers know this and they make a lot of money based on it. Free
tools like Credit Sesame or Credit Karma can help you understand
where your credit score falls and what kinds of interest rates you
might qualify for. You can check the latest average auto loan rates at
Bankrate as an up-to-date benchmark.

Shop Before You Go

If you have excellent credit and you know it, you can usually get the
APR COMPARISON best financing rates right from the dealership, who serves as a broker
How much does your credit for multiple lenders. With great credit you may qualify for incentive
score matter when it comes
to car loans? A lot. Here’s the 0% APRs or other low financing rates. The key is to know your credit
low down on APR’s typical is good so they can’t try to tell you otherwise.
for poor, fair, and excellent
credit:
If your credit is only average (say less than 700), you can benefit get-
Poor, <640
ting some loan quotes before you hit the dealership. You can visit your
10.25%
bank or a local credit union and apply for an auto loan before you
Fair, 640-720
start car shopping or use an online loan broker like this one (an affil-
5.00% iate of this Website). Most of the time local banks and credit unions
Excellent, 720+ can offer borrowers with average credit the most competitive interest
2.25% rates on both new and used car loans. Even better, you may be able to
use the pre-arranged financing as a bargaining chip with the dealer-
ship’s finance and insurance (F&I) manager and score an even lower
interest rate.

7
 Keep The Term Short

Shorter loan terms come with lower interest rates but higher month-
Most of the time ly payments. And that’s what you want. It’s tempting to stretch out a
local banks and loan over five or even six years to watch the monthly payment drop,
credit unions can but this means you’ll pay a lot more in interest and almost certainly
offer borrowers be upside down on your car.
with average
credit the most Put 20% Down
competitive
interest rates on In addition to a short loan term, you can avoid a situation in which
both new and used you owe more money than the car is worth by putting money down.
car loans. This may seem like a no-brainer, but many dealerships don’t even
require buyers with good credit to make any down payment at all!

Pay For Taxes, Fees and “Extras” With Cash

When you buy a car, there are always miscellaneous expenses like
sales tax, registration fees, documentation fees and any extras you
choose to purchase like extended warranties. Often, dealers are more
than happy to roll some or all of these fees into your financing. Un-
fortunately, doing that just ensures you’ll be upside down on your
car loan, at least for a while, since you’re increasing the amount of
your loan but not the value of the car securing the loan.

Gap Insurance

Gap insurance (guaranteed auto protection insurance) is some-

thing car dealers and lenders sell you to cover the “gap” between
what an insurance company thinks your car is worth and what
you owe on your car loan in the event you’re in an accident and
the insurer declarres the car a total loss. (The insurer will only
pay book value for the car, regardless of what you owe on the
loan.) So if you crash your car and still owe $12,000 on your loan
If you structure but the insurance company only covers the car for $10,000, you’re
your car loan responsible for paying back the $2,000 (and you’re without a car).
correctly,
won’t need gap People buy gap insurance based on fear because nobody wants
insurance because to be in the position of owing a couple thousand on a totaled car.
your car shouldn’t But if you structure your car loan correctly (put money down and
be worth less than stick to a three year term), you can feel confident that you won’t
what you owe. need gap insurance because your car shouldn’t be worth less than
what you owe.

8
Prices for gap insurance vary widely (from $30 or so a year to over
$600 for the term of a car loan). The policies the dealers offer may
be the most expensive, so if you feel like you need gap insurance,
contact your auto insurance agent.

Refinancing a Car Loan

So you didn’t see this article in time and got stuck with a really
bad car loan. No big deal. If your credit is good and your car isn’t
too old, you should be able to refinance your car loan just like you
can refinance a house.

The best place to ask about car loan refinancing is a local credit
union, but you can also get free quotes from online loan brokers.
Ask about any fees for applying or initiating the loan and avoid
lenders who want to lower your monthly payment by extending
the term of your loan. (With an auto loan refinance, you want to
get a lower interest rate and pay down the loan over the same or a
shorter term).

Recap

Unless you’re looking at 0% or another really low APR, the best way
to buy a car is with cash. If you have to get a car loan, be as pragmatic
as possible. Know your credit score going in. If it’s less-than-perfect,
shop for a loan before you go to the dealership and use these offers
as leverage to get the lowest APR possible. Keep the terms as short as
possible and put money down to avoid a loan in which your destined
to become upside down. And remember to shop around and compare
insurance quotes often once you have the car– putting in that extra ef-
fort really could save you hundreds over the lifetime of the car.

9
 How to Ensure You Get A
Fair Deal On Your Trade-In
By Tom Niejadlik
Tom works in the car industry and has deep insight into how cars are
bought and sold, and how you can save money (and have a better experi-
ence) in almost any car-buying situation.

In my opinion,
O ne major hurdle you can encounter when buying a new or used
car is the trade-in. It’s usually the toughest part of the deal to see
eye-to-eye on. As a buyer, you have a personal connection to your car.
the most accurate Dealers see it as just another unit to manage. How do you know if you
site out there to are getting fair value for your trade? Let’s see if I can shed some light
determine trade on this part of the transaction.
value is Trade-In
Marketplace by Start – but don’t stop – with online research
Autotrader.com
If you want to know what you might be able to get for your trade-in,
it’s easy to research. And although everyone should start here, it’s im-
portant to keep in mind that the number you find on the Web is not
the end-all-be-all of trade-in pricing.

A simple Google search for “used car prices” will give you at least
seven different sites on the first page alone that will give you a trade
value. Unfortunately, you will probably get seven different values for
your car. Which one is right? That personal connection you have with
your car generally directs you to believe in the highest value you find,
but it’s not always the most accurate.

TWO THINGS THAT ARE EXTREMELY IMPORTANT:

1. The type of transaction

2. Condition

You’ll see lots of terms used like clean trade-in, loan value, retail, pri-
vate sale, etc. Let’s assume you plan to trade your car into a dealership
and buy a new(er) model from that dealer. You are looking for trade
value. I can tell you what to make of the other values at a later date. In
my opinion, the most accurate site out there to determine trade value
is Trade-In Marketplace by Autotrader.com and I’ll tell you why in a
bit.

10
 Be realistic about your car’s condition

Kelly Blue Books I’d be a rich man if I had a dollar for every time I’ve heard a custom-
estimates that er tell me their car has “new tires” and, upon further questioning, I
only three percent discovered those “new tires” were put on 12,000 miles ago. In some
of trade-ins cases, tires with 12,000 miles are half-worn!
meet the criteria
for excellent Maintenance.Maintenance of a car is expected. Complete service
condition. history does add some value, but lack of service history devalues your
trade far more significantly. For instance, that $500-dollar 60,000-
mile service you just performed? It doesn’t add $500 dollars to the
value of your car. However, if you didn’t do the 60,000-mile service
and it is due, your car might be worth $500 less. Buyers expect that
you maintained your vehicle to manufacturer’s guidelines.

WHAT QUALIFIES AS Condition. Very, very few trade-ins are in excellent condition. Kel-
GOOD CONDITION? ly Blue Books estimates that only three percent of trade-ins meet
the criteria for excellent condition. Even good condition is usually
Shiny, recently waxed
paint. a stretch. But customers always rate their own cars either good or
excellent.
No dents or major
scratches.
Look over the list to the left. Can you answer yes to all of them? If not,
No interior odors. then your car is probably in “fair” condition.

Carpets and seats are

clean with no stains. Payoff. I know the guys and gals reading Money Under 30 are more
financially savvy than the average car-buyer, but I’ll say this anyway:
No rips or tears in the
If you owe money on the car you’re trading, understand that the out-
cloth or leather.
standing payoff balance has no correlation to the car’s trade-in value.
Tires are new or have In fact, many car owners with outstanding loans are underwater,
significant tread life left meaning they owe more than the car is worth. That doesn’t mean we
(more than 50%).
won’t still take your car in trade, but if the amount we offer is less
Service history is up to than what you owe on the loan, you’ll have to either pay the difference
date and there are no or roll the difference into a new loan (not a habit you want to get into).
mechanical issues.

Getting perspective. My advice? Walk around your trade-in and pre-

tend you are about to buy it for the first time. Ask yourself what flaws
you see and what would you want the dealer to fix before they were
to sell it to you. If you can realistically look at your trade-in this way,
you’ll be better prepared at negotiation time.

11
 Keep an open mind

If you owe Now that you’ve done your research, keep an open mind. If working
money on the car out a trade-in figure was as easy as going to www.kbb.com, why would
you’re trading, car dealers have used car managers to appraise trades? Contrary to
understand that what many consumers think, it’s not to low-ball your trade and make
the outstanding the process uncomfortable. The answer is that there are more vari-
payoff balance ables to consider than any one website can address, and experience
has no correlation goes a long way. Car dealers trade multiple cars every single day. In
to the car’s trade- my experience, the average consumer trades cars once or twice every
in value. five years.

What are the dealers are trying to do? The owner of the dealership
entrusts the used car manager with an open checkbook and wants
his/her money properly managed. A used car manager will take into
consideration popularity (how fast a car will sell and is it in high or
low demand), fuel economy (with gas at almost $4.00 dollars a gallon,
people are less interested in fuel inefficient vehicles), and local supply
(are similar cars available in fewer numbers or does every dealer in
town have one in stock).

These factors can have a significant effect on your final trade value,
and they aren’t necessarily included in those Web numbers. For ex-
ample, some dealers pay thousands of dollars each month for soft-
ware that can accurately take all this information into account and
help the used car manager appraise trade-ins for their correct value.

The final step in the trade’s lifecycle is what to do when it just won’t
sell. That’s when wholesale auto auctions come into the picture. The
reality is the dealer needs to know what cash amount they can con-
vert your trade into if all else fails. Therefore wholesale figures must
A good used play a part in your trade value.
car manager is
trying to offer a This brings me back to Trade-In Marketplace by Autotrader.com.
fair price for a What sets this trade value source apart from all the others is that they
trade-in given the will cut you a check for the value of your trade. Cold, hard cash. If that
myriad variables doesn’t build validity in their trade figure over all the other sources
that will impact then I don’t know what will. The Trade-In Marketplace figure general-
what the ly leans towards the wholesale side of the price curve but, depending
dealership can on what you have to trade, it might be spot on. If you have a squeaky
get for the car in clean, desirable trade-in, you can expect the dealer to do better than
a sale. Trade-In Marketplace.

12
 What’s the point?

Hopefully this post sheds some light on how trade-in prices are de-
termined and what dealers are looking for. If you’ve seen one online
source for an “excellent condition” trade-in value and a dealer comes
A good used
in significantly lower, you may feel that the dealer is taking advantage
car manager is
of you because they don’t agree with your figure.
trying to offer a
fair price for a
This is the point in the sales process in which negotiations can stall or
trade-in given the
the customer gets frustrated and leaves. Before this happens, ask the
myriad variables
sales consultant to explain how they came up with their figure. You
that will impact
might have to speak with the used car manager in order to get that
what the
answer, but with your research behind you, an open mind, and an
dealership can
open dialogue you will be better positioned to get past the trade por-
get for the car in
tion of the transaction and focus on getting an all-around good deal
a sale.
on a new car.

13
 How Much Should You
Spend on a Car in Your 20s?
By David Weliver
How much car can you afford? Find out how much you should spend on a
car in your twenties and why — unless cars are your absolute passion —
it’s probably way less than you think.

I t’s easy to get caught up in the manufactured romance of the au-

tomobile. The new-car smell. The comforting feel of cool leather
cocooning you as you grip the wheel and accelerate into a curve. The
prowling glow of halogen headlights and distant thumps of bass as
you approach a hot spot’s valet stand. The allure of cruising a busy
strip on a warm summer evening.

That’s what car manufacturers want, of course. For most of us, the
reality goes something like this:

• You get your license towards the end of high school.

How much car
• If you’re lucky, your parents let you borrow their minivan
can you afford?
every now and then. If you’re really lucky, your parents
Unless cars are
give you their old minivan or some equivalent beater that’s
your absolute
safe, slow and guaranteed to break down twice a month.
passion — it’s
probably way less • At some point you either work your tail off to save cash for
than you think. a used car of your own – or perhaps you get a job and just
as quickly march into a car dealer to finance a brand new
car, no money down.

• Either way, you end up disillusioned with cars tout de

suite.

• If you buy your own $3,000, it still breaks down twice a

month.

• If you finance a new car, you live the dream for a few
months before realizing that you’ll be making this crazy
car payment for the next three and a half years and that
you can’t afford anything else. (Oh yes, and by the way:
That new car still needs oil changes, tires, and other main-
tenance).

What’s the answer? Is it possible to own a car that’s both reliable and
affordable, if not even – dare we say it – sexy? (At least just a little bit?)

14
 Like everything I write, it depends on your situation. Personal fi-
nance is personal.

Is it possible to But like many financial decisions, the key is to adjust your car-buying
own a car that’s budget to your income. Remember that boring, tried and true advice:
both reliable and spend less than you earn? A car is a big expense. So it’s important that
affordable, if not you get this decision right if you want to have any hope of living with-
even – dare we in your means and investing the difference.
say it – sexy?
Now here’s the thing: The most frugal people I know go out of their
way to spend as little as possible on their car. It’s not just smart mon-
ey; it’s a point of pride. They buy a used car, probably with cash. They
drive their cars to 200,000 miles or beyond. They own one car for a
family instead of two or three. And some really frugal ones don’t own
a car at all.

FEELING FRUGAL? So the real answer to the question: “How much should I spend on a
Here’s how much car 10% of car in my twenties?” – or anytime – is “As little as you can get away
your income gets you:
with.”
$30,000/year
2001 Honda Civic
The frugal answer: 10 percent of your income
$60,000/year
2005 Subaru Forester For many people I think that will be between 10 – 15 percent of your
income. So if you earn $25K a year, that’s going to be a high-mileage
$90,000/year
2009 VW Passat used car for $2,500 – $3,000. If you earn $80K that’s a used car for
around $10K or $12K. (Yes, this is the harsh reality of being good with
money).

So here’s the thing: I’m not that frugal. I know that’s weird coming
from a personal finance blogger, but I’ve always been honest about
the fact that I’m more of a natural born spender than saver. I’ve
So the real
checked myself in a lot of ways and become better at making frugal
answer to the
decisions, but I don’t have that driving passion for spending as little
question: “How
as I can at every turn (though I’m often jealous of those who do).
much should I
spend on a car in
The compromise: 20 percent of your income
my twenties?” – or
anytime – is “As
For me, if I’m going to buy a new car I want something that’s as safe
little as you can
and reliable as possible for my needs. Especially with a young family
get away with.”
and two busy working parents, reliability is key – sending the car to
the shop all the time would be a hassle. When the small pickup truck
I was driving would no longer fit the car seats of my growing family,
I found a three-year used Toyota Highlander with only 18,000 miles.

15
 It was a pretty great find because I got a like-new car for a used car
price.

THE COMPRIMISE. What I’m saying is: How much car you can afford is a different ques-
Looking for some greater re-
liability? 20% of your income tion than how much you should spend on a new car.
could get you:

$30,000/year A loan officer will look at your income and credit report and say: “you
2003 Subaru Impreza can afford $400 a month”. Well, you could finance a new Porsche for
$400 a month if they stretch the loan long enough, but you certainly
$60,000/year
2005 Volvo S60 shouldn’t spend that much on car.

$90,000/year If you take pride in your frugality, 10-15 percent for your income
2013 Ford Fusion
sounds about right. If you value the reliability a newer, more ex-
pensive car brings, then 20-25 percent is a good benchmark. This
gets you $5,000 to $7,500 on a $25K salary. Still not a lot, but you’ll
have more options. At a salary of $50K you can spend $10–15K which
should be plenty for a basic used sedan under 100,000 miles.

Finally, if you really really love cars…

To all you personal finance blog regulars out there, this probably
sounds good so far. If this is your first time here (and assuming you’ve
read this far), you might be thinking, “These people are so cheap!
That’s crazy. There’s no way I can get a car I want for that money!”
To you I would say: Ask yourself why you’re saying that. Is it because
you’re a “car guy (or girl)” and you value your car most out of all your
possessions? Or is it because you’ve simply been conditioned by our
culture, advertising, and car salespeople to think that you should buy
a brand new car or that there’s nothing wrong with spending a year’s
worth of paychecks on a car?

There’s nothing If it’s the former – that you love cars – cool. There’s nothing wrong
wrong with with intentional spending when you’re conscious of it and make
intentional sacrifices in other areas. By intentional spending I mean spending
spending when money – maybe more than other people would think is sensible – on
you’re conscious things that interest you.
of it and make
sacrifices in other So if you value your car, I don’t see anything wrong with spending
areas. more than we recommend for most people, perhaps up to 50 percent
of your income on a car. Chances are – as a car person – you’ll care for
the car better, enjoy it more, and get more money for it when you sell
it than the average car owner. Again, you just have to remember that
because the car will be a large expense, you’ll have to be extra vigilant

16
 about other expenses.

If you’re not a If you’re not a car person, the takeaway is to think about why you
car person, the think you need to spend so much on a car. It’s easy to think that way, I
takeaway is to know – I worked at a car dealership once.
think about why
you think you If someone walked and didn’t specify a budget, we’d sell them any car
need to spend so they wanted and only after the fact worry about whether they could
much on a car. It’s afford it. And by “afford”, of course, I mean that they could get financ-
easy to think that ing approved. In some cases I’m sure they sold cars that cost more
way, I know – I than the customer earned in a year.
worked at a car
dealership once. We didn’t care about the car buyer’s actual income or budget; it
wasn’t the dealer’s business. If a customer can’t afford a car, the bank
send a repo man and gets its car back. The system looks out for every-
one else but you. You can start by looking out for yourself by figuring
out how much you should pay for a new car and sticking to your guns.

Happy driving.

17