The Working Backwards Series: How Much Car Can I Afford?


The Working Backwards Series?

The Working Backwards Series takes a look at budgeting in each spending category from the standpoint of “what money is available given our lifestyle and choices?” In this case,  we are talking about a family of four living in Austin, Texas and making $74,000 a year (the average household income in Austin).

What are we trying to accomplish? We want to show what a balanced, sustainable budget looks like, and one way to do that is to “back into” the dollar amount for each budget category given life choices: Raising two children in a two income home. While we understand we can spend more in categories that mean a lot to us, and each family is different, we want to set expectations that the discipline of a balanced budget, (spending and saving less than we make), requires conscious decisions, sacrifices and tradeoffs to meet our long term goals and desires that include financial freedom.

Topic For This Post: AUTOMOBILES

How much automobile(s) can we afford in our balanced budget? It is a tricky and emotional question. Americans are passionate about their cars. The question has many variables too: If we own our cars outright, then our auto expenses are just operating costs like gas, insurance, repairs, etc. But if we have an auto loan(s) or worse, lease(s), we have monthly payments that must be factored in as well. For the purposes of this exercise, we will look at the budget with and without auto loans on each car. Ouch! I know, having two car payments is expensive, but sadly, two auto loans (or leases) in a family are more common than not.

What percentage of our budget is allocated to autos? If we own your cars, the operating costs of those autos can be less than 5% of your net spendable budget (after taxes and charitable donations). With auto loans, it can be three times that. For today, we will assume that our budget percentage for autos in 14% of our net spendable budget.

What Does That Look Like – The Math

A $74,000/year household income equates to roughly $54,750/year after taxes and charitable donations, or $4,563/month. At 14% of our budget going to autos, that’s roughly $639/month for auto costs. Total. I know, that is not very much when you figure the operating costs of gas and insurance eat up a large part of that budget. Let’s take a look, assuming each well-running car, that are insured to good, safe mature drivers does 10,000 miles a year

Monthly insurance for two autos:                $125

Monthly gas:                                                     $150

Repairs/Misc (Register, etc)                             $ 50 (Optimistic)

What’s left in the budget:                               $289

What does this say? It says that IF we have two well running cars with limited repairs, good gas mileage and limited monthly mileage, we only have $289 to service any auto loans or leases. That could be either one loan up to $289/month, or two $145 auto payments. Have you heard of an auto loan as low as $145/month? Not me. Furthermore, what does that mean? It means we are not driving brand new BMWs. It means we are probably not driving new cars at all, but used cars. I think it really means that a family of four with two cars needs to own AT LEAST one of the two cars in order to make their budget work.

So What Is The Fuss?

The point is that a balanced budget for a family of four on an average household income and with many essential budget categories like housing, food, children’s needs, etc, does not have much room for auto loans or leases. Plain and simple. While the vast amount of cars on the road today have some form of loan or lease associated with them, most of us can’t afford them. Ouch. But true. We certainly can’t afford most of the high priced sports cars, custom trucks or expensive people movers (think supersized SUVs) on a loan or lease. Yet most of us are trying to do just that. And I believe that is one of the major reasons we have more than 75% of households in America living paycheck to paycheck with no savings or funds for emergencies.

What’s The Solution

There are several. We could end out fascination with cars, but that’s not going to happen. We could end our fixation on new cars and buy used to make our budgets balance. We could try to be one car families although that could be tough in a two income household. We could save our money and buy our cars with cash. That is really the answer. Each month, save an amount of money that, over time, allows you to purchase a car with cash when it is needed. How do we do that on a tight budget? First, get rid of all your consumer and auto debt that you currently have. Do everything possible to get out of debt so that all your money could go towards your needs and not your loans. Let’s face it, borrowing money is expensive. Next, each month, set aside money in a savings account or investment. If you need a car in five years, that’s 60 payments to your savings to go toward your next car. How much do we save? Well, if the budget for the next car is $12,000 (think used car), that would be $200/month. For two cars that would be $400/month which sounds like a lot. But when you consider that the average household spends $499/month (source: Experian) on loans/leases alone, it is considerably less AND you own the cars outright!

Final Word

Auto expenses are one of the three biggest budget busters (home and entertainment) and the main culprit is our auto loans and leases. The best way to control your auto expenses is to own your vehicles and not have outstanding auto loans. If you must finance your autos, be careful not to “break the bank” on financing that prevents you from maintaining a balanced budget and living in financial freedom!

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