One of our family’s financial goals in 2012 is to replace one of our cars. I have to be honest; I dislike the whole car buying process. It is not something I enjoy and find it to be very unenjoyable. Still, by asking these three questions before I set out car shopping it has made the process more enjoyable.
Question #1 Are you paying in Cash?
Of course I ask myself that question in every purchase, but when looking at cars I must ask this first to know how much I can afford. I am so much against having a car payment because I believe having one robs us of our freedom to live the kind of life we want to. Remember the cost of a car payment is more than just the monthly payment. Yes, this probably means you have to drive a lesser car but that is OK. Like I told a listener on a recent podcast, there is nothing wrong with moving up in car later on, when the cash is available.
Question #2 How much of your income is in your cars?
You need to ask yourself this question whether you are paying with cash or not. The reason is that you do not want more than 50% of your income tied up in the value of your cars. So for example, if you make $50,000 a year and have one car valued at $15,000, I would not buy another that exceeded $10,000 in value. That is because cars go down in value fast and if too much of your financial worth is tied up in things that drop in value it is going to be hard to reach your financial dreams.
Question #3 How old is the car you are looking at?
Speaking of cars dropping in value, the value of a new car drops like a rock. According to a recent study from Edmunds.com the average car loses 20% of its value after one year, 40% after 3 years and 60% after 5 years! That is why I am not keen on buying a new car unless you have significant net worth. Instead, I like to find nice used cars and by doing that I can easily find a car that we can buy for cash that does not break the 50% of income rule.
If you do not enjoy the car buying process either, next time ask yourself these questions and it should help ease the pain of going through the process. Whether or not you enjoy the car buying process, by getting answers to these questions you will avoid getting yourself into trouble and making a purchase that you will regret later.
What are some questions you ask yourself when deciding to make a car purchase?