Budgets - Part 3

Next to housing, transportation - which for most of us means an automobile of some sort - can often be our second largest expense.

If you are like most people, you probably have a car loan right now.  Add to that the cost of maintenance, gasoline, and repairs (insurance is a separate budget category and will be addressed in Part 4) and the dollars going out the door each month add up rather quickly.

Oftentimes I hear people lament about the cost of their vehicle and gasoline - but I always remember that in many cases, it is the very ownership and use of that vehicle that allows us to get to work, which in turn generates the income that allows us to invest, save and pay for our expenses.  Think about how you would get to work without a car?  In my case, it involves driving (or getting a ride) to a park-and-ride lot, taking a connector bus to the train station, taking a train, and then taking another bus to my office.  This would use more than double my regular commute time each day and limit the flexibility that I sometimes require.  I tried it for a while last year, but notwithstanding the environmental benefit of utilizing public transportation, the lack of convenience (for me) was too great of an obstacle to overcome.  NOTE: if you live in a city with an excellent public transportation system (e.g. New York), then I would strongly suggest utilizing it since in the long run, it will likely be cheaper and more convenient than driving to work each day.

Because I look at my car as a requirement for me to earn income, a primary concern for me is reliability.  When I was younger, I used to own a car that was just not reliable.  My most memorable experience was stalling in the middle of an intersection, blocking traffic in all directions in the process.  It was at that moment that I realized that ‘cheaper is not always better’ - especially for a tool designed to get me to work each day.

Keeping that in mind, here are a couple of things to think about when planning your automobile budget:

 

1.  Vehicle cost - when you are purchasing a vehicle (especially if you are taking a loan), focus on the price of the vehicle - not just the payment!  If you are financing your purchase,  a car salesperson will go out of their way to make a payment work for you - but oftentimes this will involve inflating either the price of the car, the interest rate on the loan, or the amortization period of the loan.  All of these will cost you more in the end - notwithstanding the fact that you can afford the payment.

2.  Savings - if you currently have a loan on your existing vehicle, once it is paid off, continue to save the same amount as the payment was each month - this will allow you to increase your down payment or possibly even purchase your next car for cash.  If you do not currently have a car loan, start putting away some money each month since at some point in time, you will need to purchase another car.

3.  Gasoline - this will be your most notable day-to-day vehicle expense.  My only advice: think long term.  Gasoline, although cheaper than it was a year ago, is still far more expensive then it was just a couple of months ago.  Consider where gas prices are going - not where they are.  And choose a vehicle to match your expectation.

4.  Maintenance - while a new car has relatively minor maintenance expenditures, as soon as it is off warranty, the possibility of expensive repair bills can increase significantly.  To be prepared for situations like that, I suggest saving some amount each month to offset the cost of these repairs.  Even $50 per month will add up to $3,000 in five years from now - which is enough to cover even the most expensive of repairs.  If you wind up not needing these funds, you can use them as part of your down payment when purchasing another vehicle.

5.  Purchasing new versus used - this is a question I ponder very seriously because it addresses the reliability concern above.  Of the last two vehicles we purchased, one was new and the other was 3 years old.  Would I purchase new again?  Yes indeed.  Would I purchase used again?  Yes - in the right circumstances.  To give you an example, earlier this year, we were able to purchase a low mileage 3 year old car saving about $17,000 over what a new one would cost.  In that type of circumstance, it just made sense since we were able to purchase a much nicer - albeit used - car than we would have been able to if we were just looking at new cars.  And quite frankly, we haven’t looked back - it has been absolutely wonderful and worked out well for us.

As you can see, there is a lot more to your automobile budget than just choosing a car and filling it with gasoline.  Keep in mind these things when you are considering a vehicle purchase, or even if you are not yet in the market for one.  At some point in time, it is quite likely that you will be on the market for another car - so now you will be prepared for that moment!

One more thing to think about:

If you are on the market for a new vehicle, don’t forget about the cash for clunkers program .

President Obama has signed the bill creating this program into law.  The official website for this program is: http://www.cars.gov