How Much Should Your Car Actually Cost: 3 Strict Financial Rules When Buying A Car

Do you know many people who drive premium cars that are borrowed? Surely each of us has plenty of such examples. But few people think about the consequences. And they can be deplorable. A person may find himself in debt, which will not allow him to make more rational decisions, and try his hand at business. And the worst thing is when he gets a second job to feed himself, pay off the loan and maintain a car for the rest. Where this idea came from, there are no ends to be found, however, it is believed that in developed countries a car should cost no more than 6 (in a different interpretation – 12) monthly salaries so that its owner does not become a hostage of “materialism”.

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On the one hand, a car is a wonderful dream that people dream and sigh about. To buy the first car, a car of a higher class is all wonderful. Cars are often included in strategic purchases in personal financial plans, and they also say that the car raises the standard of living. And this is all, undoubtedly, so. On the other hand, a car is quite an expensive purchase. Especially when you come to the salon with one option (it seems you aimed at a “basic consultation” with a price from …), and then you realize that you need climate control, and rear windows and everything else is also needed – otherwise, of course, you don’t buy a car every day.

So, in order to put everything in its place, there are 3 reinforced concrete rules in strict financial management, when and which car is worth buying. You can disagree with them and even be indignant. But here, as they say, everyone decides for himself how well these rules suit him. Although if you follow them, your personal financial health will definitely be better.

  • The cost of the car should not exceed 6 monthly income

There is, by and large, nothing to add. The price of the car should consist of income for 6 months – for half a year if you want – for average incomes (this is for those who have high seasonality and income differences throughout the year).

In numbers it looks like this: With an income of 1000$ per month, the price of a car should not be more expensive than 6 thousand dollars. It may seem to someone that there are no such cars. But here we need to look at the question from the other side. And earn more.

  • First, create an asset that will recoup the costs of the car

The peculiarity of the approach is not to put an additional financial burden on yourself, but first, create an asset that brings money and covers the costs of a car, and therefore already makes a purchase.

For example, we count. We take a car loan with a monthly payment of 1000 dollars. And the cost of a car is 500 dollars per month, – by eye. Total 1500. Task: create an asset that will generate an additional profit of 1500$ monthly, and then purchase a car. Someone will say: harsh. But it is with this approach that we will move forward financially. Not back.

When buying for cash, it makes sense to estimate how much the monthly payment would be if we took this amount on credit at an average rate. After all, we do not send money to work but spend it by acquiring property which creates regular expenses.

The second rule sounds like this: “First create assets, and then use the income from them to buy liabilities, including a good car”.

  • You can buy a car only when you have cash for 3 cars

From the point of view of understanding, everything is also simple. This approach will save you from unreasonable financial expenses and will not create a huge hole in your personal finances.

P.S. An exception, perhaps, should be made only for those cases when the car really helps to earn. For example, it is necessary for work. Or, for example, the results of negotiations depend on which car you arrive at the meeting (but in reality such situations are extremely rare).

That’s probably all. Now you know all the main points that need to be taken into account when calculating your future auto budget.