How Much Car Can I Afford?

Let’s talk about buying a new car. You know it’s coming, you can feel it and the car repair category shows it. You’re due for a new car soon. You’re trying to hang on as long as you can because maybe you aren’t sure if you can afford a new car payment.

That’s the agonizing question, isn’t it? Here’s how to totally nail it down.

Run an Experiment

If your car is not dead yet, you’ve got some time for a very cool little experiment. This is the best kind of experiment because there is literally no downside. None.

Let’s say you think the car payment will be about $400 a month for five years.

Each month for the next three months, I want you to take $400 and set it aside. Maybe you take this out in cash, or move money to a separate savings out. If you use YNAB, it’s as easy as creating a category in your budget for the new car payment and adding a monthly funding target for $400.

(By the way, if your car insurance will go up as a result of this purchase, apply this experiment to that category too. Start budgeting for the new insurance amount.)

Budget to this category for 3 months. Here’s the key part:

Do not buy the car.

Not yet…

That means you won’t be spending any money from that category. Do not move the money out of there! Hands off! No spending or moving for three months! Pretend these are real car payment dollars going out the door.

Just keep on budgeting! Add $400 to that category for three months. At the end of the three months, you’ll have $1,200.

Now ask yourself the million dollar question:  Do you want to keep doing that for next five years?

Do You Want to Keep Doing That for Five Years?

You’ve lived with the car payment for three months. You’ve dedicated real dollars to this category that you could not use anywhere else in your budget.  You know what it feels like to live with this car payment.

So ask yourself this question: “Do I want to keep doing this for five years or more?” There are a few possible ways you’ll answer this:

  • “Heck yeah! I barely felt that increase at all. Sign me up!  Remote start, leather seats, sunroom for days, I’m all in!”
  • “Hmm, I can afford it just fine, but I ‘d rather have those dollars going in my ‘Trip to the Bahamas’ category instead.”
  • “Nope.  We flat out cannot afford this and I don’t like feeling this pinch.  Now we know.”

And the best part is, you are not committed to the loan…not yet.

You can still decide not to do this.

“Woah, that was painful, I don’t think I can afford that for the next five years.”

Knowledge is Power

Now you have information, and information is power. By artificially creating some scarcity, you have clarity.  It’ll be super clear at this point whether or not you can afford this payment long term.

But here’s something else you have:  $1200.

Even if you decide that payment amount is too high, you now have a down payment and can revisit your options.  Maybe you’ll look at used cars more closely. Or, maybe you try budgeting $300 for the next three months. Give it a try and see how that feels.  By then you’d have $2100, and that gives you options.

There’s no wrong answer here, no car that you “should” or “shouldn’t” buy. This is just a great little exercise in gut checking your priorities and gaining clarity on that all-important question that pops up in all our lives regularly:  Can I Afford This?

Try this exercise and you’ll know the answer with confidence when it comes to your car. You can buy your car without the shame, without the guilt, and without the added stress.

Good luck and budget on!

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