Step 1, Part 2: What Can I Afford?
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How Much is Too Much?
Knowing you can afford a car is only half the story. If your family has two or more cars, you could be spending all your funds on transportation, leaving nothing to put toward goals like home ownership, college savings, debt reduction and other important areas.
How do you know if you’re spending too much? The accepted standard is to spend between 15-20 percent of your monthly income after taxes on transportation. This includes all car payments, insurance premiums, fuel and maintenance costs.
If, after adding up your expenses, you find that you’re over that 20 percent marker, perhaps it’s time to reassess your finances as a whole. Re-evaluate your budget and see if you have wiggle room in your other expense categories. There may be an easy way to make changes.
Focus on paying off any cars you currently own. When you pay off a car, be sure to transfer that monthly payment amount into savings or apply it to debt reduction.
