Breaking Free from Debt: A Smart Approach to Buying a Car
Are you tired of dealing with a broken-down vehicle or racking up repair bills? It may be time to consider replacing your car. But before making a purchase, it’s essential to determine how much car you can afford. Financial expert Dave Ramsey offers a straightforward solution: only buy what you can pay for in cash.
The Hidden Costs of Financing
Financing a car may seem like an easy option, but it can lead to long-term debt and significant additional costs. As of 2024, the average interest rate for a new-car loan was 6.6%, while used car loans averaged 10.8%. This means financing a $30,000 car for five years at 6.6% interest would add over $5,300 in extra costs.
Setting a Budget That Works for You
To determine how much you can afford, start by examining your savings. Consider how much you can spend without compromising your other financial priorities, such as paying off debt or saving for a house. If you’re trading in your current car, use tools like Kelley Blue Book to estimate its value and add it to your budget.
Ramsey’s Rule: Avoid Tying Up Too Much Wealth
Dave Ramsey recommends a key rule: the total value of all your vehicles should not exceed half your annual income. For example, if you earn $70,000 a year, your cars’ combined value should stay under $35,000. This guideline helps prevent tying up too much of your wealth in assets that lose value over time.
The Dangers of Depreciation
New cars can lose up to 20% of their value in the first year and nearly 50% within three years. Unless you have a net worth of at least one million dollars, it’s often better to opt for a reliable used car. This can save you thousands while still providing a dependable ride.
Factoring in the Total Cost of Ownership
Beyond the sticker price, consider the cost of owning a car, including fuel, maintenance, and insurance. In 2024, AAA estimated the average annual cost of owning a vehicle at $12,297. Luxury vehicles often incur higher maintenance and repair costs than standard cars, so it’s essential to factor these costs into your budget.
A Smarter Approach to Buying a Car
If your current vehicle still runs, consider keeping it while you save for your next one. Set a goal based on the cost of the car you want and divide that amount by the months you plan to save. This approach can help you avoid debt and save thousands in the long run.
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