So, how much is too much to spend on a car? Some credit counselors suggest car costs shouldn’t exceed 20% of your after-tax pay, but that figure could still be way too much if your living costs are high.
My rule: If you have a car payment and you aren’t saving for retirement, you probably spent too much on the car.
Here are some ways to reduce car costs to free up more money for the future:
- Consider alternatives. In many urban areas, it’s quite possible to forgo owning a car altogether, thanks to public transportation and rental agencies or services such as Zipcar. Even in some suburban areas, it may be possible to get by without a car or with one fewer car.
- Buy used. New cars are a luxury, and luxuries should be paid for with cash. If you can’t pay cash for a vehicle, let the other guy take the new-car depreciation hit. If you’re nervous about buying a car you didn’t break in, go for a certified preowned version.
- Hang on to your cars longer. With proper maintenance, today’s better-built cars can last more than 200,000 miles. Make sure your current car is paid off and that you have saved a substantial down payment on a new one before you start thinking of replacing it.
- Keep loans short -- and cheap. If you can’t pay cash, line up financing before you ever set foot on a car lot, recommends Phil Reed of Edmunds.com. Credit unions often have the best rates and terms. If you can’t pay off the car in four years, you probably can’t afford the car.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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