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How much should you spend on a car?

Car shopping can be fun and test driving the new Tesla and Aston Martin gives you a taste of luxury and prestige you’ve never experienced before. You’re tempted by the sleek look and unique features and along with the impressive tech you convince yourself you deserve it!

With the average Australia car cost creeping up to $33,000 you may need to check the budget if you’re considering the Aston Martin. It fascinates me that with a population of 24 million we purchase over a million new cars each year.

So, how much should we spend on a car?

Whilst a ‘car price to salary ratio’ seems the easiest way to consider how much you should spend on a car the advised ratio seems to vary from 10 – 50% of your yearly gross income. Therefore, if you earn an average income of $80,000 your car budget would be between $8,000 – $40,000. However, if you follow the higher percentage you may find yourself struggling to make ends meet.

Ideally you would not want more than 10% of your income to go into your car expenses; this includes any loan, insurance, maintenance and registration. The average cost of vehicle registration is $800 pa and insurance in Melbourne approx. $1,200 pa, this can vary greatly depending upon your insurer, what type of car you have, your age is factored into the equation as well, and your chosen excess can make a big difference.

Further, you should consider not taking out a car loan for more than 4 years. This will give you a good idea of how much you can really afford on a car. It will vary depending on how much you have saved for a deposit. Remember a car is a depreciating asset so as soon as you drive away you are losing value.

The freedom of getting into your car and going wherever you like is a huge convenience. Some features such as cruise control, automatic, airbags are a given whereas you may want to consider carefully if you need the leather seats, seat heaters and state of the art sound system. The auto industry will often try and lengthen your loan to lower your monthly repayments. This is done to convince you to purchase a more expensive car. Be savvy and shop around for your loan as well, dealer finance isn’t always the best option, so be sure to compare lenders.

Visibility is key so don’t be blinded by the bling. Focus on building your savings and growing your wealth with appreciating assets. There was a time when we though built-in Bluetooth, parking sensors and navigation were a luxury and now they are found in the most affordable of cars. Happy shopping.

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