Buying a car: what you need to know

Dec 11, 2023

Financial planning

Buying a car what you need to know
Buying a car what you need to know

Buying a car can be overwhelming. There are so many features to compare, different ways to pay, and the added pressure from a sales person lurking over your shoulder. Fortunately, we're here to make buying your first car as smooth a ride as possible. 


So hop on in. We'll cover: 


  • Does buying a car make sense for you? 

  • How much does it cost to buy (and maintain) a car? 

  • How can Plenty help make sure you’re buying responsibly? 


Does buying a car make sense for you?


If you're here, odds are you're thinking of buying a car. And while everyone’s situation will be a little different, there are a few common considerations to help you weigh whether it’s a good idea. Here are some pros and cons of owning a car.


Pros of owning a car: 

  • Independence and flexibility. Knowing you can go anywhere, anytime is a freeing feeling. Having a car offers convenience and peace of mind in an emergency. 


  • Saves time. On average, driving a car takes about half as much time as using public transportation. That goes for everything from commuting to work, to running errands, or visiting your parents for the weekend.


  • Easier access to hobbies and hauling. Whether you're filling the trunk with camping gear or a trunk full of groceries, a car makes it easy to get around and get things done.


Cons of owning a car:


  • Financial commitment. On average, cars cost their owners over $10,000 per year. The real number for you could be much different. But it’s worth considering the upfront price of the car, your monthly payments, maintenance, insurance, taxes, and fuel costs. Having an emergency fund to cover unexpected repairs can also provide peace of mind and protect your finances.


  • Environmental impact. Thankfully, eco-conscious car shoppers have lots of options these days including fully electric vehicles (EVs) and hybrids. But even the most earth-friendly cars can still contribute to air pollution, traffic congestion, and climate change.


  • Different stresses. Even the most responsible car owners face stressors like reckless drivers, parking, regular maintenance, getting stuck in traffic. 


What about ride-hailing vs car ownership?


If you live in a city, you may also be wondering if using a car service like Uber or Lyft would make more sense. One study by KCRA San Francisco found that ride-hailing was more cost effective than car ownership. Using average costs in California for insurance, car payments, and gas for a 5-mile commute to work, ridesharing could result in over $300 a month in savings vs owning a car. 


For some people the monthly savings and convenience of ride-hailing is indeed more favorable to owning a car. But the big difference is the monthly cost of ride-hailing doesn’t go toward any equity - meaning you’ll keep spending indefinitely and never own an actual car you could sell in the future. And the farther your commute is to work, typically the less favorable ride-hailing is in terms of cost.


If the pros of buying a car outweigh the cons for you (and for most people they do), move on to the next step: understanding the costs of owning a vehicle, some of which are sneakier than others.


How much does it cost to buy and maintain a car?


On average, car buyers paid $48,451 for a new car in 2023 and $27,028 for a used car (Sources: Forbes, CNBC, 2023). As for fuel and maintenance, most car owners spend about $900/month on average to own and operate a car. Keep in mind that's separate from any lease or loan payments.


Recurring expenses


Before you buy a car, we recommend estimating your monthly expenses to maintain it. In general, how much you spend will depend on what kind of car you buy, whether it's new or used, and how many miles you drive.


Here are some considerations.


  • Fuel can cost $2,700 per year. You can save around $2,000 annually by going for an electric vehicle, even accounting for charging costs of about $600 per year. 



  • Routine maintenance can cost another $200-500 per year. Oil changes, tune-ups, tire rotations, and tire replacements are just the basics. But watch out - certain luxury vehicles can have much costlier maintenance such as Jaguars which could quickly set you back $1,300 a year just to keep it running smooth! (Source: JD Power, 2023) To help reduce these costs, consider an EV or purchasing a car with an extended warranty that may cover some of these expenses.


  • Unexpected repairs call for an emergency fund. If you don’t already have an emergency fund, it’s a good idea to start one before buying a car. For example, a new transmission could set you back $5,000 (Source: JD Power, 2023).



  • Insurance costs about $2,150 annually. How much you’ll pay for car insurance will depend on a lot of things such as the make and model of your car, your age, driving record, credit score, location, deductible, and coverage. Plus, car insurance is mandatory in most states. Expect to pay an average of $2,150 for full coverage or $467 for minimum coverage (Source: Forbes, 2023).



  • Taxes, registration, & other fees. Depending on your location, you may be required to pay annual taxes on your car, registration fees, or even get an annual smog check. And if you live in an urban area, you may also have to pay expensive parking fees. For example, some parking garages charge $40/day in downtown San Francisco where many office buildings are located (Source: Way, 2023). 


Financing a car


Most car owners also have monthly lease or car loan payments to make that are a fraction of the car’s total cost. Whereas those who buy a car in cash pay the full price of the car up front. 


The benefit of paying cash is you can avoid paying loan interest and own the car outright. But it also means you’ll have more of your money tied up in something that loses value over time (more on this later). 


Most people buy new cars and use some kind of financing, while those who buy used cars tend to pay all cash. If you lease a car or take out a loan to pay for it, you'll end up paying a monthly bill. 


So, how much car can you afford? Some financial experts suggest a 20/4/10 rule which guides buyers to:


  • Pay a 20% down payment

  • Repay the loan in 4 years

  • Make sure your total costs don't exceed 10% of your monthly income


As a benchmark, the average monthly car payment is $716 for a new car and $526 for a used car. Then if you add on the average monthly maintenance cost we determined earlier, the average costs jump up to $1,610 a month for a new car and $1,420 a month for a used car.


Remember, no matter what kind of car you buy, it will lose value over time. If you’re choosing between a $50,000 car and a more luxurious car for $70,000, consider putting that extra $20,000 toward your retirement account. In thirty years, that $20,000 could be worth over $130,000.


How can Plenty help with your car purchase? 


When you create a car goal in Plenty, we'll ask you a few simple questions about what you're looking for. We can even help you estimate how much the car you're looking for will cost and help you save for a down payment if you're looking to finance, or the full amount if you’re looking to buy with cash.


The less you can spend on a car that safely and reliably transports you and your family around, the better for your household’s net worth growth. 


Whatever path you take toward buying your first car, we can help you make it happen.


Sign up for an account with Plenty today.


  – Team Plenty

_____



This information is for general informational purposes only. It is not intended to constitute investment advice or any other kind of professional advice and should not be relied upon as such. Before taking action based on any such information, we encourage you to consult with the appropriate professionals. We do not endorse any third parties referenced within the article. Market and economic views are subject to change without notice and may be untimely when presented here. Do not infer or assume that any securities, sectors or markets described in this article were or will be profitable. Past performance is no guarantee of future results. There is a possibility of loss. Historical or hypothetical performance results are presented for illustrative purposes only. An investment in a fund entails a high degree of risk, including the risk of loss. There is no assurance that a Fund’s investment objective will be achieved or that investors will receive a return on their capital.

Plenty was founded to democratize access to financial products and tools that accelerate wealth building. Plenty Financial and affiliated entities. (“Plenty Financial”) provide a web, mobile, personal financial management and educational platform to consumers; some of these tools are freely accessible to all consumers, others require a fee-based subscription. Advisory services are provided in the form of software-first financial planning and investment advisory services for fee-based Subscribers. Plenty Financial RIA, LLC is an SEC-Registered Investment Advisor. All investments made are legally owned by you. Investing is inherently risky and Plenty does not guarantee positive performance. Investments are held in accounts at BNY Mellon | Pershings, the world's largest securities servicing company and are SIPC insured. Investing involves risk, including the possible loss of principal, and there is no assurance that the investment will provide positive performance over any period of time.


Brokerage services are provided by Atomic Brokerage LLC "Atomic Brokerage", member FINRA and SIPC. Clearing and custody services are provided by Brokerage firm BNY Mellon Pershing, member SIPC. Plenty Financial RIA, LLC has a relationship with Atomic Brokerage to manage and execute investments on behalf of customers. Subadvisory services are offered through Atomic Invest LLC ("Atomic Invest"), an SEC-registered investment advisor, member SIPC. Atomic Invest was formerly known as Helium Advisors LLC.


Return data used in the interactive tool are hypothetical performance data which contains inherent limitations and is not a substitute for actual investment returns derived from a live portfolio. There are numerous risk factors related to trading and markets which cannot be fully accounted for when depicting Hypothetical Performance. Consequently, future returns are not guaranteed, and a loss of principal may occur. THIS IS FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE RELIED UPON AS INVESTMENT ADVICE. This site/application has been prepared by Plenty and is not intended to be (and may not be relied on in any manner as) legal, tax, investment, accounting or other advice or as an offer to sell or a solicitation of an offer to buy any securities of any investment product or any investment advisory service. The information contained in this site/application is superseded by, and is qualified in its entirety by, such offering materials. This site/application may contain proprietary, trade-secret, confidential and commercially sensitive information.


By accessing this site, you signify your agreement with and understanding of the following Terms of Use and Legal Information pertaining to both this site and any material in it. Plenty owns and maintains this site. No act of downloading or otherwise copying from this site will transfer title to any software or material at this site to you. Anything that you transmit to this site becomes the property of Plenty, may be used by Plenty for any lawful purpose, and is further subject to disclosure as deemed appropriate by Plenty, including to any legal or regulatory authority to which Plenty is subject. Plenty reserves all rights with respect to copyright ownership of all material at this site, and will enforce such rights to the full extent of the law.


Plenty was founded to democratize access to financial products and tools that accelerate wealth building. Plenty Financial and affiliated entities. (“Plenty Financial”) provide a web, mobile, personal financial management and educational platform to consumers; some of these tools are freely accessible to all consumers, others require a fee-based subscription. Advisory services are provided in the form of software-first financial planning and investment advisory services for fee-based Subscribers. Plenty Financial RIA, LLC is an SEC-Registered Investment Advisor. All investments made are legally owned by you. Investing is inherently risky and Plenty does not guarantee positive performance. Investments are held in accounts at BNY Mellon | Pershings, the world's largest securities servicing company and are SIPC insured. Investing involves risk, including the possible loss of principal, and there is no assurance that the investment will provide positive performance over any period of time.


Brokerage services are provided by Atomic Brokerage LLC "Atomic Brokerage", member FINRA and SIPC. Clearing and custody services are provided by Brokerage firm BNY Mellon Pershing, member SIPC. Plenty Financial RIA, LLC has a relationship with Atomic Brokerage to manage and execute investments on behalf of customers. Subadvisory services are offered through Atomic Invest LLC ("Atomic Invest"), an SEC-registered investment advisor, member SIPC. Atomic Invest was formerly known as Helium Advisors LLC.


Return data used in the interactive tool are hypothetical performance data which contains inherent limitations and is not a substitute for actual investment returns derived from a live portfolio. There are numerous risk factors related to trading and markets which cannot be fully accounted for when depicting Hypothetical Performance. Consequently, future returns are not guaranteed, and a loss of principal may occur. THIS IS FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE RELIED UPON AS INVESTMENT ADVICE. This site/application has been prepared by Plenty and is not intended to be (and may not be relied on in any manner as) legal, tax, investment, accounting or other advice or as an offer to sell or a solicitation of an offer to buy any securities of any investment product or any investment advisory service. The information contained in this site/application is superseded by, and is qualified in its entirety by, such offering materials. This site/application may contain proprietary, trade-secret, confidential and commercially sensitive information.


By accessing this site, you signify your agreement with and understanding of the following Terms of Use and Legal Information pertaining to both this site and any material in it. Plenty owns and maintains this site. No act of downloading or otherwise copying from this site will transfer title to any software or material at this site to you. Anything that you transmit to this site becomes the property of Plenty, may be used by Plenty for any lawful purpose, and is further subject to disclosure as deemed appropriate by Plenty, including to any legal or regulatory authority to which Plenty is subject. Plenty reserves all rights with respect to copyright ownership of all material at this site, and will enforce such rights to the full extent of the law.


Plenty was founded to democratize access to financial products and tools that accelerate wealth building. Plenty Financial and affiliated entities. (“Plenty Financial”) provide a web, mobile, personal financial management and educational platform to consumers; some of these tools are freely accessible to all consumers, others require a fee-based subscription. Advisory services are provided in the form of software-first financial planning and investment advisory services for fee-based Subscribers. Plenty Financial RIA, LLC is an SEC-Registered Investment Advisor. All investments made are legally owned by you. Investing is inherently risky and Plenty does not guarantee positive performance. Investments are held in accounts at BNY Mellon | Pershings, the world's largest securities servicing company and are SIPC insured. Investing involves risk, including the possible loss of principal, and there is no assurance that the investment will provide positive performance over any period of time.


Brokerage services are provided by Atomic Brokerage LLC "Atomic Brokerage", member FINRA and SIPC. Clearing and custody services are provided by Brokerage firm BNY Mellon Pershing, member SIPC. Plenty Financial RIA, LLC has a relationship with Atomic Brokerage to manage and execute investments on behalf of customers. Subadvisory services are offered through Atomic Invest LLC ("Atomic Invest"), an SEC-registered investment advisor, member SIPC. Atomic Invest was formerly known as Helium Advisors LLC.


Return data used in the interactive tool are hypothetical performance data which contains inherent limitations and is not a substitute for actual investment returns derived from a live portfolio. There are numerous risk factors related to trading and markets which cannot be fully accounted for when depicting Hypothetical Performance. Consequently, future returns are not guaranteed, and a loss of principal may occur. THIS IS FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE RELIED UPON AS INVESTMENT ADVICE. This site/application has been prepared by Plenty and is not intended to be (and may not be relied on in any manner as) legal, tax, investment, accounting or other advice or as an offer to sell or a solicitation of an offer to buy any securities of any investment product or any investment advisory service. The information contained in this site/application is superseded by, and is qualified in its entirety by, such offering materials. This site/application may contain proprietary, trade-secret, confidential and commercially sensitive information.


By accessing this site, you signify your agreement with and understanding of the following Terms of Use and Legal Information pertaining to both this site and any material in it. Plenty owns and maintains this site. No act of downloading or otherwise copying from this site will transfer title to any software or material at this site to you. Anything that you transmit to this site becomes the property of Plenty, may be used by Plenty for any lawful purpose, and is further subject to disclosure as deemed appropriate by Plenty, including to any legal or regulatory authority to which Plenty is subject. Plenty reserves all rights with respect to copyright ownership of all material at this site, and will enforce such rights to the full extent of the law.