Dec 11, 2023

Financial planning

Buying a car: what you need to know

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

Emily Luk

CPA, CFA - CEO and Cofounder of Plenty

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. Hence, follow a strict car buying guide, like the 1/10th rule for car buying to encourage you to spend less or earn more if you really want a nicer car.

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.

Start your free trial with Plenty today.

  – Team Plenty


Emily Luk

CPA, CFA - CEO and Cofounder of Plenty

Emily is the ceo and cofounder of Plenty. Started by a husband and wife team, Plenty is a wealth platform built for modern couples to invest and plan towards their future, together. Previously, she was VP of Strategy and Operations at Even (acquired by Walmart/One) and a founding team member of Stripe's Growth and Finance & Strategy teams. She began her career as a VC, and was one of the youngest nationally to complete her CPA, CA and CFA designations.


Financial planning

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