• The key to not spending too much is knowing what you can actually afford
  • Research which cars you can afford and don't stray from the list
  • Any add-on made in the dealer's business office will cost you for the life of the loan

You've made the decision to buy a car; now the big question is, how much car can you afford?

The toughest part in purchasing a car isn't researching different models, taking test drives or even negotiating with the seller; it's determining how much car you can really afford, and then buying within your means.

It requires self awareness, commitment and discipline. This part of the process isn't fun, and may even be a little discouraging, but it's necessary to prevent you from spending beyond your means.

Here is the truth about buying a car: Dealers will sell you more car than you need and some lenders will let you borrow more than you can really afford. When the dust settles, you will have no one but yourself to blame if you wind up with too much car at a payment that busts your budget.

Keep in mind, every dollar that goes into the upkeep and operation of your car restricts your fiscal freedom. Each one is a dollar you can no longer save, use for a night out, or buy a new flat-screen TV.

Create a Household Budget

Many buyers who are underwater with their car loan first chose the car they really wanted, then tried to rework their budget to somehow accommodate the choice.

This cart-before-the-horse behavior increases the likelihood you will buy too much car.

If you don't already have one, put together a household budget. It's net income versus expenses. Include every expense. You may need to keep a written record for a month of every dime you spend, whether it's in the vending machines at work, your cell phone bill or a movie on the weekend.

If you currently have a car, you probably are making payments, and certainly are spending money for fuel, insurance and upkeep. Total these expenses for the past year. That number is a good starting point for determining how much car expense you can afford.

Although Eric Hoffman, speaking for Americans Well-Informed on Automobile Retailing Economics (AWARE), said that when budgeting for car expenses there are no hard and fast rules about dollar amounts or percentages, buyers need to make sure the expense fits comfortably within their budget.

"Each individual's circumstance is different," he said.

The bottom line: Your total car expense shouldn't be a burden.

Base Your Search on What You Can Afford

Now that you know how much per month you have for buying and operating a car, it's time to find a car that fits that number.

Make two lists: one of needs and one of wants. One of basics, the needs list should include features like the number of passengers it must accommodate, gas mileage, type of transmission and so forth. On the wants list are features you would like to have, but can live without like leather seating, satellite radio, navigation system and so on.

If you have read this far, it probably means you have some budget issues. So, let's get this out of the way now: A car is not an investment; it's an appliance. Think of it as a washing machine and not as a 401K. If new, it will be worth less - as much as 30 percent less by some estimates - the second you drive it off the dealer's lot. Granted, that means it would be outperforming most 401Ks during the past four years, but it's still a guaranteed loser.

Look for a car that meets your needs list. AutoTrader has a search engine that allows you to research cars by new, used or certified, as well as by brand, body style or specific model. In addition to providing vehicle ratings and reviews, it lists standard features and options. It even tells you what dealers pay for the car, so you have a baseline when negotiating. There is also a calculator that can provide a fairly accurate estimate of the monthly payment.

Remember, the cost of ownership includes much more than just the monthly payment. To get a more complete picture of the cost of ownership, including taxes, fuel, insurance and so forth, go to Nadaguides.com. It has a calculator that computes the annual average cost of all the related expenses for the specific model you are considering. That will give you a pretty good idea if the car you want fits into your budget.

If the annual cost is below your budgeted amount, you can add in a feature or two from your wants list; but only if doing so doesn't put you over your budget number.

If you are buying used, locating just the right car may be a little more time consuming, but AutoTrader.com and Nadaguides.com can still provide all the information you need to make an educated decision.

Don't Budge

You know what you can afford and you have found a couple of cars that fit into your budget.

If you are buying used from an individual, all you need do is check the car out and haggle over the price.

However, if you are shopping a dealer, don't allow a salesperson to push you into something else. You've put in a lot of time and energy to get this far, don't blow it now. Insist the salesperson show you exactly the car you want.

Keep your monthly budget amount to yourself. The salesperson doesn't need to know it. Your goal is to find the right car and then negotiate down the purchase price. Don't muddy the water by revealing what you can afford to pay per month.

Just Say, No

With all the haggling done, you will find yourself signing paper work in front of the business manager. Take nothing for granted. Double check every page you sign, ensuring the numbers are those you agreed to.

Also know, the business manager is really a salesperson, making money from whatever extras, such as life insurance, gap insurance, extended warranties or seat-fabric protection, he can sell you. None of these extras are in your budget.

Even if you decide you might need something offered in the business office, you can get it cheaper somewhere else. Moreover, its cost won't be added to the amount financed, on which you will pay interest for the life of the loan.

Finally, secure financing before going to the dealership even if you don't use it. Arranging financing ahead of time tells you how good your credit is and how a lender sees you. Even if you are going to take advantage of a manufacturer's financing deal that requires using its finance company, knowing where your credit stands gives you valuable information.

What it means to you: All of the tools to buy within your means are readily available, it's up to you to use them.

author photo

Russ Heaps began covering the automotive industry in 1986, first overseeing the automotive pages of the Boca Raton News and then the Palm Beach Post in Florida. In 2001 he became managing editor of AMI Auto Week and NOPI Street Performance Compact magazines. Since leaving AMI he has freelanced his auto reviews and industry analysis to the Washington Times, Hispanic magazine, Journal-Register Newspapers, Bankrate.com, MyCarData.com, Interest.com, and others. He resides in Greenville, SC.

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