I’m pretty sure that the first thing most new dental school and resident grads do when they get their first paycheck is go down to the dealership and buy a new car. And why not? After all, most of you have been slaving away, living on loans or the meager salary of a resident which is barely enough to cover your loan payments and rent. So here you are, finally ready to buy the car you have been thinking about for 7 years. Hopefully this article will help you get a better deal. In addition to getting a good deal, my hope is that this article will help you think through the steps involved with a large purchase.
Many people walk on to a car lot and buy the car that they happen to like best that day. After some discussions, the dealership often just presents a monthly payment to the prospective buyer without even discussing the actual purchase price of the vehicle. Let’s discuss a better method for buying car, even if you are paying monthly.
Also note that this thought process is relevant to any large purchase. The spirit of this article is to get you thinking about how to better manage your finances with a little planning. There are lots of ways to buy a car, this is just one of them.
- First, decide what you can afford and stick to it. If you are going to pay cash for your vehicle, set aside that money and commit to not spending more than that amount. Since most of you probably don’t have much cash sitting in savings, you will likely be financing your purchase. Even if you do have $25,000 sitting in savings, it probably wouldn’t be prudent to unload all of your savings on a car. So the next few steps will talk about what to do if you are going to finance (or Lease – but don’t do that) your vehicle.
- Second, figure out what you can afford and commit to not spending more than that amount. Yes, I repeated that on purpose. But this time let’s talk about the payment. Go to your budget (because I know you have set one up) and figure out what kind of monthly commitment you are willing and able to take on. You will be able to borrow far more than is considered prudent so just make sure you have done a good job with your budget. Let’s say that you look at your budget and determine that you are willing to take on a $500 a month payment.
- Figure out what that will buy. You will need to know the interest rate and the number of years you want to repay the loan. We’ll use a 5 year term and an interest rate of 3%. You pick the term (Usually 3-6 years). You can figure out current vehicle loan interest rates with a google search.
- If you want, you can go to a credit union or other financial institution and get preapproved for a car loan. They will tell you the numbers ahead of time and that way you don’t even have to deal with the finance department at the dealership.
- So you have your rate, your payment and your term, now you need to know what that will buy. Google “Car loan Calculator” and enter those variables. You will find that you can afford a car of around a total cost of $27,500. Notice I said total cost. Don’t forget that you will likely have to pay a variety of fees and taxes associated with your vehicle. In my home state of California, you can pretty much count on an additional 10% in extra cost. So in this case, I would be able to purchase a car for $25,000 as $2,500 will go to sales taxes and registration fees, etc.
- Now you have what you can afford and this is where it gets fun. It’s time to make the most of your $25,000. Now is the time to figure out what kind of car you want. You will probably have an idea what you want, suv, sedan, four doors, V8, leather seats, 4×4 etc. Use an online car search service to get an idea of what $25,000 will buy. You can enter the criteria that you care about and sort by price.
- If you want, you could call your car insurance agent and see what your car insurance cost may be on your ideal car to plan even more closely.
- Car experts suggest that buying a brand new car is often not a very good idea as the vehicle depreciates significantly once you drive it off the lot. That means that you buy your car for $25,000 (plus the fees and taxes so $27,500) and if you turned around and sold it the next day, you might only get $22,000. Thus $3,000 of depreciation.
- Once you narrow in on the vehicle parameters that you want, do an online search within a radius of how far you are willing to drive and sort by price. You will likely see a wide range of prices. Make sure you know the differences between the cars in your search list (mileage, trim level, etc.). Now you know the “free market” price of the vehicle you are looking for. Email the dealerships that have the vehicle you most desire and with the best price (although maybe not the lowest). Don’t forget to tell them that you are looking at the same the vehicle from multiple dealerships and ask them to drop the price (They almost always will).
- Now you can go to the dealership without having to “haggle” but also knowing that you got the best price on the market. You know that your car payment is going to be within your budget and that you are going to get the car you want. Happy Driving!
- One other note, try not to buy a new car every 3 years. The temptation is to keep buying new cars as your income goes up. This puts you in a perpetual state of consumption. It makes it difficult to save money and build your net worth if you are constantly buying new things. Managing you spending is one of the best ways to build your Net Worth.
Could you buy whichever car you want without much planning or thinking? Probably. But thinking through and planning ahead for you purchases, especially large purchases, can help you stay on top of your finances, avoid surprises and avoid overspending.
~Ryan Schulte, financial advisor, CFP®
Ryan is a new contributor to ASDA’s Money Monday feature. If you have any other questions for Ryan or ideas for a future post, leave a comment below!
Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS).OSJ: 750 B Street #2740 San Diego, CA 92101 ,612-746-2200. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is an indirect, wholly-owned subsidiary of Guardian. WestPac Wealth Partners, LLC is not an affiliate or subsidiary of PAS or Guardian. CA Insurance Lic. #0F03557 | Guardian and its subsidiaries do not endorse or have any direct or indirect responsibility with respect to this activity | 2015-11504 | exp 10/17
About Ryan Schulte
Ryan Schulte is a financial advisor who focuses his practice on Dentists. He works with young dental professionals that are transitioning in their careers and helps them manage their student loans, understand the insurances they need and how to design them, how to investment money without speculating and gambling, what it means to be an independent contractor and a business owner, understand their tax situations and a variety of other issues unique to dentists. Ryan lives in the mountains near Yosemite with his wife and 5 boys on 4 acres that they affectionately refer to as the “The Schulte Farm.” Ryan serves on a community development council dedicated to redeveloping an industrial zone in Madera County. He also coaches little league and enjoys hiking, brewing beer, playing softball and soccer. His contact info can be found at www.ryanschultecfp.com.