Auto insurance tip: Are you buying too much car?

Buying a car is one of the biggest financial decisions you'll make, second only to buying a house. As such, it's not something you should approach casually.

Buying too much car is a common money mistake for new recruits: Opens in a New Window.‍ ‍ ^{See note 1} Buying a car these days can be a bigger challenge than in previous times. Interest rates, increased vehicle costs and navigating financial products to protect your purchase can be difficult. Many Americans simply miscalculate what they can afford.

We'll share some insight on how you can avoid this mistake, especially when it comes to buying and insuring a new car.

The real cost of car ownership

Let's assume that you have $500 a month for a car payment in mind. For some people, that's the only expense they budget for, but there are several more factors in the total cost of car ownership.

For example, your monthly auto expenses — on top of your loan payment — include:

• Fuel: $60 per month
• Maintenance: $50 per month
• Car insurance: $90 per month

Add all those and you have an additional $200 in auto expenses every month. If you're already spending $500 on your car loan, that brings your total cost to $700, which is a 40% increase to your budget.

That's why it's important to estimate your additional expenses ahead of time so you can reserve part of your car buying budget to cover them.

How to get affordable car insurance

Who isn't looking for a good deal on car insurance? According to Google keyword data, there are more than 200,000 monthly searches for cheap car insurance by people in the United States. And while cheap is good when it doesn't impact quality, the adage for other products rings true with insurance: You get what you pay for.

As you prepare for the full cost of car ownership, auto insurance is a big chunk of the budget — and for good reason. It's all about protecting your current and future finances.

Here's the thing: If you need to, you can drive less to save on fuel or wait until your next paycheck to perform maintenance.

But you can't predict when you may need to make an auto claim or how expensive it'll be. Car insurance can protect you from the full financial impact of an unexpected accident. That's the whole point of having it.

So, how do you make sure you have the coverage you need while staying within your budget?

Look at cars through your insurer's eyes.

What many people don't consider is how the type of car they buy affects their premium.

For many people, car buying is an emotional decision. Even if you go into the process with a logical perspective, it's easy to be swayed by a flashy paint job, buttery-soft leather seats, premium sound system or other expensive extras.

But what you see as exciting and enticing, your insurance company may see as expensive — in terms of claim size and frequency.

Consider this scenario: Let's say you buy a car and then get into a fender bender just a few days later. You're more likely to make a claim on a pristine new vehicle than if you were driving a used car that already has a few dents and dings.

Newer vehicles can also be more expensive to repair, thanks to advanced technology features like back-up cameras and sensors. And if your car is outfitted with high-end finishes and specialized materials, that'll increase repair costs too.

The main takeaway? If you want to spend less on your auto premium, try looking for the cheapest used car to insure. But that's not the only thing you should keep in mind.

You may need extra coverage with an auto loan.

If you choose to finance your new or used car, you may be required to take out additional comprehensive and collision coverage. The car is your collateral on the loan, so your lender needs to know that any damage will be covered. But that extra coverage will make your car insurance more expensive.

To avoid the higher costs, try to reduce the amount of financing you need by choosing a cheaper car or making a bigger down payment. And don't forget to shop around for your auto loan — your only option shouldn't be haggling with the dealership.

Discounts can help lower costs.

Auto insurance can be expensive, but you may qualify for discounts. For example, you could get a discount for anti-theft devices and advanced safety technology, because these features can help you avoid accidents and other insurance claims.

If you also have homeowners or renters insurance, you could save more money by bundling your policies.

How much should you spend on a car?

Savvy spenders know that setting guardrails before you make a big purchase can make a difference. There are a few smart ways to approach buying a car, but choose the approach that's right for you.

Many people believe you should spend as little money as possible when buying a car. This means new cars are out of the question. Instead, you'll want to look at used or preowned cars. Often, you can get a better deal by buying the car through a private party rather than a dealership.

Just remember, if you opt for a clunker that breaks down every few months, you might ultimately spend more on repairs than you saved by buying a cheaper car.

Another variation is to limit your total auto costs to no more than 15% of your monthly take-home pay. This includes your monthly payment, insurance, gas and maintenance expenses. Some experts recommend this approach if your mortgage is your only debt.

Choose your budget before your car.

If your heart is set on a certain car, you're far more likely to overspend — and that means more expensive car insurance.

It's much wiser to determine your budget ahead of time, and then only look at cars within the budget you set. That will help you avoid falling in love with the wrong vehicle.

To help you stay within budget, you can even get a quote for car insurance before you commit to buying. It may even help to talk with an insurance agent to understand what you should expect to pay for insurance before starting your car search.

Whichever route you choose, the important thing is making sure you have a car you can afford with the coverage you need.