How much car can I afford?

Buying a car is a complex decision. You have to balance budget with desire and need, which can be challenging.

Matthew Angel, USAA Advice Director, remembers the day his friend's 23-year-old son got his first job and bought a new car. "It was an expensive sports car — all the bells and whistles," he says. "His parents thought he was totally crazy for spending all that money on a car."

Angel saw their point — but he saw their son's, too. "Sure, maybe it was a splurge, but he did his homework first," he says. "Being young and single with not many expenses and a steady income, he had it in his budget to spend more on a car than most other people. So, in his circumstances, it wasn't such a bad move."

There's no one answer when it comes to the right amount of money to spend on a car. It all comes down to your budget and the total cost of buying a car. Read on to learn how you can balance the features and price tag of a new set of wheels with your other financial goals.

How much should my car payment be?

If you already have a car payment, it can be tempting to think of that current payment as a regular bill, asking yourself, "How much more could I manage on a monthly basis?" However, this line of thinking can contribute to car payment creep, leading to higher and higher car payments over the years.

Everyone's budget is different when they go to buy a new car, but as a general rule of thumb, you want to keep your total monthly car expenses at or below 15% of your after-tax pay.

Angel explains that the monthly car expenses include not only the loan payment amount, but also sales tax and vehicle registration fees, insurance, fuel, maintenance and repairs. These are all part of the total cost of owning a car.

Depending on where you live and work, parking may be an additional expense — one you should weigh if you're deciding between owning a car or relying on public transportation and rideshare services.

How much car can I afford based on my salary?

The best way to find your take-home pay is to look at your most recent paychecks. If you don't have a set salary and your paychecks vary, figure out the average amount you take home each month, and use that number as a guide. Try to keep your car expenses at or below 15% of your monthly income after taxes.

Examples based on a single filer taking one federal, state and local allowance with no pre-tax or post-tax deductions. Your specific tax situation can vary widely from these examples. Be sure to consult a tax professional regarding your specific situation.

Break down the cost of ownership.

If a person were making $50,000 a year, they might estimate their monthly auto expenses this way:

• Car payment $303
• Auto insurance $90
• Maintenance $50
• Fuel $60

Total cost of ownership $503

Each of the above estimates will vary based on the individual driver, car type and other factors.

Be sure to eliminate the guesswork on the specific car you're looking to buy, by getting an insurance quote. You should also check its gas mileage and how many miles you typically drive to estimate fuel costs.

Test drive your budget.

Think you're ready to buy a new car? First, take your new budget for a test drive. In other words, set that money aside — the total cost of ownership — for a few months to make sure it fits comfortably within your budget. If you already have a vehicle, set aside the difference from what you're currently paying and the total cost of ownership for the car you'd like to buy.

Not only will this give you a realistic view of how much you can afford, but the few months wait period will also buy you some time to build your savings for the purchase. Waiting could also be a benefit so you can time the purchase of your car with the best time to buy a car.

What type of car should I buy?

When you're deciding on a car, look at the big picture. Don't just look at numbers today. Consider how the cost of buying a new car may change over the coming years.

For example, if you don't have a mortgage payment today but are hoping to buy a house in the next few years, you'll want to leave ample room for that dream.

When deciding how much money to allocate to your new ride, it's also important to factor in other financial goals like college or retirement savings and an emergency fund.

When figuring your monthly car payment average, you can determine a potential loan and payment amount by using this car affordability calculator.

If you're falling short and already have a car, you may want to postpone replacing it until you strengthen your financial position. If you must replace your vehicle now, consider buying a less expensive car.

Consider your family's needs.

When families have multiple drivers, the car payments can add up. Consider the following guidelines to help your family stay on budget.

• If one or more of your cars are currently paid off, make a "payment" to a savings or other account to let cash build up over time. "That way you'll have a nice chunk of money to put down on your next car when the time comes," Angel says.
• Keep your overall costs lower by rotating your car purchases so that you only have one car payment at a time.
• Plan for new drivers hitting the road in the next couple of years. Remember that even if they're getting a hand-me-down car, they'll still add insurance, fuel and maintenance costs.

Avoid overstretching your car payments.

In trying to keep your car payment low, you may be tempted to stretch your payments over a longer term. While four-year plans used to be common, the average term has gotten longer. Lenders are even going as far as seven years for newer vehicles.

There are two major drawbacks to longer plans:

• The longer the term, the more you'll pay in interest.
• You increase the risk that over the coming years your car will be worth less than what you owe on it because early payments are comprised mostly of interest rather than principal.

Being "upside down" on your loan could be a major disappointment when selling your car a few years down the road. Or if it's totaled, you have to come up with additional funds just to pay off the remaining balance.

When you're at the dealership, be aware that salespeople tend to focus on the monthly payment rather than negotiating the overall price of the vehicle. A common tactic is to make the payment fit your budget by stretching the loan out over as long as possible to secure the sale. Don't get caught up in the pressure. Remember: Your salesperson won't be paying on this car seven years later, you will! A good rule of thumb is to keep financing to less than 60 months whenever possible.

Should I buy a used car or a new car?

Since new cars can lose a big chunk of their value the moment you drive off the lot, buying a used car may be a smart move.

You can gain extra peace of mind by choosing one that comes with a warranty — or you can buy a warranty of your own. Either way, consider having a trusted mechanic inspect it before buying. Ask for a vehicle history report, which some dealers will supply at no cost.

And what to do with your old car? Some people trade it to the dealer, and others sell it themselves. Selling it yourself could yield a better price, but selling it to the dealer can be a lot easier. To decide which route makes sense for you, read Should I trade my used car or sell it?.

When is leasing a better deal than buying?

Leasing a car means that you pay to drive a car for a certain time. Most leases run anywhere from 24 to 36 months, but that can vary. There's also typically an expectation that you'll only drive the vehicle between 10,000 and 15,000 miles per year.

Most of the time, your monthly payment is lower than when you buy a car. However, savvy buyers know that the monthly payment isn't the sole factor to consider when buying a car.

Another advantage of leasing is that basic maintenance is covered in your lease. If you're a new-car enthusiast, leasing also gives you the opportunity to drive relatively new cars and switch up the driving experience every couple of years.

But from an overall financial perspective, leasing may not make the most sense. After all, if you make a smart buying decision, you'll eventually own a paid-off car, which gives you a little flexibility in your budget and time to focus on other financial goals — which can always include savings for a new car.

Most importantly, keep it real.

Americans tend to buy more car than they need thanks to our country's car-loving culture and the general urge to keep up with the Joneses. Don't fall into that trap.

Instead, think about your lifestyle. What do you need? What is right for your family? Ask yourself the following questions:

• Do I plan to travel a lot in this car and need a durable vehicle with good gas mileage?
• Am I traveling with children who require more room for car seats or enhanced safety features?
• How important is the cool factor to me?
• Am I approaching retirement and looking for a dependable car with a long life?

Avoiding unnecessary spending is important, not only when choosing your make and model and the bells and whistles that come with it, but also when deciding if it's even time to go car shopping at all.

Giving yourself some time to decide when buying can help make sure you get what you want in both the car and your overall financial situation.

The USAA Advice Center provides general advice, tools and resources to guide your journey. Content may mention products, features or services that USAA Federal Savings Bank does not offer. The information contained is provided for informational purposes only and is not intended to represent any endorsement, expressed or implied, by USAA or any affiliates. All information provided is subject to change without notice.