It is a bittersweet moment when you say goodbye to the sports car and hello to the minivan. We know that shifting your focus from horsepower to car seat anchors is a major life transition. You want your family to be safe and comfortable, but you also don't want to derail your financial roadmap with a massive purchase. It's completely normal to feel torn between the car you want and the practical choice your budget suggests.
Define what a "family-friendly car" means to you
Before you head off to the dealership, you need to clearly define the type of car that is right for your family. If you go car shopping without a plan, you will inevitably fall in love with the car that has all of the bells and whistles and a much higher price tag.
Create your lists
Start by writing down two distinct lists. The first list should include the most important items. This includes safety features, storage space, good gas mileage, or maybe a hybrid or electric engine. The second list should be the "nice-to-haves" like the panoramic sunroof or the fancy tech package. Keep these lists handy when you go to price the car online.
Ask the right questions
As for the type of car, here are a few questions to consider:
- Is it just the family car, or will it be used for commuting as well?
- Who will be the primary driver?
- How long will you drive it?
- Would you consider a used car if you are a bit more budget conscious?
Remember that cars are not good investments. You want to buy a car that you can drive for a long time to get the most value out of it.
Determine how much you should really spend
The all-in cost of the car
When buying a family-friendly car, or any car for that matter, focus on the total cost of the car and not just the monthly payments. A $40,000 car is still a $40,000 car no matter how long you pay for it. The trick with financing is that an extra $5,000 or $10,000 is only $100 or $200 more per month. This makes it feel more budget friendly, but you are eventually paying the full price.
Opportunity cost in action
A good way to keep your car budget in check is to think about the other ways you can use the money you don't spend to boost your savings for another milestone.
Let's look at an example. After shopping for a car, you decide to upgrade to the nicer model and add a few optional packages to the car that increase the purchase price by $10,000. If, instead, you took that extra $10,000 and invested it in an education savings account for the next 17 years and earned a 6% rate of return, you would have almost $27,000 saved for college.
Investment performance is not guaranteed. Investing involves risk.
Deciding to finance or pay cash
It's rare that people can drop $30,000 to $40,000 cash, or more, for a new car. If you don't like debt or paying interest, you need to save accordingly. For most car buyers, a healthy down payment and a modest monthly payment are the right call.
The right monthly payment
The rule of thumb for a car payment is to spend less than 10% of your pre-tax income on the monthly payment. However, rules of thumb only get you so far. You need to look at your other monthly debt payments and savings goals to get a better idea of what payment fits your overall roadmap.
How much to put down
You typically want to put 20% down, although it's not required. A larger down payment can have several benefits:
- A lower monthly payment
- A lower interest rate
- You will pay less interest over the life of the loan
- You offset the initial hit of depreciation
Follow these smart family-friendly car buying tips
The right car insurance
Don't go with the cheapest policy just to save a few dollars. You need to find the right coverage for a fair price. Shop the insurance with a few companies, including the one you use for your current home. They may give you a discount for keeping all of your insurance policies with them, also known as bundling.
Look for a non-dealer car loan
Talk to your bank or credit union about your loan before you go car shopping. While dealerships will offer you financing, you can likely get a better loan, with a lower interest rate, elsewhere.
Check your price points
Shop online before heading to the dealership to get a sense of the price tag. Remember the exercise of listing your wants and needs? You may find that a few of those nice-to-haves increase the price rather significantly. That $40,000 car fully loaded may run you $55,000.
Test drive everything
Always test drive a few cars to determine which one is best for your driving preferences. For new parents out there, bring a baby seat to the dealership as well. You want to make sure it's easy to get in and out before you sign on the dotted line.
The Facet difference
A car is a big purchase both financially and for your family. At Facet, we believe financial planning helps with every decision you make that money touches, big and small. Because we operate on a flat membership fee, we don't charge based on how much money you have invested with us. This means our CFPs® can give you objective advice on whether to spend that extra cash on a car or invest it for your future. We help you navigate these processes with confidence so you can put yourself in the driver's seat of your financial life.
