If you do a lot of field work, having a car is convenient. Also, if you have kids, you can easily bring and fetch them from school.
A car is a big-ticket purchase. Thus, it is important to analyze if you really need it or not and you need to carefully plan your finances. How much you can afford or if you can afford having one.
Once you have a car, your monthly expenses will be higher than usually. It’s not enough to check your salary alone if you can afford the monthly amortization of an auto loan. Also, you need to check the possible expenses of owning a car.
The 20/4/10 Rule of Buying a Car
According to an article from a U.S. personal finance website, the 20/4/10 rule is a popular tool to check if you can afford to purchase a vehicle. Simply check if: you can make a minimum downpayment of at least 20% on the car loan; you can afford the monthly payments of a 4-year term for the car loan; and 10% of your monthly income to cover the cost of owning the car. You can afford to buy that car if you are good on all three criteria.
Applying the 20/4/10 Rule
If you are buying a brand new car worth 1M pesos, the first question to ask is, do you have 200k pesos in cash for the downpayment? Since the rule says that you should be able to make at least 20% downpayment. If no, then you can’t afford a car. But if yes, then proceed to the next criteria.
The next question will be, can you afford to pay that much? If the best deal you got is a 4-year or 48-months auto loan with 6.50% interest and your monthly repayment will be 21k pesos per month based on your salary.
If your current income is 70k pesos per month, your 10% is 7k pesos. Given that you calculate how much you’r expenses per month on your car like gasoline, toll gates, parking, check-ups and more… the result is 6.5k pesos then it’s safe to say that you can afford to buy the car that you want considering your monthly expenses is less than the 10% of your income.
How To Choose The Right Car To Buy
The right car to buy is the one that: you love the brand and model; the car will effectively serve the purpose that you intend to use it for; it has a reputation for durability; it has good fuel efficiency; replacement parts are easy to find in case you need repairs; and it potentially has good resale value.