Balance your budget before buying a car

When you buy a car, it may be the first major purchase you make. Your car will not only give you more freedom –it can also help you establish a positive credit history, if you finance your car and pay your bills on time.

The process of buying a car can serve as a dry- run for the next big thing you want in life: a home that you own.

That said, you don’t want to make choices that hurt you, like buying a car that you can’t afford. If you have bad marks on your credit history, from late or skipped car payments, they can affect your later — and possibly more important — financial decisions.

You don’t want to risk defaulting on your loan or the repossession of your car –and you won’t, if you behave responsibly from the beginning of your search.

There are two things you should think about, before you start shopping: how much you can afford to spend, and what you need from your car.

Can you afford it?

The first step is to find out how much room you have in your monthly budget for a car. To begin, it’s best to write down the other costs you have per month and weigh them against your salary.

Think of your housing costs, your credit card payments, your cellphone bill and the amounts you spend for food, household items and clothing. When you do this, remember to keep some room for unexpected expenses, like an appliance replacement or typhoon repairs.

You should also factor in all of the costs that are connected to the car. For instance, you will have yearly registration fees to pay at the DMV. You’ll need to pay for preventative maintenance throughout the year, to keep your car in good running condition and prevent expensive repairs. Car insurance is required by Guam law, and you may want to purchase more than the minimum required for coverage that you’re comfortable with. If you get into a minor car accident and you decide to pay out-of-pocket for repairs, you’ll need funds for that as well. And last, you’ll need to pay fuel costs to run your vehicle.

You can talk to friends and relatives about their auto costs if you’ve never owned a car before, and online calculators can help you estimate supporting costs. Just keep in mind that they often predict the U.S. average, and those costs may vary for Guam.

After all of these factors have been considered, you should have a solid idea of how much you can afford to pay each month for your car. Hold onto that number for now: in next week’s column, we’ll talk about using this number to find a car you can afford, and financing your car in a responsible way.

What do you need?

If you’re on a limited budget, you can help yourself in the long run by outlining your basic needs. How many passengers do you have, and is that number going to change within the next five years, the life of the loan?

You may decide to have more children, or your parents may move in. Do you need to haul large items for your home or business? Does anyone in your family have health issues and need to be seated comfortably?

A list of these needs can help you stick to your budget, so you can make a purchase that you won’t regret.

Michael Camacho is the president and chief executive officer of Personal Finance Center. He has more than 18 years experience in retail banking and with financial institutions in Guam and Hawaii.

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