It's hard to believe my old Saturn is turning 15 in January. It seems not so long ago that I wandered, clueless, into the showroom to kick the polymer side panels and not haggle over the price (because Saturn was "A Different Kind of Car Company" and dickering was not its thing). I giddily signed my 4.9-per-cent financing agreement, posed with my first car for my Saturn calendar photo, and proudly drove off in it.
Things will be different when the "little blue car," as my kids now call it, finally kicks the bucket. I'm older, wiser and, I hope, more savvy about big purchases. My paycheque has also matured since those starter-job days, so we can now afford to look beyond the economy-car category – but how far beyond?
It's a question my husband and I are grappling with as we plan our next car purchase, and we're not alone, says Kurt Rosentreter, a senior financial adviser at Manulife Securities in Toronto. He cites a disturbing trend of Canadians buying cars they can't really afford and sacrificing personal savings to pay for them.
"When it comes to car debt, people really are struggling to fit in the cost of a vehicle when they're already burdened with significant financial commitments," Rosentreter says. "People are forgoing RRSP savings or paying down their mortgage more aggressively and taking on car debt because they view the car debt as essential and there's no room after that for saving."
Since my husband and I would rather drive a rusty old beater than work a day past retirement, some budgeting seems to be in order, but how do we decide what's affordable?
Barbara Garbens, president of BL Garbens Associates Inc., a fee-only financial planning firm in Toronto, says a good rule of thumb is to spend no more than 3 to 5 per cent of after-tax income on car expenses. That monthly sum should be put into a savings pool for future car payments to save on financing costs, she says.
Rosentreter advises clients to figure out how often they plan to upgrade their car and what that will cost, and then divide by the number of months they have to save. A $30,000 upgrade every five years, for example, would mean setting aside $500 a month.
"You've got to have a financial budget," Rosentreter says. "At the end of the day, there has got to be enough wiggle room for either car savings or a car payment as well. It should not be so tight that you're scraping by."
If savings fall short and a loan is required, Garbens recommends securing financing before visiting any dealerships, to avoid high-pressure tactics.
"You shouldn't go to the dealer saying, 'I can afford $200 a month – what can you sell me?'" she says. "You might be at the mercy of the salesperson if you don't really have all your eggs in a row."
Once dealers know what you're willing to spend monthly, they might try to stretch out the length of your loan to make a more expensive car fit into your budget. Although it can be tempting, stay away from financing deals that last for more than five years, Garbens says. Three years would be prudent.
"It's not an investment, so to take a long-term look at paying that down, it's just money that could go toward something else," she says.
While paying off your car may seem like a reason to celebrate, don't use it as an excuse to stop saving, says Rosentreter. Budgeting for car expenses needs to be a year-round, life-long habit, especially for retirees.
"One of the top items people fail to plan for is car replacements and it can be a killer because it's a big chunk of capital coming out of their retirement base that can really accelerate the depletion of their capital."
With that warning in mind, I'll have to tell my husband the bad news: We're probably not getting the Tesla he wants. The good news, however: If we're careful with our spending, we won't have to work as long and hard as the old Saturn.
If you have questions about driving or car maintenance, please contact our experts at globedrive@globeandmail.com.
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