Few people budget for a new car. Most just jump into figuring out if they can afford the down payment and the monthly expense and then make their purchase. This is not a wise way to live. In fact, it could be positively harmful. By not having a clear idea of their cash inflow and outflow, they might end up having their car repossessed.
All your costs will depend on the car you buy. After you have decided on the car you want to buy, you can calculate monthly payments, insurance, maintenance, gas, and other costs associated with car ownership. In budgeting for your car, you will have some fixed costs and some variable costs. For example, there is not much you can do about the price of gas, but you could save on insurance. Acceptance Insurance suggests you could save 20% on your insurance by getting an online quote.
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Budgeting is Holistic
Something that is holistic entails a comprehension of many intimately connected parts. The parts can’t be separated because they only work in reference to the whole. In this sense, a budget is holistic.
You can’t just figure out how much to set aside for monthly payments, insurance, maintenance, gas, and forget about allocating enough for mortgage, utilities, and groceries. To budget for your new car, you have to take stock of your entire income and all your expenses.
Budgeting Is Not Rocket Science
Creating a budget is not difficult. It is not rocket science or brain surgery. Although it does require patience and persistence, it does not require a background in bookkeeping or an A average in high school math. And if you have trouble with basic operations—addition, subtraction, multiplication, and division—then a calculator will instantly solve this for you.
To create a budget, all you have to do is to review a few bank statements and figure out how much money flows into your bank account and how much flows out of it.
A budget estimates the balance between two different categories: income and expenses. It then evaluates whether you have more coming in than going out or vice versa.
So, you either have positive cash flow or negative cash flow.
Positive Cash Flow
If you have more money than expenses, you have financial health. You are doing fine and there is no need to fix anything.
Negative Cash Flow
If you have more money going out than coming in, then you are courting trouble. You might bridge the gap of paying for your expenses after you have run out of money by borrowing on credit cards or rolling some of your expenses into the next month.
If you have a negative cash flow, your situation will only get worse over time. You are incurring interest on your credit cards and late fees on your postponed bills. If this situation is not addressed, you are heading for a crisis.
One way to avoid impending crisis is to figure out how to bring in more money. You can do this by getting a better paying job, working longer hours, getting a second job, or creating a side business.
Another way to address financial problems is to decrease how much money you spend each month. You have to cut out certain expenses and make do with less than you desire.
The way you probably figure out whether you have a positive or negative cash flow is by looking at your stress level at the end of the month. However, a more scientific approach is to look at the categories in your budget.
Budget Categories
A budget helps you figure out whether you have positive or negative cash flow by looking at the balance between two categories—an income category and an expense category.
Under the income category, you will list your income, paycheck, predictable bonus, expense reimbursements, investments, rental income, interest earned on income-earning accounts or loans to others, and dividends and capital gains. You might also acquire an income from miscellaneous sources like gambling winnings; a federal state or local tax refund, and a purchase refund.
Under the expense category, you can have 50, 100, or more items. Some will be fixed, like your rent; others will be predictable, like your utilities and grocery bills. Some will be recurring but optional, like your Netflix subscription; others will be random, like going out to movies and restaurants.
Although you don’t have a car yet, you should factor in how much you would pay for the down payment, auto loan payment, registration fees, maintenance, and gasoline.
Choose A Budget System
So how do you begin to pay attention to all the details of your financial life? Here are four most commonly-used budget systems:
1. The pen and paper method. You can either use sheets of paper or a notebook. This is by far the most difficult as it is difficult to erase your mistakes or put everything on one sheet.
2. The spreadsheet. Microsoft Excel is the most popular way of budgeting. You can use templates to figure out what items to enter into your categories.
3. Online Software. You can use free or paid online software to do your budget. Mint.com offers excellent free tools to track your expenses.
4. Financial Software. You can buy a software program like Microsoft Money or Quicken.