I want to purchase a car but avoid taking out loans. Would it be better to take money out of my emergency savings or my investment account?
-Ashley
Hi Ashley,
If you can remove money out of your emergency or “rainy day” savings account and retain a four to six-month reserve to cover your living expenses in case of a financial setback, then I think that is the better account to tap. [Just be sure to replenish savings as soon as possible.]
My guess is that the money in your investment account has been benefiting from a higher rate of return and that is where your cash can potentially grow the most over the long run. To that end, it’s better to stay the course and keep your money invested for as long as you can.
If using your emergency funds for this car will significantly reduce savings, then my advice is to find ways to spend as little as you need on this vehicle.
Research sites like Edmunds and Consumer Reports can help narrow down your list based on various ratings like sticker price, mileage, safety and customer satisfaction.
By the way, if you do plan to finance the purchase and take out a loan, a smart rule of thumb is to allocate no more than 20% of your monthly take-home pay towards payments. That’s the maximum and (in my book) includes maintenance and gas. It’s much better if you can keep the overall expense to 12 to 15% (or less) of your after-tax income. So, if you earn $50,000 a year, figure spending an average $600 a month on car payments.
From there, consider these additional ways to stay on budget and curb your purchase costs:
Price Compare From Home
Coincidentally, my husband and I will soon be shopping for a new car ourselves, too, but before we step foot in any dealership we’ll come super prepared with price comparisons in hand directly from their sales managers.
These days you can do most, if not all, of your pricing research prior to stepping foot at a dealer showroom. Once you pick your preferred vehicle, you can virtually compare prices in real time from the comfort of your home and without the hassle of going back and forth on location with a salesperson. Print out your results and come in armed to negotiate.
This not only reduces the amount of time spent putting on your poker face with the sales team, it allows you to enter price talks accurately informed. And knowing you’ve done some homework and compared prices around town (with evidence in hand) will hopefully encourage the sales teams to meet your needs.
Every dealership typically provides contact information for their Internet Sales Manager on their website. Matt Jones, Consumer Advice Editor at Edmunds recommends emailing at least three dealerships to ask about their current inventory and best price.
Go [Certified] Pre-Owned
You’ll almost always save a pretty penny by purchasing a used vehicle (unless we’re talking a rare antique). And while individuals and dealers are always selling used cars, a safer (albeit pricier) way to buy used may be to opt for a certified pre-owned (CPO) car from a dealer. In fact close to 90 percent of those who say they would consider buying a used car would pay more for a CPO vehicle.
Auto dealers are typically required to spruce up CPO vehicles from the inside and out prior to selling. According to Edmunds a certified pre-owned vehicle “is generally defined as a used vehicle that has undergone a minimum 100-point inspection in which any mechanical and body issues are addressed.”
They also tend to come with a longer manufacturer’s warranty and better benefits like free maintenance and roadside assistance, as compared to standard used vehicles.
Now, depending on the make and model of the car you want, finding a certified pre-owned vehicle at a local dealership could prove challenging. In that case, it helps if you’re willing to travel further to snag a pre-owned deal. Cast a wide net and you may locate more results. My husband and I, in fact, discovered we have many more options for CPO cars at suburban dealers around New York City, versus in Manhattan.
Strike Sooner Than Later
With the end of the year approaching, this is historically the best time of year to drive off with a bargain [assuming you are in the market for a car!] 2016 inventory levels are still strong, while 2017 models have made their way to showrooms. This means dealerships are eager to unload current-year vehicles, as it costs them money to have the older models take up real estate on their lots.
Just keep in mind that if you have your heart set on a particular color and build, your 2016 model options may be limited the longer you wait to buy. But if you’re not too picky, have fun haggling!
Have a question for Farnoosh? You can submit your questions via Twitter @Farnoosh, Facebook or email at editor_mint@intuit.com.
Farnoosh Torabi is America’s leading personal finance authority hooked on helping Americans live their richest, happiest lives. From her early days reporting for Money Magazine to now hosting a primetime series on CNBC and writing monthly for O, The Oprah Magazine, she’s become our favorite go-to money expert and friend.