One of our top tips for buying a used car is to understand your financial situation before you sign on the dotted line. Some people can purchase their car all at once with a nest egg, but most choose to spread their car payments out over a longer term.

When you’re making a long-term investment like that, you need to know what your financial situation looks like at the time of buying, and what your financial situation might look like in a month, in 6 months, and in a year’s time. The big question is, how do you take an accurate snapshot of your finances? No one knows the future, so the best way is to understand your current situation and forecast what your budget is going to look like for the term of your car payments.

From Auckland’s experts on cars and car finance, here’s our ultimate guide to evaluating your financial situation before making a big, long-term purchase!

Step One: Understand Your Current Cash Flow

According to the dictionary, cashflow is defined as “the real or virtual movement of money”. In personal situations, cash flow refers to the movement of money in and out of your bank account via your earning and spending.

Understanding your current cashflow means looking at three main factors: how much you earn, how much you spend, and how much you save. All this information should be available to you via your bank’s online statements, so this is the best place to start.

It’s time to whip out a pen (or spreadsheet) and calculate what your average earning and spending is for a month. Do that for a few different months throughout the year (e.g. January, April, August, and November), or the entire year if you’d like a very accurate picture.

By getting a sense of where your money goes from month to month, you’re providing yourself with a solid basis for an investment decision. Plot out all regular payments you make. We’ve given you an example list below:

  • Mortgage or rent payments
  • Student loan payments
  • Groceries
  • Transport costs
  • Eating out
  • Payments to your own savings accounts
  • Miscellaneous expenses (e.g., gifts, homewares, etc.)

Step Two: Evaluate Your Emergency Fund

The next step requires working towards creating a financial parachute for yourself. We stand out from other Auckland car dealers because of the emphasis we place on solid emergency planning, as this can make or break your choice to buy a used car.

Your emergency fund—or “rainy day” fund—is the piggy bank you run to when something has gone wrong. Maybe you need to pay an unanticipated dental bill, or your child has a field trip they didn’t tell you about, or your job becomes unstable.

Emergency funds shouldn’t be used for regular payments, as this can deplete it quickly and leave you with no solid backup should you find yourself in need of it. If you can’t invest in a vehicle without dipping into your emergency fund payments each month, consider finding a slightly cheaper car or waiting until you’ve built up a sufficient nest egg of funds.

Step Three: Project into the Future

Now that you have a solid grasp on your current finances, it’s time to play seer and investigate the coming years. Unfortunately, the crystal ball that can see into the future hasn’t yet been invented, so we never know what the future might bring! That said, it’s important to plan for any big life changes that may impact on your finances in the future.

Let’s say the repayment term on your chosen car lasts for two years. In that time, is the income from your job likely to change? Are you anticipating buying a house, having a child, or making any other large investments? How will your KiwiSaver or other investment funds play into paying for those expenses?

Factor in your car repayments to understand how they may reduce your available income within your chosen timeframe. Don’t worry about unanticipated changes here, that’s what an emergency fund is for. This is all about what you want your life to look like in two years time, and how a car payment plays into that.

Let’s look at an example. If you’re looking to pay for a newly purchased used car at $60 per week for two years, you will roughly be paying $260 a month, and roughly $3,200 a year. Factor this expense in with any other expenses you’re planning for in the near future. If you’re feeling comfortable after deducting these car repayments, as well as regular expenses and incoming investments from your regular salary or pay, then you’re good to go!

Apply for easy and competitive vehicle finance with MotorCo.

Making a huge investment can feel a little overwhelming! While there is a lot to consider, once you’ve fully understood how a car can impact your financial situation, you can head into the purchase with your eyes wide open.

If you’re still not sure how to begin with comprehending your finances, or need some help around the intricacies of a car loan, we are more than happy to help. Our friendly team provides quick and easy car finance for Auckland customers. We can tailor a finance package to suit your current and future financial needs. Use our online finance calculator to get a quick estimate of the finance available to you and browse our vehicles online to see how much they cost per week. Reach out for your competitive car finance today!