Question: I’m a 18 year old man and I’m planning on refinancing for my dream car so I just want ideas from people and see what I need to adjust.(btw I haven’t refinanced yet so if a lot of y’all say it’s not worth it I won’t due it(: ) anyway I make 4k a month and here’s my spending.
•500-800 on with car and insurance •200 a month to my mom for rent she needs help with us moving into a new home •120 Gas and subscriptions (Xbox,doordash,Spotify etc) •600 Future (400 to high yield savings 100 to stocks 100 to Roth IRA) •rest of the money is a mix of emergency/spending money that I don’t know what I should do with of course I’m young and I still want to enjoy life a lil but I pray I retire by 55 ish so whatever helps my future.
Which for an 18 yr is a lot of money 2.5-2.7k of leftover money at the end of the month.
Answer: Evaluating Whether Financing Your Dream Car Is a Wise Financial Decision
Hello! It's commendable that you're considering the financial implications of purchasing your dream car at such a young age. Making informed decisions now can set the foundation for long-term financial success. Let's delve into your current financial situation and assess how buying your dream car fits into your overall goals.
Your Current Financial Snapshot
- Age: 18 years old
- Monthly Income: \$4,000
- Monthly Expenses:
- Car and Insurance: \$500–\$800
- Contribution to Mom (Rent): \$200
- Gas and Subscriptions: \$120
- Subscriptions Include: Xbox, DoorDash, Spotify, etc.
- Savings and Investments: \$600
- High-Yield Savings Account (HYSA): \$400
- Stocks: \$100
- Roth IRA: \$100
- Remaining Income: Approximately \$2,500–\$2,700 per month
Financial Analysis
1. Budget Breakdown
Total Monthly Expenses:
- High Estimate of Car and Insurance: \$800
- Rent Contribution: \$200
- Gas and Subscriptions: \$120
- Savings and Investments: \$600
- Total Expenses: \$1,720
Monthly Surplus:
- Monthly Income: \$4,000
- Total Expenses: \$1,720
- Remaining Income: \$2,280
Note: There's a slight discrepancy with your estimated leftover amount (\$2,500–\$2,700). For accuracy, consider tracking all your expenses meticulously to ensure all costs are accounted for.
2. The Car Purchase Decision
Key Considerations:
- Total Cost of the Car:
- What is the purchase price of your dream car?
- Will there be a significant increase in your car payment after refinancing?
- Interest Rates and Loan Terms:
- What interest rate will you qualify for?
- Over how many years will you finance the car?
- Insurance Costs:
- Will the new car significantly increase your insurance premiums?
- Depreciation and Maintenance:
- New cars depreciate quickly, and maintenance costs can add up, especially for high-end models.
3. Assessing Affordability
Financial Guidelines for Car Buying:
- 20/4/10 Rule:
- 20% Down Payment: Aim to put at least 20% down to avoid being upside-down on the loan.
- 4-Year Loan Term: Finance the car for no more than four years to reduce interest paid over time.
- 10% of Income on Total Car Expenses: Keep total car expenses (payment, insurance, maintenance) below 10% of your gross monthly income.
Applying to Your Situation:
- 10% of Income: \$4,000 x 10% = \$400
- Current Car Expenses: \$500–\$800, which is 12.5%–20% of your income.
Your current and projected car expenses exceed the recommended percentage, potentially impacting your other financial goals.
4. Opportunity Cost
By allocating a significant portion of your income to a car, you may be limiting your ability to:
- Increase Savings: Boost your emergency fund or save for future large purchases.
- Invest More Aggressively: Additional investments now can greatly enhance your retirement funds due to compound interest.
- Achieve Financial Independence Sooner: Higher expenses can delay milestones like home ownership or early retirement.
5. Retirement Goals
- Retiring by 55:
- Requires diligent saving and investing, especially starting at a young age.
- Current Retirement Savings: \$100/month into a Roth IRA.
- Roth IRA Contribution Limits: For 2023, you can contribute up to \$6,500 annually if under 50, which is approximately \$541/month.
Consider increasing your retirement contributions to maximize tax-advantaged growth.
Recommendations
1. Reevaluate the Car Purchase
- Delay Gratification:
- Consider waiting a few years before purchasing your dream car.
- Alternative Options:
- Buy a reliable, more affordable used car to reduce monthly expenses.
- Save up a larger down payment to decrease the loan amount and monthly payments.
2. Adjust Your Budget
- Increase Savings and Investments:
- With a surplus of over \$2,000/month, you have the capacity to save more aggressively.
- Emergency Fund: Aim for 3–6 months' worth of expenses in your HYSA.
- Retirement Contributions: Increase your Roth IRA contributions to get closer to the annual limit.
- Taxable Investments: Consider opening a brokerage account for additional investing.
3. Limit Discretionary Spending
- Subscriptions and Dining Out:
- Review and possibly reduce subscription services.
- Limit spending on DoorDash and dining out to save more.
- Entertainment Budget:
- Set a reasonable monthly amount for entertainment and stick to it.
4. Focus on Long-Term Goals
- Financial Independence:
- The more you save and invest now, the sooner you can achieve financial freedom.
- Career Development:
- Invest in education or skills training that can increase your earning potential.
5. Enjoy Life Responsibly
- Balance is Key:
- It's important to enjoy your youth, but within a framework that doesn't jeopardize your financial future.
- Budget for Fun:
- Allocate a specific amount each month for leisure activities.
Potential Impact of Adjusted Plan
- Increased Savings:
- If you allocate an additional \$1,000/month to savings and investments, you'd save an extra \$12,000/year.
- Compound Growth:
- Investing this amount with an average annual return of 7% could grow substantially over time.
- Future Car Purchase:
- By saving more now, you may be able to purchase your dream car outright or with a larger down payment in the future, reducing financial strain.
Conclusion
While owning your dream car now is tempting, considering the long-term financial implications is crucial. By postponing the purchase and focusing on building a strong financial foundation, you'll be better positioned to enjoy such luxuries without compromising your future goals.
Remember:
- Assess Needs vs. Wants: Determine if the immediate gratification is worth the potential delay in achieving financial independence.
- Financial Discipline Now Pays Off Later: The habits you build today will shape your financial well-being for decades.
Wishing you the best on your financial journey! Making smart choices now will set you up for a prosperous future.