Alright. As promised, here's my first how-to post gleaned from months of unemployment. Towards the end of January, my husband was out driving with my son Gabe when our car was hit. It was the other person's fault (she didn't see us when she turned left) but it rendered our car undriveable.
We were initially given a rental for four days (2011 Dodge Charger. Yeah!) while the car was in the shop. However, after the mechanic gave it a closer look it was clear that the car had been totaled (cost to repair > cost to replace.) That came as little surprise to us, since the car was a '99 Venture with 184,000 miles on it and a bit of prior cosmetic damage. It meant, however, that we only had the rental for one week, during the school year, and somehow had to find and purchase a new car during that time. The check from the insurance company was just a few bucks over $2,000 even.
So, what happens now?
The first thing we had to do was establish a budget. This sounds straightforward, but there are a couple of pitfalls that car-buyers fall into when it comes time to make the purchase that you should account for. For example, we initially figured out that we could spend $10,000. We were getting a large tax return (about 6k after credits), so combined with our 2k check and the 2k we had in savings, that gave us 10,000 total in cash. Considering that was essentially 5 times the savings we were used to having available, the amount was definitely drool-inducing. Think of the car we could get! It would be SO reliable!
But there were four big reasons why that would have been a bad idea:
1. Whatever your budget, be sure it's not maxing out your savings.
As I've mentioned, we were unemployed. Although that was about to change, we didn't know it at the time, so spending everything we had would have been foolish. We'd calculated that in order to survive until summer, where as a worst-case scenario we could have found work as technicians installing security systems in another city, we would need 2,000. That, in conjunction with our Air Force stipend, would cover our rent expenses of around 675/month, plus insurance, contracted cell phone expenses, gas, and miscellaneous expenses. It wouldn't leave a lot of wiggle room in case of emergencies, but there was just enough there that we could scrape by. So that left us with 8,000 for the car.
2. Account for extra fees.
Our '99 Venture was cheap to insure. If we got a newer model, it would be more expensive. In our case, it added about $120 to our paid-up-front six month policy with USAA, which would be due in March. In addition, taxes, registration, and fees amount to about 10% of the cost of the car. So right off the bat, we had to subtract that $120 and 10% (800) from our overall budget, since these were costs we'd incur as part of the process. In addition, we knew we wanted to buy direct from the car owners, so we had to anticipate a minimum of about $100 to cover the cost of getting the Carfax and a third-party inspection, or a likely maximum of $300. All of that combined brought our budget down to $6780.
3. Account for the "close-enough" factor
As humans, we tend to round numbers to what we consider "close enough." Sellers know this, which is why you see so many "5999" price tags. They know that even if we KNOW they're doing it, we still tend to place significance on the left digits first. So if I say "my budget is 5,000" I might be swayed to buy a car for 5,999 because it's "close enough." This is especially prevalent in car-buying, where we assume that we can haggle because costs are obviously inflated. The result is that we might end up at a starting price point, but not succeed in haggling to where we want, and still consider it "close enough." Unless you have tremendous reserves of willpower, plan for this in your budget. I'd say, subtract about $15% of your overall budget to cover the cost of your own psyche. If you don't succumb, good for you, you pocketed the extra money! If you do, the good news is, you won't be in the hole because of it. Our new budget: $5580.
4. Be prepared to make minor repairs or do regular maintenance.
Once you purchase your car, you might have to do some maintenance to get it where you want it. New tires, fluid flushes, regular mileage maintenance, and new brake pads can add up quickly, but they also allow a seller to hike up the price if he's the one to do them. Decide on a maintenance budget you can live with (example: "I won't buy a car if regular repairs on it will cost me more than X.") I didn't factor this in when we bought our car so I had to make the decision at the mechanic's when I brought it in for inspection. It was no biggie; we were still definitely within our budget, but if we'd barely eeked by it would have put us over the top.
To save you the time of calculating it out on your own, consider this simple equation: shop in a range between 60 and 70 percent of your initial budget. Our budget clocked in a bit below that because Carfax and insurance fees represented a disproportionately large percentage of our overall budget. If you had a little more money, that would go away. As it is, we were shopping at around that price range because we were planning to spend around $5580, so with haggling, we were looking at cars in the $5,000-$7000 range. You want to give yourself that much wiggle room because the environment of haggling is so built into the car buying experience that even second-hand sellers expect to get less than their asking price (usually), but since they're not professional dealers, they often don't know what're reasonable to inflate the price to. I had a seller who readily agreed to drop the price from $6400 to $5500--almost a 1k difference--after a short text message exchange. I also had one who wouldn't take a penny less than her asking price, even when I had cash in hand and was ready to walk otherwise. It depends on the person...and on your willingness to haggle!
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