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Can I afford that Mercedes?
Dear Debt Adviser,
OK, let's say I want a 2003 Mercedes Benz S-class
S430 for $73,320. How much income do I need to bring in a month to
afford the monthly payments of let's say, $1,130.83 for 72 months?
Jessica
Dear Jessica,
The first thing that comes to mind is, "If you have to ask,
you can't afford it." But let's examine the situation. It is
a great sign that you are asking questions about whether
you can afford the purchase, rather than going out and buying the
car and deciding later how you will afford the payments.
An S-class Mercedes at $73,320 may seem a bit pricey
as far as car purchases go and many people may advise you to spend
your money differently. However, you make the money and you should
be able to decide how to spend it. So, if driving this car is important
to you, let's explore how to make it work in your present financial
situation without causing undue financial stress.
My prime concern with the purchase is the amount
of leverage you will be using for what to most people would be a
large debt. As with any large debt, do the math and make sure you
understand everything involved with the purchase and the associated
costs. Ask yourself if it is worth taking on $73,000 worth of debt
to have this car at this point in your life. Don't forget to figure
sales and property taxes, insurance and maintenance in your calculations.
Another thing to consider is how well the car will retain its value
should your financial circumstances change and you need to purchase
less expensive transportation. Being upside down in a car loan of
this size and needing to sell could be disastrous.
People have different priorities when it comes to
financial obligations. For many living in a good neighborhood in
the best home is their top priority. Others may make home furnishings
and fashionable clothing a priority. Still others, like you, want
to drive newer and better cars. The key is to make sure you have
enough income to cover all your expenses and to make adjustments
in other areas to afford those things that are most important to
you.
You asked what your income should be to afford a $1,130
car payment. To answer the question, you need to look at your total
expenses, including car insurance payments and any credit card or
other unsecured debt. There is no magic amount of income required.
You just need to make enough money to cover all your living expenses
and savings requirements (retirement, emergency savings fund, etc.).
For example, let's say you earn $50,000 gross in salary
per year and after taxes you bring home approximately $37,500 a
year or $3,125 per month. Your monthly expenses may look something
like this:
|
Monthly expenses
|
| $750 |
Mortgage or rent |
| $300 |
Utilities (phone, cable, gas,
electric) |
| $400 |
Food |
| $1,130 |
Car payment |
| $200 |
Car insurance |
| $150 |
Savings |
| $95 |
Clothing/medical |
| $100 |
Entertainment |
| $3,125 |
Total |
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In this example, the Mercedes S-class payment is workable.
However, any change in monthly expenses will change the amount of
income needed to buy the car. Also notice there is no room for a
big credit card payment, Caribbean cruise or other big expense!
If you have a $400 housing payment or own your home outright, income
requirements go down. Conversely, if you have a monthly mortgage
payment of $1,400 and spend $500 a month in college tuition payments
for a child, income requirements go up.
You work hard for your income and you deserve to spend
it on what will bring you joy. So take a hard look at your finances,
consider the effect of the purchase on your short and long term
goals and determine if purchasing the S-class Mercedes is realistic.
However, as the Debt Adviser, I would be remiss if I did not point
out that your joy could easily turn to heartache if buying the car
will stretch your income beyond what you can pay not only today,
but also tomorrow.
Financial troubles arise when people do not accept the fact that
their incomes do not match their wants and they purchase them anyway.
To avoid problems, make every effort to live within your means.
Finally, no where in your question did you say if you were buying
or leasing the car. Unless your job is super secure or you have
oodles of money in the bank, please don't consider leasing this
car. If your situation should take a turn for the worse, you would
be obligated to keep making the lease payments and selling the car,
even at a loss, would not be an option.
Congratulations on your willingness to take a look
at how deep the water is before taking the plunge!
The Debt Adviser, Steve Bucci,
is the president of Consumer Credit Counseling Service of Southern
New England. Visit CCCS
for additional debt
advice or click
here to ask a debt question.
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