Car insurance is usually on the highest costs of owning a car. When purchasing a car, people are usually more concerned about car loan payments, maintenance, or gas. While these costs need to be considered, there are additional costs such as insurance. Ignoring additional costs such as insurance can lead to budget overages which can impact your finances.

How Much to Budget for Car Insurance

When you are thinking about how much to budget for car insurance there are several factors you need to consider. Insurance companies take several factors into consideration when providing a quote.

Insurance Rating

If you are purchasing a car, you need to do some research. Always check the insurance rating of the car, one of the factors insurance companies use is a rating system that helps them determine the premium. For this, you should go to the Insurance Bureau of Canada, which measures the cost of collision, comprehensive, direct compensation property damage, and accident benefit claims. These indexes are then highlighted green, yellow, and red, with green being the best and red the worst.

Impact of Address

Insurance companies also factor in your address. Geography plays a role in insurance premiums; premiums can fluctuate wildly depending on your postal code. Cities or neighbourhoods with higher collisions or thefts lead to higher costs.

Age of Driver

Insurance companies take into consideration. A young driver with little driving experience is likely to pay higher premiums than an older individual with more time behind the wheel. However, your driving record also comes into play, a clean driving record will obviously lead to lower costs.

Vehicle Safety

Car safety matters as well, insurers are concerned with liabilities they may face in case of an accident. Always check the car safety rating, it is important not only to reduce premiums but also you want to buy the safest car available within your budget.

Car Use

Insurers are also interested in what and how you will use the car. If your car is going to spend most of the time on the road then the risk of an accident will increase, that is why you will see a question about the expected distance to be driven.

Compare Insurance Quotes

It is always a good idea to shop around and get quotes. Don’t buy insurance from the first insurer you reach out to. Check out online insurance quotes and compare the premiums, websites such as Insurance Hotline and Rates.

Understanding what impacts your insurance premiums and comparing different quotes is a good place to get an idea of how much to budget for car insurance. Checking insurance rates before buying a car will ensure that you can stay within your budget and there are no surprises. Once you buy a car there is not much you can do about insurance premiums. Research is key to knowing how much to budget for car insurance.

What is Zero-Based Budgeting?

In a nutshell, zero-based budgeting is preparing a budget from scratch, ignoring last month or last year figures and budgeting from the ground up. Zero-based budgeting is not just about budgeting, it is also about planning every expense, telling your money where to go. Whereas traditional budgeting is basically using your existing budget and making changes to it to get to the desired budget.

This method is appealing as it forces you to justify every expense on your budget. As our financial resources are limited each activity must prove its merit to earn a place in the budget. With traditional budgeting, often expenses get carried over into the next budget, it does not mean you will end up spending that amount, it just means that you are not planning your finances efficiently. This is not to say that traditional budgeting does not work, for a seasoned budgeter it may make sense to use the regular budgeting method. But if you are new to budgeting, zero-based budgeting may make more sense as you try to understand the relationship between your income and expenses.

What are the Disadvantages?

As appealing as this may sound from a financial perspective, there is a downside to using zero-base budgeting. The downside is that practically it can be time consuming. There is a fatigue factor which means that building a budget from zero every month can be tiring and can lead to loss of motivation.

What are the Advantages?

Following a set budget month after month is quick, easy, and has an element of simplicity requiring very little effort. While rolling over budget from previous month or year can be tempting, there is an inherent problem that causes inefficiencies to be carried forward.

Zero-base budgeting, on the other hand, requires that you build your budget at the lowest level possible and then add additional spend based on the cost-benefit of the specific activity. In effect, you are incrementally increasing your budget from the lowest level possible to a level you feel more comfortable. This activity highlights your essential expenditures that are included in your base budget, fixed expenses like rent/mortgage, insurance, car payments, any other fixed monthly expenses and then identifying the discretionary expenditures.

The insight this activity provides is invaluable in understanding your financial constraints and your spending habits. Let’s not overlook the fact that this method incorporates a high level of accuracy in your budget, that cannot be realized by just tweaking your previous budget.

This method is also useful for people who do not have regular income. Rather than using a previous month budget template which may be built on a different income amount, you can tailor your budget each month on the expected income for that month. It gives you more control over your budget as you get to build it from ground up.

This method is great for achieving your financial goals. Let’s say you want to save for a car, with zero-based budgeting once you have taken care of your fixed expenses you can decide to forgo other discretionary spend and allocate the remaining amount towards saving for a new car, for example. If you are trying to pay off debt, then you know exactly how much you have left towards paying down your debt after allocating your fixed expenses.

What is the Verdict?

So, is this method a waste of time? In my opinion, absolutely not, as the advantages of this method far outweigh the disadvantages. It pays to take time to evaluate expenditure in greater detail as required under zero-base budgeting.

Budgeting for a car should be the first step in preparation for buying a car. It is a big decision that requires careful financial planning. For most people buying a car is not a frequent event, it probably happens every few years.

Research is the key to buying a car. There is an endless supply of cars and finding the right can be daunting but we mostly know what kind of car we are looking for. The only hurdle is the cost of buying a car. You are most likely to buy a car on finance and financing comes at a cost. Whenever you take out a loan, you will have to make regular payments to service that loan. The rate of interest you get is important as your regular payments will include principal and interest. So, before you walk into a dealership, find out what you can afford. Look at your budget and decide the maximum monthly payment you can make for a car loan. This is where budgeting for a car comes into play.

Often a lot of emphases is placed on getting approved for a car loan. It is not difficult to get approved for a car loan, the difficulty lies in servicing the loan. Just because you have been approved for a car loan does not mean that you can afford it.

The amount you can afford is not necessarily in sync with the loan you can get.

Budgeting for a Car

Affordability

When budgeting for a car remember that the advertised price is never the purchase price if you are buying from a dealer, there are always add-ons. So when you’re working on your budget to determine the amount you can afford, I would recommend adding an extra on the sticker price. Budget for the absolute maximum you can afford, this way you know with certainty your affordability.

Down Payment

Making a down payment towards your car purchase will have an impact on your monthly payments. The higher the down payment, the lower the monthly payments will be.

Down payment will reduce the amount of loan you need which will reduce the total interest over the term of the loan.  Deciding on what should be your down payment is dependent on how much you can afford to pay out of your savings.

Miscellaneous Costs

When budgeting for a car it is easy to make the mistake of just budgeting for monthly loan payments. Loan payments are just one aspect of owning a car. There are a whole host of other costs that need to be considered, such as insurance, maintenance, and gas. You have to be certain that you can cover these costs.

Don’t fit your budget around your car payments, your car payments should reflect what you can afford.