Rancho Cucamonga, CA (PRWEB) February 21, 2012
Borrowers often wonder how much of their income should be devoted toward a monthly vehicle payment. If this amount undershot, borrowers may wind up with a vehicle they never wanted. If they overestimate the amount they can afford, borrowers may find themselves tied down with expensive auto loans that restrict their financial freedom for years to come. In the worst cases, an overestimation can lead to repossession and a severe blow to one’s credit. In order to help borrowers avoid such scenarios, Loans.org has published a new article informing prospective financers how to establish a budget.
One safe, secure and responsible approach is to use the 50/30/20 plan. Touted in Elizabeth Warren’s book, “All Your Worth,” the 50/30/20 plan divides expenditures into three categories: needs, wants and savings. While originally made for debt management and avoiding bankruptcy, the plan is a wonderful tool to determine how much to devote toward a car loan.
To begin, consumers need to determine their total after-tax monthly income. For workers with a steady bi-weekly check, this can be achieved by looking at two consecutive pay stubs. Self-employed and freelance workers may have to do a bit more research to come up with this number.
Next, prospective auto loan borrowers should try to spend no more than 50 percent of that number on their “needs.” Needs, in the context of this budget plan, include everything that is necessary in day-to-day living: housing, groceries, medicine, insurance, transportation and outstanding debts, to name a few.
Wants would then receive 30 percent of one’s after-tax income, and the remaining 20 percent would be set aside in savings, which can be used for emergencies, big purchases or retirement.
A car loan provides a consumer with transportation, so it is considered to be a need. In order to determine how much potential borrowers can spend on a monthly car payment, they should first try to reduce their “needs” spending to below the 50 percent threshold. Then whatever is remaining between the designated “needs” fund and the amount actually spent is the number a consumer can devote to a monthly payment.
To learn more about auto financing and budgeting, readers can go to http://loans.org/auto where they will find informative resource pages and a free-quote-comparison generator to help find the best borrowing rates.
To access the full 50/30/20 article, readers can go to the “Articles” link at the top of any page on the site.