We talk a lot about budgets, budgeting and financial acumen. It’s not to bore you or show you how clever we think we are. It’s because budgeting is the cornerstone of a successful financial life and can save you a lot of heartache.
There can be heartache when buying a car. My brother knows it only too well. I’m sharing this as a cautionary tale and to illustrate exactly why we recommend setting budget before setting foot in a dealership.
Boss before budget
My brother is an A/C engineer in Vancouver and has a good life. He is frugal, has his own home, a good credit score and a sensible outlook. Until he saw a 2012 Ford Mustang Boss 302 in a dealership he drove past on his way home from work.
My brother is not prone to impulse purchases and usually his head rules his heart. He also isn’t usually a muscle car fan. Not this time. Usually he would never consider spending over $50k on a car or spend money he didn’t have on a car.
But he did.
He went directly into the dealership, offered up his 10 year old BMW 530i as part exchange and got a car loan for the balance. It was a big car loan too and not the cheapest. Certainly not as cheap as we could have got for him.
He couldn’t really afford it but he was in love and went for it anyway.
It didn’t end well.
Budget before boss
The loan was just about manageable at his current salary and he passed the affordability test comfortably enough to qualify for a loan. Until his landlord put his rent up.
It wasn’t by much, $100 per month. While it sounds a lot for a rent rise, Vancouver is expensive and it was only an 8% increase. Regardless of that, it was enough to push him over the financial edge.
There was no overtime available, no opportunity to get a pay rise or promotion and you cannot Uber with a Boss 302!
He had to sell the car. He couldn’t manage the loan payments and everything else after the rent increase and he wasn’t going to accept help from his brother. So he sold the car at a loss, settled the car loan and got himself an old Ford Focus to get him to work.
Had he set a budget and done his due diligence properly, he would have seen how close the car loan pushed him. He may also have identified easy savings he could make to his outgoings in order to help him keep the car.
Alternatively, he could have quickly seen that he couldn’t afford the car and either haggled more with the dealer or walked away. Walking away would have been tough but having the data in front of you in black and white is equally difficult to walk away from.
The point I want to make here is that budgeting is for everyone. It has real value in managing finances and can make a fundamental difference to your choices. When we recommend setting a budget so you can make informed decisions, it’s genuinely for your benefit, not ours!