It’s so exciting to buy your first car – but you don’t want to get yourself trapped in a bad financial situation right off the bat. How much should you spend, should you borrow, and how much can you save?

Don’t overspend on a car

Once you secure a full-time job, you might feel as though you deserve a decent car to match your new situation in life. But reining in your spending will help you take care of your financial future. You just need a safe car that will do the job – can you let go of the desire to buy a car that will impress your friends?

It’s recommended you spend no more than 15-20% of your gross salary on a car, and ideally less. For example, if you’re earning $50,000 a year, that would cap your spending at $7,500 - $10,000. By not overspending, you’ll keep more of your pay in your pocket for other essential costs.

Look out for lemons

Yes, you need to stick to a budget, but buying an extremely cheap car comes with its own risks. If the car keeps breaking down, repairs can be very costly. Soon you’ve spent more on that old lemon than you would have if you’d just bought a better car from a reputable dealer in the first place.

One way to help prevent you buying a dud is a pre-purchase inspection – an AA Pre Purchase Inspection is independent and AA Members get a discount.

Make safety a priority

It’s better to be safe than stylish. Road crashes are a major cause of death for Kiwis aged under 25, and unsafe cars are a big factor. If all teenagers drove the safest car available, death and serious injury rates would be 70% lower, according to one study.

You don’t need to spend a fortune to get a safe car; there are plenty of small, less expensive models with four-star or five-star safety ratings. If you’re comparing cars, always choose the safer vehicle instead of the better-looking one. Rightcar provides a safety rating on any vehicle.

Insurance is a financial safety net

Comprehensive car insurance covers you if your car is damaged or stolen, and it also covers damage you do to another person’s car or property. Third party insurance only covers damage you do to other people’s cars or property – if your car is stolen or damaged it won’t be covered.

Driving around uninsured is a massive financial risk, and you could be taken to court if you damage another car or property, so insurance is highly recommended.

You can find out more about AA Insurance’s policies and get a quote at AA Car and Vehicle Insurance.

Only borrow what you need to

Ideally, you should pay for every car you buy with money on-hand. Buying without borrowing means you have no ongoing payments and the total cost of the car is lower, because you’re not paying interest or loan fees.

However, if you can’t get to work without a car, it is worthwhile borrowing money to buy one. Although a car is a depreciating asset (it loses value over time), in this case it’s an essential tool that allows you to earn.

Try to save as much as you can toward a car, while maintaining at least $1,000 as an emergency fund. The more you can save, the more affordable your car will be.

A full licence is well worth the investment

The total cost of obtaining your full licence can be as low as a few hundred dollars, yet 40% of people spend five years or more on their learner’s licence without progressing to a full licence. Up to 70% of jobs opportunities require at least a restricted license, so having no licence, or just your learner’s, will really narrow your job options.

If you’re still on your learner’s, it’s well worth the investment to progress to your restricted and full licence. We help you with lessons and testing, through the AA Driving School, with discounts for AA Members.