Buying a new or used car is always exciting, but it comes with a lot of work. Buyers have to understand the market, make decisions about brands and models, and navigate auto financing before they drive their prize off the lot.

A good place to start is to create a car budget. This allows you to understand how much you may be able to spend and how much you will need to borrow to make your new (or new-to-you) car a reality.

Getting Started

To create a car budget, you will determine your take-home pay for the month and for the year and then calculate your expenses for those same periods. Subtracting expenses from income will give you an idea of how much you might be able to spend. If you need to adjust your expenses to be able to afford a car, the budget will help you identify areas where you can cut back.

Part of the budget process can also be getting pre-qualified for financing, which will give you valuable information to use in the budgeting process. This may be the easiest part of the process. To start, you can get pre-qualified with Credit Acceptance in just a few minutes.

Determine Your Take-Home Pay

To create a car budget, start by opening a document on your computer (you can do this just as easily on paper, if that’s easier). If you use a spreadsheet, it will do the math for you. But any document where you can list things will do the job.

Write down your take-home pay for the month and for the year. This should be the amount on the paychecks that get deposited or cashed every time you get paid. Then, list the take-home amounts for any additional sources of income. If you have more than one job, sell things online, do seasonal work or get money in any other way, write it down

When your sources of income are added up, you should arrive at two numbers: your net income, meaning the amount you take home after taxes, every month and for the year. The other number is your gross income, which is all income sources before taxes.

List Your Expenses

When income is done, you can move on to expenses. Part of listing your expenses is easy. You can simply look at your bills. List all of your expenses each month and for the year, including rent or mortgage, loans (including student loans), utilities, phones, credit cards and all other bills.

Review your bank statements and credit card bills and be thorough. Include subscriptions, streaming services, medications and other items you might pay without thinking too much about it. The idea is to develop an extremely accurate picture of where your money goes.

The next step is not as easy: listing your out-of-pocket expenses. These are not bills. They are the money you spend in day-to-day life. For example, if you buy a coffee and a pastry for $8 every day before work, you never get a bill, but it is an expense worth noting. It adds up to $40 a week, which is about $160 a month or roughly $2,000 a year.

Identifying these out-of-pocket expenses is important because they often add up to a lot of money. These are also some of the expenses that can be cut back to afford a car payment. Take the time to review where your money goes, including lunches, clothing, hobbies, coffee, transportation, and nights spent out on the town. Add these expenses to your list.

Putting it All Together

When you are done, you will have your income and your expenses on a monthly and yearly basis. You can use these numbers to calculate how long it will take you to save for a down payment, and how much money you may be able to devote to a monthly car payment. The Credit Acceptance Monthly Car Payment Calculator can help estimate these costs by inputting down payment, term length, and other factors.

Remember too that monthly payments are not the only cost of car ownership. There is also insurance and maintenance, which should also be factored into your budget.

Of course, if you don’t have money left over after paying your expenses, then there is work to be done. You will need to reduce the money that you spend (or increase your income) in order to afford your car purchase. While every person’s finances are different, reducing expenses by a few hundred dollars each month is often a realistic goal. Drinking your coffee at home, eliminating restaurant meals, cutting unused subscriptions and limiting indulgences can have a dramatic impact.

While you are adjusting your budget, take the time to explore auto financing. Getting pre-qualified will give you a great deal of information about how much you might be able to borrow, which will give you an idea of how much you could spend on a car. Inquiring with Credit Acceptance is easy, just fill out the online pre-qualification form.

With budget and financing in hand, you will be ready to visit dealerships and negotiate the best price on your car.