How to Factor Car Insurance into Your Budget

The problem is that a lot of little extra fees and expenses can add up quickly and take you way over the initial budget.

To create an effective budget, your car payment needs to include the cost of car insurance, taxes, and other fees such as title, tag, and doc fees.

Of course, there are other costs related to owning a car - such as gas, maintenance, and repairs - but for this article, our concern is on budgeting for the fixed costs.

Car insurance is the most frequently overlooked expense and makes up 15 to 20% of your monthly car payment.

If you figure you can afford car payments of $500 per month, you need to subtract $75 to $100 to cover for car insurance. This means your car loan has to come out to between $400 and $425 per month (including taxes and other fees).

Car insurance for some cars costs more than others. The newer the vehicle, the more you can expect to pay.

Smaller cars also tend to have higher insurance costs due to the increased risk of injuries during an accident.

When properly budgeting for a car, we recommend the following guidelines:

• Down payment of at least 20%
• Maximum loan term of 48 months

The best way to reduce this is to comparison shop for insurance BEFORE deciding which car to buy.

You may find that one car has a considerably lower rate of insurance. It's best if you can keep your car choices open to at least 2 or 3 different models.

You can get online insurance quotes for each car and compare the cost differences.

In most cases, you will find price differences of at least $500 per year if you comparison shop between 3 different vehicles.