Begin by Looking at YOUR Budget

How much should you spend on a new car? Experts say not more than 20 percent of your monthly income. And that should include payments on all the cars you may own, whether you have one vehicle or six. And experts are talking about your take-home pay, not your gross income.

Even if your home is paid for and you have few monthly bills, the basic rule still stands.

At the same time, you should keep in mind the amount you can truly afford and that often depends on more than just the purchase price: Insurance rates, fuel costs, maintenance and repair can play a major role in determining affordability.

Auto insurance agents look at two things when determining the premium for a particular vehicle. First is the driver. Nothing reduces premiums like a clean driving record. Many insurers now also utilize credit information to help determine the premium to charge.

The value of the vehicle and loss experience on that particular vehicle is the second consideration. Sedans and mini-vans generally are less because they are not as expensive to begin with. Because they are not regarded as "cool," they tend to be driven by more conservative folks. These folks are generally better drivers and thus there is little loss experience connected to those vehicles.

Realize that going from that small sedan in your driveway to a flashy new SUV will mean shelling out more per month at the gas station. Some models, such as sports cars and some luxury foreign models, cost more to repair than mini-vans and American-made cars.

If you're devoting more than 15 to 20 percent of your household income to transportation, you should probably scale back. By and large, cars are terrible investments because cars constantly go down in value.