Aside from buying a home, a car is the biggest purchase most people make and it’s getting bigger as the cost of vehicles rise.

This means that the first step to take when shopping for a new car is not deciding what kind of car you want, but how much you afford.

This requires putting together a budget to determine what you are already spending and how much money you can dedicate to purchasing, owning and operating the new vehicle.

To do this right, you will need to set aside two to three hours, depending on how well you keep records and your computer savvy. If you bank online, you are in luck, because you may be able to download your checking account records into an Excel spreadsheet and start categorizing expenses from your last statement. If you don’t have access to the spreadsheet program Excel, you can find a variety of browser- or Word-based budget templates on the Internet. Those who have Excel can download this template ^[1] from Microsoft’s Web site.

There is plenty of great advice on line on how to prepare a budget, but here are a few general rules of thumb to consider when budgeting for a car.

• Ownership costs: Think not just in terms of monthly payments, but total ownership costs. That is to say, how much does it cost to insure the car, operate the car and maintain the car?
• Maximize down payment: Pay as large of a down payment as you can. This will bring down the interest rate and may enable you to finance over a shorter period of time, which will also save you money.
• Avoid trade-ins: Rather than trade your car in, consider selling it to another private party. You will generally get 20 to 30 percent more than if you trade it in or sell it to a used car dealer. This will greatly simplify negotiations with dealers and make it easier to compare offers between dealers.
• Go for shortest term you can afford: Car loans only used to be available up to 36 months, but as cars have become more expensive, lenders have been willing to stretch out loans up to 72 months. Just remember you are paying more in interest for those longer terms.

So on a $15,000 loan, you could lower your payment by $100 (from $460.83 to $358.22) by stretching out the loan from three to four years, but you would end up paying roughly $600 more ($2,194.57 vs. $1,589.82) in interest over the term of that longer, more expensive loan. That’s a lot of nice dinners with your significant other.

The budgeting process is a good time to ask yourself how long you plan on owning the vehicle. If you are the type who likes to trade in every few years you might want to consider a lease. But if you keep cars for five years or more, it might be okay to extend the terms of your loan another year or two to push down the monthly payments.

Monthly payments are a critical guide for determining what you can afford. But you can’t really determine what your monthly payment will be until you figure out what interest rates you are going to be paying.