How to Buy a Boat - Establishing a Budget

Chapter 2: Establishing a Budget

This is the second of a 10-part series on how to buy a boat. You can see Chapter 1 – Identifying Needs here.

Once you have decided on the type and approximate size of the boat you want, the next step is to establish a general budget to help guide your purchase. After all, you don’t want to waste time chasing after boats that you cannot afford.

If you intend to pay with cash, this step is fairly straight-forward. You already know how much you have available and so the question becomes how much of your savings do you want to spend.

But if you intend to finance your purchase, then it would be helpful to know up front how much you might be able to borrow.

In this chapter, we will help you calculate how much boat you can afford as well as identify the overall cost of boat ownership so that you can make an informed budget decision.

HOW MUCH BOAT CAN YOU AFFORD?

One of the key considerations lenders look at when deciding whether or not to approve a loan is the Debt-to-Income ratio (DTI). Specifically, a DTI of 40% or above is considered risky. Therefore, you should calculate your DTI to help determine whether you are a good loan candidate.

Calculating Your DTI Ratio

So what is DTI? It is simply the sum of your monthly debts divided by your gross monthly income. Your debts include such things as your mortgage, property taxes, HOA fees, student loans, car payments and credit card charges. Gross income would minimally include your paycheck along with that of your spouse (if applicable) and any other monthly income streams.

Here is an easy-to-use tool to help you calculate your DTI ratio (also referred to as the backend debt ratio. Take a moment to calculate your DTI ratio since we will need it for the next section.

Establishing Your Max Monthly Amount

Recall that a DTI of 40% or higher is considered risky by lenders. So, if your ratio is below this level – great, you might be a good candidate for a boat loan. The next step is to estimate the maximum amount you might be able to borrow.

To do this, simply subtract your DTI from 40% and multiply by your gross monthly income. For example, if your DTI ratio is 35% and you earn $10,000 per month, then you might qualify for a monthly loan payment of (.40 – .35) x $10,000 = $500.

Of course, there are many more considerations than your DTI ratio when applying for a loan including your credit score, the amount of the down payment, and whether or not the boat will be used as collateral. However, this will give you a quick idea of the maximum monthly amount for planning purposes.

Translating Max Monthly to Total Purchase Price

When looking at new or used boat listings, chances are you will see the total price instead of a monthly payment. The good news is estimating the total price is fairly easy. Just click on this Boat Loan Calculator tool and go to the “Monthly Budget” tab. Enter the Max Monthly calculated above in the Monthly Payment box, and then enter an interest rate and term length – say 10% and 10 years. Of course, rates fluctuate over time and based on things like credit scores so your rate might be higher or lower than this.

Using these assumptions and a $500 monthly budget, the estimated boat price comes out to $37,836. Consider this the “high-water mark” for budgeting purposes. However, you might want to budget something below this – especially if you anticipate other expenses or investments in the future or just to account for “unknowns”. Also, depending on the total amount estimated, it may be that you can find a suitable boat that meets your needs for much less than the total budget estimate.

Consider the Total Ongoing Cost of Boat Ownership

Before you commit to buying a boat or determining how much you plan to spend, you should also consider the other costs of boat ownership. Things like maintenance, insurance, taxes, registration, fuel and storage can be quite substantial and vary considerably by the type, size and age of boat and where you live.

To help get a handle on this, I’ve put together a Cost of Boat Ownership tool. Take some time to complete this. I’ve added some assumptions to assist you along the way. There is also a separate Fuel Consumption Calculator that you might want to use to help you estimate the total annual fuel cost to input into the Cost of Boat Ownership tool.

After you have completed your estimate, take a look at the Total Ongoing Cost Per Year at the bottom of the form. If this is more than you are comfortable with, then consider lowering your boat purchase price budget to get to a more acceptable level.

Should You Make the Investment?

For most people, owning a boat is a sizeable investment. Whether it is worth the money is a personal decision. What I can share with you, however, is my experience as well as the feedback I have received from hundreds of boaters in over 3 decades of research.

One such study was for the state of Oregon many years ago. They wanted to find out why some people sell their boats or let their registrations lapse. Though the reasons varied greatly, most could be explained by this conceptual cost/benefit model that I created based on the research.

What this model shows is that there is a balance between the cost of boat ownership vs. the perceived benefits. If one side “outweighs” the other, it is predictive of whether or not someone has a successful boat ownership experience and remains a boater.

Let’s talk about each of these main components in a bit more detail.

Costs

The purchase price is one thing but not the key reason why some get out of boating. Rather it is the ongoing costs such as storage fees or unplanned expenses such as frequent repairs that push some people away. The key lesson here is to look for a quality boat, not just the cheapest, to minimize the chances of unwelcomed “surprises”. And, if you are fortunate enough to be able to keep your boat at home to avoid storage fees and/or you are able to do your own maintenance, then you are already one step ahead.

However, even those with substantial ongoing costs of ownership often remain happy boaters provided that they are receiving sufficient value or benefit from using it which is what we will discuss next.

Benefits

On the benefits side of the balance are two components. One is the level of enjoyment per usage. When you have gone boating, is it a relaxing experience or somewhat stressful? Does the whole family enjoy it or do you have to drag some along? Are your local waterways and facilities in good shape or overcrowded and polluted?

If you are contemplating buying your first boat, you might not have answers to the above questions. But what you can do is make sure that the key people you intend to boat with are exciting about the idea of owning a boat. And, taking an in-person or online boater safety course (required in some states depending on your age) can help reduce some of the anxiety in the early days of boat ownership. If you live near a major city and the waterways are crowded, look for opportunities to sneak out during the week when there are far fewer people on the water.

The second factor on the “benefits” side is the frequency of using your boat. You might absolutely love getting out on your boat but if you can only do it once or twice a year, there is a good chance you will second guess buying one.

In talking with boaters, the main things that prevent some from using their boats as often as they would like include:

Work commitments
Family obligations (e.g., kids in many school/sports activities)
Product issues

It was the absence of these first two items that caused boating to boom during the height of the covid pandemic. There simply were fewer things “competing” for families’ discretionary time.

When I’ve asked boaters how often they need to use a boat to justify owning one, the most common answer was 12 to 15 times a year. So, if you don’t think you will be able to use your boat roughly once a week during the boating season (especially in colder climates), then owning a boat might not be the most practical decision unless you really enjoy those few occasions on the water.

For me, buying my first boat was an easy decision. I absolutely love being on the water and am an avid angler and waterskier. I purchased my first boat (a 1987 Cajun Espirit 175) back in 1986 – shortly after getting my first job after grad school. At that time, I didn’t even own a house or have a tow vehicle. So, I had the dealer apply anti-fouling paint to the hull and rented an in-water slip on Lake Conroe outside of Houston. Here is a picture of my boat on the day it was delivered. You can even see a portion of my red Toyota Celica in the background since I didn’t own a truck. That is how badly I wanted to get into boating. Fortunately, my girlfriend (now wife) enjoyed it too and so we went out on it often.

In my case, the scales were tipped heavily towards the right side of balance and I was determined to own a boat as soon as it was financially feasible. However, everyone’s situation is different and you should think through these “cost” and “benefit” factors before deciding whether to pull the trigger on a boat purchase.