Buying your first car after graduation (or while you're still in college) can be tricky — especially at a time like this when prices are soaring.

The average price of a new car was $46,000 in June and the average price of a used car was $28,000, both up more than 20% since the start of the pandemic, according to Cox Automotive analysis of vAuto Available Inventory data. The market is so competitive that buyers are paying thousands of dollars over the asking price in many cases. And prices aren't expected to come down until at least 2023.

So, under those circumstances, if you're in the market for your first car, it's going to be a challenge.

Before you get caught up in the buying frenzy, there's one thing you have to get straight first: How much can you afford to spend on a car?

Figure out your budget

First, be clear on what your budget is: How much money you have/make, what your bills are and what is left over.

"You have to figure out what you truly can afford," said A'Shira Nelson, Wellspring Tax Manager and founder of Savvy Girl Money, a financial activism service dedicated to helping millennials achieve their long-term financial goals. "I recommend about 15% of your monthly income to be allocated to auto expenses. This includes auto payments, gas and insurance," Nelson said.

Generally, financial experts suggest that you spend between 10% to 15% of your budget to allow for adequate management of other expenses as well. The worst thing you can do is get in over your head and start to miss payments on some of your bills and/or have your debt start piling up. So don't talk yourself into spending more just because your heart is set on your dream car. Stay within your budget. That probably means getting a used car that fits your needs now and waiting a few years to get your dream car.

When calculating your budget, be sure to include all your monthly expenses. In addition to your automobile expenses, you have to account for rent, groceries, shopping, household bills, and fun extracurricular expenses as well.

Most recent college graduates will need to factor in monthly student loans payments as well. Then, once you have configured an estimated cost of living, you should know what you can afford to pay toward a car.

It may be helpful to even follow the 50/30/20 rule where 50% of your paycheck is spent on necessities, 30% on wants and 20% on savings. There are other tools at your disposal, such as online budget calculators that can help you configure specific costs such as the Edmunds Car Affordability Calculator.

John Carroll University graduate and former student athlete, Lucia Cannata, said she is prioritizing staying within her budget as she prepares to buy a car.

As a real estate agent, Cannata, a 2022 college graduate, is paid after she makes a house sale, so the time in which she could receive a paycheck varies anywhere from once a month to every week or two.

"I really want a Ford Bronco. That is my dream car," Cannata said.

It is important to be realistic and know what is affordable for you. Cannata knows she can't quite afford the cost of a Ford Bronco right now, but she plans to use the first car she does buy as an opportunity to responsibly start managing her finances — which is a huge step toward eventually buying that dream car. 

 "The most important thing is that I figure out what I can afford to pay towards my car each month," she said.

Start saving ASAP and consider using cash for the purchase

Now that you have a budget helping you plan how much you can spend on a car, start saving right away. It is never too early or late to start putting money aside, even during your undergraduate years, so after each paycheck be sure to stash some money away into a savings or investment account.

That's because the more you can pay up front in cash for that first car, the smaller your monthly payments will be. Don't use all your savings, though — remember you need a cushion for some emergencies or unexpected expenses that may come up!

Do your online research and compare cars and dealer prices online

Nelson of Savvy Girl Money also recommends that you hop on your computer and start looking at cars to compare prices at the different dealers near you.

"Sometimes the cost of the car depends on the location," said Nelson. "For example, maybe in Akron, Ohio, I can get a more affordable one than I've tried to purchase in Cleveland. That's why it's important to do your research to get an idea of different areas where the car might be more affordable."

"Researching is probably one of the most important steps of the process," Cannata said. "Since I wanted to trade in my old car, it was important that I knew what it was worth so that I would know how much I would have towards my new car."

There are a lot of different sites for buying a car and researching prices including CarMax, Carvana, Vroom, Kelly Blue Book and Edmunds.  

So once you've made your way through the initial financial planning steps, it's time to start shopping. At this stage, ask yourself these four questions:

1.       What size car do I want?

As always, planning is of the essence. It is important to have somewhat of an idea of the type of car you are looking for.

"The first thing I always tell people when they ask me for advice is to think about what size car you want," said Grant Feek, CEO of the online car marketplace TRED. "I really encourage people to know if they want a compact car, standard SUV, full-size SUV — know the size you want. I would start there."

Once you know the size vehicle you want, remember to take fuel economy into account because an SUV, say, will cost you more in gas prices than a small sedan.

2.       Do I want to buy new or used?

Once you've decided on the size of car, you then need to know if you want to buy a new or used car. Ultimately, you will have to continue taking those earlier factors in consideration such as knowing your budget and looking at how much money you have saved because there are advantages and disadvantages to both options.

The market and the economy are always changing so there may be times when the new car market is a better deal than used and vice versa. A used car will need maintenance or tuneups sooner than a new car would, which would be another expense you need to factor into the budget.

When you purchase a new car, you are purchasing directly from franchised dealerships aligned with the manufacturers. "You're not going to have to worry about the condition of the vehicle, the previous owners damaging the car in any way, being defrauded in terms of getting the title for the vehicle," said Feek. "There are plenty of quality-of-transaction assurance benefits."

More from College Voices:
Tips for college students: How to rent your first apartment
Are you doing your job search right? How to land your first job after graduation
Setting up a budget right out of college is easy—and smart

Buying a new car would be a good option to consider if you are planning to own it for a while, Feek said. However, he would not recommend buying a new car right now with the current inflation of car prices.

If you are a recent college graduate and or a first-time buyer, it is most likely that you want to save as much money as possible. So definitely shop and compare. When buying a used car, you have to decide if you want to buy from a private seller or dealership and then find the best price.

A private seller may offer the best price, but you have to take extra precaution during the process to avoid vehicle or title fraud. "You have to be really careful and make sure the seller actually has the title of the vehicle and can hand it to you," said Feek. "You have to confirm their identity to verify the seller, so make sure you look at their license and the name matches the title. Then you have to get the vehicle inspected to make sure it is in good shape."

3.       Do I want to lease a car?

In the same way that a lot of people rent an apartment before buying a house, leasing a car is another option instead of buying. Although you would never outright own the car, it's an option that works for a lot of first-time buyers.

But with this option it's really important to know the terms of the lease, such as what the cap is on how many miles you will drive during the term of the lease, what the interest rate is, what your maintenance requirements are and what the penalty is if you want to get out of the contract early.

4.       How do I inquire about the best car insurance rate?

So once you know the size of car you want and whether are going to buy new, used, or lease, you will need to inquire about a car insurance plan.

You can compare rates and reviews from companies like Progressive, All State, Liberty Mutual and Geico. Using online resources such as Bankrate and Insurify can help you navigate the car insurance process to find the best fit for you.

Whether it's driving discounts or insurance bundling deals, there are many ways for young drivers to save.

"You can bundle your auto and home insurance policy or your renter's insurance policy," said Insurify Research Lead, Emily Leff. "Most young drivers or recent grads are more likely to be renting, so bundling renter's insurance policies will probably be more relevant to them."

Always look for discounts available or other advantages to find an insurance coverage plan that is most accommodating and affordable for your current financial state.

You are on your way to making your purchase … Now what?

After recently going through this process herself, Junys Javier, a current master's student at Farleigh Dickinson University, advises anyone who may be getting ready to buy a car to do their research and accept that the first car may not be ideal.

"You may have to make these sacrifices to have something to get you from point A to point B. Just know the car that you eventually want to have will come. Your first car will probably not be your dream car and that's OK."

The car-shopping process can be an exhilarating yet stressful one but try not to become too overwhelmed. Be sure to utilize all the tools and resources that are available to you, do your research and ask questions.

Along with knowing your budget, Feek says one of the most important things to always remember is the cost of vehicle maintenance.

"Knowing the car has been cared for according to the manufacturer's recommendations is the most important factor, and after that, buying a car with the lowest mileage that will fit into your budget is a good way to minimize the risk of costly repairs."

″College Voices″ is a guide written by college students to help young people learn about important money issues such as student loans, budgeting and getting their first apartment. Taylor Anthony is a 2022 summer intern with CNBC's news desk. In the fall, she will be a senior at John Carroll University in Cleveland, Ohio, pursuing a major in communication with a concentration in digital media and a minor in Spanish and Hispanic studies. The guide is edited by Cindy Perman.

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