The first step is to look at your monthly budget to determine how much room you have for car payments and insurance premiums. If you need help, visit our budget section and check out the budget worksheet to help you with these calculations.

If you are currently making a car payment, then you have some idea of how expensive a new car can be, and how long you have to make those payments. If you bought a car for $20,000 and your payments are or were about $450 a month, you should expect the payments now to be about the same for a car costing a similar amount. As a general rule of thumb, if you're devoting more than 15 to 20 percent of your household income to transportation, you should probably scale back.

If you already have a certain car in mind (or you've done step 5), contact your current insurance agent to find out how much your premiums might change. You can also check out InsWeb or Insurance.com to get online quotes for your vehicle type. You may be surprised how much or how little the rate changes based on the type of car you are choosing. Make sure you factor any significant increase into your budget.

You also need to consider a down payment. If you are planning on selling or trading in your current vehicle, then the next section will help you determine how much you might get in return. If you don't currently have another vehicle to trade-in or sell, then you should seriously evaluate your budget, not just to determine how much you can afford monthly, but also how much cash you might be able to put down on a new vehicle to lower the payments or at least negotiate a better financing deal.