How to Save for a Car

A car is one of the biggest purchases you will make in your lifetime. From imagining how it will look in your driveway to comparing the features (like heated seats or sunroofs), there are a lot of decisions you need to make. It’s easy to get caught up on all the fun parts of car ownership. But before you start shopping, you need to understand how a car will fit into your budget. Keep reading to learn how to save money for a car.

1.  Understand the true cost of buying a car 

When you’re searching online or visiting dealerships for a vehicle, remember that the sticker price is not the full cost of the car. You also have to consider costs like a down payment, sales tax, title fees, registration, car insurance, or financing costs – if you’re taking out a car loan.

Furthermore, the costs don’t magically stop the day you purchase your car. Apart from car payments, you’ll need to plan for recurring expenses, like gas and routine maintenance. Understanding the full financial picture from the start helps you avoid hidden fees and helps keep your budget on track.

2. Know what you can afford

You might be drawn to the car with remote start or extra charging ports, but your vehicle needs to fit more than your wishlist; it needs to fit into your budget. Before you commit to a vehicle, use a payment calculator to estimate if you can comfortably afford the monthly expenses. It’s also worth considering if a used car may make more financial sense than buying new.

Many experts recommend following the 20/4/10 income rule. The rule includes making a 20% down payment of the car’s purchase price, choosing a loan term of less than four years to limit the interest charges, and keeping total transportation costs within about 10-15% of your monthly income.

3. Decide how you're going to pay

There are several ways to pay for a vehicle. You could buy it with cash, meaning you own the car outright. This option helps you avoid interest, but it requires significant savings stored up. Another option is to finance the purchase with an auto loan. In this scenario, you take ownership of the car while making monthly payments to a lender. You could also lease the vehicle for a set period of time, but you don’t own it unless you choose to purchase it at the end of the lease.

If you already have a car, its trade-in value can help reduce your upfront costs. Before you head to the dealership, check your vehicle's estimated trade-in value on reputable websites, like Kelley Blue Book. This knowledge will give you a better understanding on what you might receive and can be helpful for any negotiations. 

4. Set a clear savings goal

Once you’ve decided on the type of vehicle you want and calculated your desired price range, you can set a clear savings goal. For example, if you plan to save $6,000 for a down payment and fees in one year, you’ll need to set aside $500 in monthly savings to reach your goal.

Breaking the larger goal down into monthly or weekly targets makes it feel more achievable and less overwhelming. Even if you fall short of your savings plan one month, you’re still closer to your goal than when you started. Keep striving to meet (and exceed) your long-term financial goals.

5. Open a separate savings account

If you put your car funds into your regular savings account, you might be tempted to dip into the money for other expenses. Small impulse purchases can slowly chip away at the progress you make towards buying your next vehicle.

Instead, put your car fund in a separate account, such as a high-yield savings account. Once the account is set up, you can automate a deposit from each paycheck. You’ll be saving money every two weeks without lifting a finger. Whenever it’s possible, try to add extra money to help reach your goal faster.

6. Build your credit score

Your credit score is a key factor of getting a favorable deal on your new vehicle. If you work on your credit while you’re saving up, it can potentially help you save more money later. This is because your good credit may qualify you for lower interest rates and smaller monthly loan payments.

To strengthen your credit, you’ll want to review your credit report for any errors, dispute any inaccuracies with your bank or credit union, pay down your credit card balances, and make all your payments on time. Improving your credit score can significantly reduce the costs needed to finance a vehicle, saving you money on interest over the life of the loan.

7. Plan for extras and emergencies

As you’re saving for a car, other expenses will keep coming. Your vehicle will bring recurring costs, like routine maintenance costs, insurance increases, repairs from accidents, registration renewals, and depreciation. On top of that, unexpected emergencies or other financial challenges can strain your budget.

Don’t let this discourage you. Build some extra wiggle room into your car savings to cover these costs. You might spend a bit more upfront on a fuel-efficient model or a vehicle with a warranty, but it can save you money and stress in the long run. Choosing a safe, reliable car is important, and so is protecting your overall financial health.

8. Adjust your goal if needed

If your car savings aren’t moving as quickly as you’d like, it may be time to make some adjustments. You could wait a bit longer before buying, cut back on extra spending, or find ways to increase your income. Cutting expenses might mean eating out less, investing in quality items that last, or finding affordable ways to spend time with friends. To boost your income, adopt a side hustle or sell items you no longer need.

Aside from adjusting your budget, you might also need to consider a more affordable vehicle. Keep in mind that cars depreciate quickly, and life can throw unexpected expenses your way. Focus on reliability and the total cost of ownership, rather than just how the car looks.

Saving for a car may feel intimidating at first, but when you break it down into clear steps and treat it like any other financial goal, it becomes possible. Instead of rushing into a purchase at the first sign of trouble from your engine, take the time to create a plan and diligently answer your auto questions. Start saving early and stay consistent to conquer the car-buying process with ease.