How to Save Money For a Car: 9 Rules to Follow

by | Dec 6, 2019

For many Americans, driving a car is a non-negotiable part of life. It’s necessary to get to work, shop for food, connect with friends and family, and more. But how should you financially prepare for such a large commitment? What steps should you take to ensure you have a reasonable cash cushion and aren’t stretched too thin? Here are nine key steps everyone should follow.

 

How to Save for a Car Quickly

 

1. Take stock of your finances

The first step in preparing for a big purchase is to understand your current financial picture. This will help you determine what kind of car is in your budget and set realistic savings goals.

Make a list of all of your regular monthly expenses, including mortgage or rent, utilities, student loan payments, credit card payments, groceries, gym memberships, subscription-based media and entertainment services, etc. Compare them against bank records and look at what you’re spending on extras like going out for meals, to concerts, etc.

Now look at your net income – your take-home pay after taxes and any other deductions like health insurance premiums and retirement plan contributions. 

Do you have savings to draw on for a car purchase? If so, how much? Write down all this information so you have it to refer to later. 

There are a variety of guidelines budget experts use to determine how vehicle expenses should fit into your overall budget. Most say total car expenses should not exceed 10-20% of your net income, with 15% being the most common figure cited. 

 

2. Consider the ongoing costs of car ownership

If you have a car now, you are already familiar with the ongoing expenses involved and how they fit into your overall budget. These costs include gas, insurance, registration fees, parking, and maintenance – aside from any payments you might still have on a car loan.

If you are planning to sell or trade in your current vehicle when you buy a new one, consider what monthly expenses are likely to change. For example, your maintenance costs might go down if you buy a newer car, but your insurance payments may go up. Fuel costs are hard to estimate since gas prices fluctuate, but swapping a gas guzzler for a more fuel-efficient vehicle will always save you money. 

If you are preparing for your first car purchase, try to get a realistic picture of each of these costs to ensure you can afford the ongoing costs of car ownership beyond the initial purchase and any car payment (if you plan to use a loan). Ask friends or family members who own cars to help, search online, and call insurance companies for policy estimates. Keep in mind that the age and mileage of the car, its fuel efficiency, and other factors all play into how much you’ll be spending or saving on car insurance, so try to create accurate estimates for the kind of car you think you’ll purchase. 

Cars last much longer and run more safely and reliably with regular maintenance, including oil changes, tire rotations, and regular inspections for other issues, so factor these items into your calculations along with repair costs. User manuals include maintenance schedules that you should become familiar with. 

When it comes to budgeting for a car, keep in mind that a car’s value always goes down over time, especially in its first few years. A car can help you generate income by making it easier for you to get to more work opportunities, if your area doesn’t have good public transit. But otherwise, a car is a drag on your finances. 

If your budget is very tight or you want to save for other things, it’s wise to think of a car as a basic tool to meet your transportation needs, rather than as a status symbol, reflection of your style, etc. If you can revise your idea of a “dream car” to focus on practical matters like reliability, affordability and efficiency, you’ll be far less susceptible to expensive up-selling when you get to a dealership and your budget will benefit for a long time to come.

 

3. If you have a car, estimate its sale or trade-in value

Kelley Blue Book is the Bible for car valuation. If you plan to hold onto your current vehicle for a few months while you save up for a new one, remember to factor in the higher mileage it will have at the time you plan to sell or trade it. 

Often selling your car yourself will fetch you a higher price than the credit you’ll get from a dealer for a trade-in. However, you’ll need to familiarize yourself with the process of creating a sales contract, transferring the title, etc. You’ll also need to make your car look marketable, ensure you have maintenance records available, create appealing ads for it, show it to potential buyers and more. In other words, it can be a lot of work. 

Whether you plan to sell your car or trade it in, make a note of a realistic figure you think you can get for it and factor that into your budget for making your car purchase. If you plan to finance the purchase, the money you get for an old car can go toward your down payment. If you plan to buy your next car outright, the proceeds can go toward the overall purchase price. 

 

4. Do some preliminary shopping

Armed with the knowledge you’ve gathered about your financial resources and the costs of car ownership, it’s time to look at actual car prices in your area. Not to buy yet – but to get a sense of how much saving you need to do and whether you’ll need to adjust your expectations about the kind of car you plan to purchase. 

Since cars lose much of their value in the first few years, buying a gently-used car instead of a new car can be a great strategy to save money, while still netting you a vehicle that’s in good shape and has low maintenance costs. 

If you plan to take out a loan to purchase your car, use an online affordability calculator (like this one from Edmunds.com) to help you estimate what total price tag you can manage based on your target monthly car payment and how much you plan to spend for a down payment. The higher the down payment you can make, the lower your monthly payments will be, and the faster you’ll pay off your loan.

At this stage, if you haven’t purchased a car before, it would be smart to work with a dealership, bank, or credit union to see if you qualify for a loan and if so, what the financing options might look like. You can go through this process to gather information without committing to buying yet.

It’s important to know your credit score and see if you need to do anything to improve it before your purchase date. A better credit score can help you qualify for loans and reduce your interest rate.

If it’s possible for you to save up to buy a car outright rather than relying on a loan, that will save you interest. If this seems feasible, it’s likely a worthwhile strategy.

The length of car loans offered has been increasing in recent years, with some dealerships now offering six- and seven-year loan terms, or even longer. A longer loan can reduce your monthly payments, but it also means you’ll pay more in interest overall – possibly thousands of dollars more. You may be tempted to buy more car than you can actually afford, and it’s more likely you’ll end up upside down on your car. (Being “upside down” means at some point the vehicle could be worth less than what you still owe on it on it. This could lead to a situation where you’re still making car payments on a vehicle that no longer works, or the amount you can sell it for later will be less than what you owe on it, making your next car purchase even harder.)

Avoid these situations at all costs! Financial advisers agree that these longer car loan terms are too risky and costly.

 

5. Determine your timeline & set a monthly savings goal

If you need to save for a few months or longer for either a down payment or the total price tag of a vehicle before purchasing, create a savings timeline. 

Divide the total amount you need to save by the amount of money you think you can realistically save each month. This will tell you how many months it will take you to save up for your car. Try to get creative here! If you can wait a little longer to buy your new car, the savings can really pay off in the long run. Even temporary solutions like public transit or low-cost car rentals might be worthwhile.

 

6. Open or start using a savings account

Having a dedicated place to set aside money for a long-term goal can help you achieve it. If you don’t already have a savings account, open one. It’s a great place to “hide” money from yourself. 

Psychology should really factor into your strategy as you start saving. Letting money accrue in your checking account can leave you far more tempted to spend it. A savings account can feel like a special place where you set aside money to meet your long-term goals. 

These psychological factors may seem silly at first, but for many people they make a huge difference in their ability to save money. Why make it harder on yourself? Use these mental hacks to your advantage (more on that in #8 below!).

 

7. Make saving easier by automating account transfers

This is one of the best ways to save. Saving money is less painful if you set up an automatic way to do it without having to think about it. When taxes and other deductions come out of your paychecks automatically, you’re less likely to notice the money is gone. 

You can set up automatic deductions yourself to make meeting your savings goal easier. There are a few methods you can use: 

  • If your employer does direct deposit, ask if you can split your paychecks into two accounts. You may be able to designate a certain amount or a percentage of each check to go into your savings account each month, while the rest goes into your checking for you to spend. 
  • You can likely set up automatic account transfers from checking to savings through your bank. You’ll be able to choose how often the transfers happen and how much money to send to your savings account. 
  • There are also apps available to help you save money without thinking about it — for example, by rounding up what you spend on purchases to the nearest dollar and putting that “change” in a savings account. 
  • The analog version of this is the old-fashioned change jar (although this doesn’t work as well if you don’t use cash very often). Just put all the change left over from purchases into a jar each night, and deposit the content of the jar in your savings account on a regular schedule (like once a month). This isn’t likely to yield everything you need for a car purchase, but every penny counts, and you might be surprised about how much it adds up to!

 

8. Reduce your spending

Go back to your list of expenses that you made in Step 1 and look for any that you can reduce. Here are some common ways to save money that can make a difference for most people: 

  • Reduce regular subscription costs for entertainment and media (as long as you won’t replace these with pricier entertainment!) 
  • Cook more and eat out less often. Try cooking larger meals on a day off so you can eat leftovers throughout the week. If your friends plan to eat out, have a bite at home first and just order an appetizer instead of a whole meal when you get to the restaurant. 
  • Invite friends over for potlucks as an alternative to going out. People will often appreciate your hosting (and may leave you with leftovers!).
  • Buy household staples in bulk either by ordering online or just buying in larger quantities at the store. The per-item cost is generally much cheaper. 
  • If you have a gym membership, consider less expensive alternatives for getting your workout. Some YMCA branches offer financial aid. Some cities have free recreation centers. Free or donation-based yoga classes may be available through community centers or yoga studios. Walking and running outdoors are also great ways to exercise for free. YouTube fitness videos can be a great option when the weather is lousy. 

 

9. Increase your income

Look into taking on more shifts at work or getting a side gig to increase your income. Just keep in mind that if you overload your schedule too much, you might end up spending more (on meals out, for example, if you don’t have time to cook). 

Whenever you make adjustments to your schedule and your spending – in other words, to your lifestyle – it’s important to be sure the changes are sustainable for the period you’re making them. In other words, you don’t want to deprive yourself so much that you give up on your financial goals. And you don’t want to work so much that your performance suffers significantly at the job that provides most of your income. 

Consider realistically how much additional work you can handle. If you have a full-time office job during the week, adding one shift at a restaurant each weekend for a few months may be just the budget boost you need, without running you ragged. Trying to double up on shifts multiple times a week with a new part-time job may be too much for you to maintain for several months. 

The most important tool for money management is steady discipline over the long haul. This means understanding your habits and how they affect your finances, and trying to create a healthy routine you can keep up over time. 

Taking a steady, reasonable approach to saving up for your next car will help you make progress and stick to your plan — and that will help turn your plan into a reality.

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