A car is more than just a practical means of getting from point A to point B. It’s been a pillar of the American dream for decades.
Knowing what car to buy can involve meticulous research. When you find the one you want, your financial house will also need to be in order. Why? Because unless you’re planning on walking into the dealership with thousands of dollars, you will likely need a loan or lease. According to a July 2019 study from Experian, 85.4 percent of new vehicles are financed this way. In other words, buying a car often means not just committing to the car itself, but also committing to the terms of the loan or the lease.
You will not only want to save up for the down payment, but for the costs that come after. Here’s what you need to know to jumpstart your car savings plan.
Identify how much car you can afford
Sure, you may have a dream car in mind. But you’ll want to make sure you can actually afford the make and model you’re considering.
Buying a car isn’t a small purchase. The average price of a new one is close to $38,000, according to Kelley Blue Book, an online resource for vehicle valuation. Meanwhile, the average monthly payment on new passenger vehicle loans was $554 in the first quarter of 2019, per Experian’s data.
With that hefty price tag in mind, it is a good idea to work through some of the finances of buying a car before moving forward:
Here’s where you should get started:
- Calculate your down payment. Knowing the amount you need for a down payment will help you start the process of buying a car.
- Check the monthly payment. Is the monthly payment going to fit into your budget? Use this calculator to help you determine what will work with your budget.
- Budget for future maintenance. Beyond your monthly car payment, it is critical to set aside some money in your budget for regular maintenance. Seek out cars that have regular maintenance costs within your budget.
- Don’t forget about insurance costs. Insurance is a necessary cost when driving a vehicle. Think about how much insurance you’ll be required to carry.
Ultimately, how much you should spend depends on your personal finances; however there are some guidelines. Edmunds recommends that your new-car payment shouldn’t exceed 15 percent of your monthly take-home pay. If the car is pre-owned or you’re leasing, Edmunds recommends that do not exceed 10 percent of your take-home pay on the payment.
Calculate your down payment
Before you head to the lot to buy a car, take the time to calculate your down payment. The exact down payment you decide to save for will depend on your unique financial situation and the kind of car you want.
“Aim to save between 10 and 20 percent for your car down payment,” says Nishank Khanna, chief marketing officer at Clarify Capital in New York City. “Putting down a large down payment will help you reduce the total interest you end up paying on the loan and lower your monthly payment.”
If you’re seeking a newer car, try to put down closer to 20 percent.
“Generally speaking, a larger percentage down payment is recommended for new cars,” Khanna says. “You want to avoid being in a situation where depreciation outpaces your loan value.”
If you’re buying a used vehicle, only putting 10 percent down might be sufficient.
Establish a savings plan
You may have a vague savings goal in mind, but it’s important to put a precise number on it. With the help of Bankrate’s savings tool, you can calculate how much money you’ll need to save every month to afford a down payment for a car.
Once you have a number in mind, it’s time to make sure you are saving enough money every month to meet your goal. That could require you to tweak your spending habits. While it’s easy to say and hard to do, keep your savings goal in mind as a motivator to make spending cuts, like cutting out subscriptions.
As you tuck away your savings, it is important to find a smart spot to park your money. You may want to open a savings account at a bank or credit union that is different from your checking account provider. By separating your bank accounts, you may be less tempted to dip into your savings because it will be out of sight.
With a little research, you’ll find that there are a lot of different savings accounts out there with varying interest rates. Right now, the best savings accounts pay around 0.5 percent APY and higher. Picking an account with a higher yield will help you accumulate money a little faster.
Make your savings automatic
One of the best ways to regularly save for a car may be to take the chore of “saving” out of your own hands. Most banks will allow you to schedule an automatic contribution from your paycheck into a savings account. Take advantage of the feature and put a portion of your paycheck into a savings account not connected to your checking account.
There are also a number of standalone apps, such as Digit or Qapital, that you can use to automate your savings. These often plug into your checking account and are typically free to use or require a minimal monthly fee.
Establish a realistic timeline
When there is a new car on the horizon, chances are that you’ll need some time to put savings aside.
It’s a good idea to put a definite timeline on your savings goals to help stay on track. Otherwise, it is just too easy to splurge along the way, ultimately slowing down your progress.
Don’t set a timeline that is going to stretch your resources too thin or make it impossible to reach. It can be the opposite of motivating to miss any savings goal — even when you knew it was unrealistic from the start.
Play around with this savings calculator to determine a realistic timeline based on how much you can save each month.
Get a side hustle
There are many other ways to save for a car, including getting a side hustle to boost your income. While you won’t get rich, you can pad your wallet. Working Americans who spend an average of 12 hours per week completing tasks related to their side hustle earn an average of $1,122 per month, according to a Bankrate survey.
If you’re a student, this could be a very sensible option at a time in your life when you’re not yet locked into a 40-hour-a-week job.
Trade in or sell your old car
Do you already have a vehicle? Consider trading it in or selling it to cover some of your new car costs.
“Trading-in your car would mean that you’re allowing the car dealer to set the price for your car,” says Paul Sundin, CPA, CEO of Emparion. “While this will help you dispose of your old car faster, you will not be able to get your preferred price for it.
“For a higher price, selling your old car is a better option. At the end of the day, it is the car owner’s choice.”
You’ll have to decide between the convenience of trading in your vehicle and potentially fetching a higher price through a private sale.
Consider buying a pre-owned car
When you drive a new car off the lot, it starts to lose value rapidly. According to AAA, a new car loses about 20 percent of its value when it leaves the lot. With that, you could save yourself thousands in depreciation costs by purchasing an older car.
Choosing a more affordable vehicle can help you save for your car more quickly.
Buying a car can feel like a dream come true. As you look for vehicle options, seek out the right balance between reliability and affordability. Your budget will thank you.