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 around $37,000, according to Edmunds, an online resource for buying or selling a car. Meanwhile, the average monthly payment on new passenger vehicle loans was $554 in the first quarter of 2019, per Experian’s data.
Once you have a car in mind, it’s a good idea to figure out how much of a down payment you will have available. Next, determine your monthly car payments and how both numbers fit into your budget. This calculator will help you understand how much you can afford from a monthly payment standpoint.
Ultimately, how much you should spend depends on your personal finances. Edmunds recommends that your new-car payment shouldn’t exceed 15 percent of your monthly take-home pay, and not exceeding 10 percent if the car is pre-owned.
Budget for maintenance and other vehicle related expenses
Beyond your down payment and monthly payment, there are other factors to take into consideration.
David DiNardo, president and CEO at financial advising company Envolta, says the biggest mistake most first-time buyers make is forgetting to save up for expenses that come after the purchase.
“The cost of insurance, repairs, parking, and of course, gas, can sometimes add up to the cost of the price that you paid for your car, but in a single calendar year,” DiNardo said. “These aren’t just a one-time expense, they’re annual, which is why you’ll often see these young drivers have to give up their new car after only a year or two of ownership.”
Taking these less obvious costs into consideration will help you determine how much you can afford to pay.
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 monthly car payment.
Next, it’s time to make sure you are saving enough money every month to meet your savings goal. That could require you to tweak your spending habits. Chances are there are opportunities to make spending cuts. While it’s easy to say and hard to do, keep your savings goal in mind as a motivator.
“If you want to get a handle on your spending, every time you go to buy something you don’t need, think about your car and how long it’s taking you to save,” said Phoebe Griffits, marketing and public relationship manager at KIS Finance. “Think, ‘it’s either this jumper or another $30 toward my car.’ It’s surprising how well this tactic works.”
Where you park your savings is also important.
With a little research, you’ll find that there are a lot of different savings accounts out there with varying interest rates. The best savings accounts pay around 1.85 percent APY and higher. Picking an account with a higher yield will help you accumulate money a little faster.
You may also 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.
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.
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.
Consider buying a pre-owned car
If the price of a new car is out of reach, consider buying a used one.
“The biggest mistake is buying a brand new car, as the deprecation is the highest on a new car,” said Ethan Taub, CEO of the personal finance site Goalry. “As you’re driving it off the forecourt, it loses about $3,000-$5,000 immediately.
He recommends looking for a car around ten years old, but shopping around to find one with low mileage. “As these cars will have as much wear and tear on them as a car three or four years newer, you have a relatively equal car but for a cheaper price,” Taub says.