If you’re on the hunt for a car, your finances might be lagging behind. Saving for a car — any car — requires extra cash you may not have right now.
How to save money for a car depends on what type of car you want, what you can afford to pay, and how much extra cash (and time) you can dedicate to the cause. Regardless, there are some basic things to be aware of and to take action on.
Saving for a down payment on a car can be overwhelming, but it doesn’t have to be. Here’s what you need to know about how to save for a car, whether that means an outright buy of an older car or cash needed for a down payment.
How much money should you save for a car?
This is usually answered by how much car you want. The cost difference between new and used is big. The average cost of a used car is $20,000, while the average cost of a new car is $32,000. The difference in cost, along with your budget and what you earn, might determine what kind of car you’re able to afford.
Whether you decide to go new or used, you’ll also need to determine if you’ll be financing your car with an auto loan or not. Taking out an auto loan means your credit score will get pulled, and your credit score will become a major factor in calculating the interest rate for your loan. The more money you have for a down payment, though, the less you’ll need to borrow through an auto loan.
If you have a car to trade in, that can also help. A car trade-in offsets how much money you’ll owe toward your new car by deducting the value of your old car. The more your current car is worth and the less your new car costs, the less money you will need to finance.
Having a general idea of what kind of car you’ll be buying can help you plan your savings. Come up with a few models or brands you’re interested in and a price range you can afford. Use that information as a guide for creating your down-payment savings goal.
How to save for a car
Before you head to the dealership, you’ll want to have your financing plan in place. That means taking the time to get your down payment in order and adjusting your budget for your likely new monthly payment.
How do you do this? Here are some simple steps to follow:
1. Set a goal for your down-payment money
The larger your down payment, the less your monthly payments will be. Therefore, down payments can be a big deal in your financing. Once you know the car you want and what you’d like your monthly payment to be, you’ll have an idea of how much down payment to save.
Then tally how much cash you have on hand. Look at what’s in your bank accounts and the value of your current car if you’re going to use it as a trade-in. Based on all that, set a specific goal for how much money you need to save. This could range from a couple hundred bucks to thousands, depending on what car you’ll be purchasing.
2. Set your monthly budget
Take a look at your monthly expenses and your typical monthly income. Subtract your essential expenses — like food, housing, and utilities — from how much money you earn each month. You can also set aside some money for fun, but make sure it’s a reasonable amount.
Whatever money you have leftover is potentially what you could put aside for your car savings. In the future, this is also likely to be the money that covers your monthly auto loan payment. If you have any other savings goals or are building an emergency fund, it would also come out of this money.
With all that in mind, determine what is reasonable for you to set aside for your car each month. Choose an amount you can stick to without it being so painful that you’re tempted to ditch your budget.
3. Calculate your timeline
Now you know:
- How much you need to either purchase your car outright or have for your down payment
- How much of your monthly budget you can put aside for this savings project
If you divide that first bullet point by the second, you’ll know how long it will take you to hit your goal. For example, if you need $6,000 for your car and you can put aside $200 per month, it will take you 30 months to reach that savings goal.
Unhappy with your timeline? Try to make adjustments elsewhere in your budget or change your idea about the car you should have. A less-expensive car might be a more-fitting goal.
Also remember that when buying a car, the dealer will check your credit score. Try to have your credit in the best possible shape before buying. Check your reports and clean up any errors. The better your credit score, the lower your interest rate will be. Use the time when you’re saving up for your car to also get your credit score in order.
4. Open a savings account
Start your dedicated car savings by opening a high-yield savings account. Many of these have low or no minimum balances, so you can easily get started, even if you don’t currently have much cash. These high-yield savings accounts — like the Ally Online Savings Account and Barclays Online Savings Account — offer higher-than-normal interest rate returns, often 2% or more, so you can increase your savings or reach your car savings goal sooner.
5. Automate your car savings
You can set up autopayments from your checking account every time you get paid so you’re always adding more money to your car savings. Sometimes it’s hard to think about setting aside money once you get your paycheck, but it’s the best way to ensure you’re saving. Instead of feeling tempted to spend your money elsewhere (or just plain forgetting to save), you’re making sure the money for your car is put aside first.
6. Get a side gig
Your day job might only cover your basic necessities, and saving for a car may not be viable. Or you may want to buy your car sooner than later. If either of those sounds like you, consider starting a side hustle or starting passive income streams to help save up your down payment and then make your monthly payments for your car.
If you’re a writer, designer, or web developer, try finding clients and building a freelance business. If you’re handy at custom goods, try selling your one-of-a-kind things through an ecommerce site. Start driving people around through ridesharing apps. Let your home earn you money by listing for rent a room online. Use your free time to earn some money that goes straight to your car savings.
Get your car
Once you’ve got enough money to pay for your car outright or for your down payment, it’s time to head to the dealership. If you have a current car to trade in, make sure you use that as leverage for your down payment. Or, to maximize what you can get for your old car, you may consider selling your car first through a private sale before buying your new one.
Saving for a car might take longer than you think, but the process is simple: See how much you need to save for the car you want, calculate how much you need to put aside each month, and start putting that money into savings first before buying anything else. Saving for a car just one way to learn how to manage your money.
Don’t let the car-buying process scare you. Once you have your finances in order, you’ll do great.