Buying a car is a big financial move for most people—especially if you're aiming for something new. Chances are, you're not going to walk in and make the entire purchase in cash, like you might with a less expensive item.
So how do you save for a new car, how much should you save and what's the process? Here, we outline the key steps to follow.
1. Decide on Your Budget
How much cash do you have now, and how much can you save before you need to make the purchase? How much can you budget for monthly payments and other costs? You might have a dream vehicle in mind, but before you start choosing a color, it's a good idea to set a realistic budget and make sure you can afford it.
Start by gathering the following numbers:
- • Any cash you currently have saved that you want to allocate to your car purchase
- • The trade-in value of your current vehicle, if you have one and intend to sell it
- • How much per month you will need to pay for car-related costs, in addition to loan payments. Think about gas or charging, insurance, maintenance, parking and anything else that might apply to your situation. If you own a car that you'll be replacing, these amounts might already be part of your budget—but remember that costs might be different for a different type of vehicle.
- • How much per month you will be able to allocate to car loan payments
- • The estimated cost for other car-related items you might have to buy, such as winter tires, wiper fluid and the contents of a roadside emergency kit
- • Interest rates for any sales tax that will apply to your purchase and for the car loan you expect to get
Once you have these numbers, you can start playing with a car loan calculator and car affordability calculator to see what price range you're aiming for. Experiment with larger and smaller down payments to see how that affects your loan payments and total interest paid. Think about how these additional monthly costs will affect your budget and quality of life.
At the end of this step, you should have a good understanding of the relevant numbers and of how much you can afford—and how much you need to save to get it.
READ MORE: 3 Strategies to Create Realistic Savings Goals
2. Choose Your Purchase Method
There are a few different ways to purchase a car:
- • Outright with cash savings
- • A combination of savings and financing
- • Entirely financing
- • Leasing
Many people choose to lease a car rather than buy one. This essentially means renting the car from the leasing company for a monthly fee and a set time frame, usually with the option to buy it for a certain price at the end of the term. Leasing is generally cheaper per month, but the car isn't actually yours. Purchasing tends to cost more per month, but you end up owning the vehicle. The right choice for you depends on your personal financial situation.
If you do choose to buy, the next question is whether you buy outright, and if not, how much of a down payment to put toward the purchase. The higher the down payment, the less you'll have to pay in monthly payments—and in interest. Some experts suggest putting down at least 20% of the purchase price, but there's no reason you can't go higher than that with the right savings strategy—or even purchase your car outright. A bit of patience now could mean lower loan payments later, which will free up more of your income for other costs.
3. Start Saving
Once you have your down payment goal in mind, it's time to start setting cash aside. How long it will take depends on your savings goal and the amount of money you can save each month.
Assess your budget and look for ways you can cut back on other costs while you save for a car. It's a bit of a trade-off: The more you can cut back, the quicker you'll reach your savings target. Think of this as an excuse to temporarily swap the things on which you tend to spend disposable income—maybe it's concerts, dining out, vacations or clothing—for inexpensive or free alternatives like hiking, at-home movie nights or finally learning how to cook your favorite cuisine.
Now, decide where you're going to put your down payment fund. High yield savings accounts are a good option, as they offer a competitive interest rate and the flexibility to access your money whenever you need it. Vivid Crest Bank 's high yield savings accounts are FDIC-insured, which means that in addition to getting a good rate, you can save risk-free.
Next, figure out how you're going to save. Where is the extra cash actually going to come from, and how will you make sure you put it in your savings account rather than spending it?
One smart strategy is to automate your savings. This means setting up your accounts so that money automatically moves into your savings account at specific times, like weekly or after each paycheck. It's a convenient "set it and forget it" tool that helps you save without having to think about it.
4. Plan for Your Purchase
If you're planning to borrow money, it's worth putting in some effort to get the best interest rate possible. Now's the time to shop around for the car loan that works best for you.
Then, get set up to make the actual purchase. Find out what documents you need and how the money will get from your savings account to the loan company, and from them to the car dealership. Also get set up for insurance and anything else you need when you drive away with your new car.
5. Enjoy Your New Ride
Congratulations on your purchase! Now it's time to enjoy it. To keep things within your budget, read these tips to save money on gas and these suggestions on DIY car maintenance.
And don't forget to keep your emergency fund at full capacity in case of an accident or other unexpected car-related costs. Vivid Crest Bank 's high yield savings account is a great place to do this, as you'll earn better-than-average interest in an online account that you can manage from just about anywhere, with an ATM card that lets you access your funds quickly when you need them.
Kat Tancock is a freelance writer who never gets tired of the thrill of earning interest on savings.
READ MORE: Personal Finance 101: Personal Loans