How to save for a car
Key takeaways
Setting a realistic budget and researching vehicles can often be a solid starting point for saving for a car.
The 20/4/10 rule may offer some guidance on how much to save, since it suggests making a 20% down payment, opening a loan with a term of four years or less, and spending up to 10% of your income on transportation needs.
You may find saving a bit easier if you try certain strategies, such as opening a dedicated savings account or using automatic transfers to help fund your car purchase.
Setting a realistic savings goal
Evaluating your needs:
It can be helpful to consider your specific transportation needs, such as whether you’ll need a small car or a larger vehicle like an SUV. It may also be helpful to determine exactly how much you are comfortable spending on a car, what monthly payment fits your budget, and whether you will be able to make a down payment.
Researching current market prices:
It may also help to do some online research after you’ve set a budget and narrowed down what type of car you’d like. Comparing features as well as current market prices could help you set a more realistic budget.
Factoring in "hidden" costs:
When saving for a car, you may want to consider budgeting for related costs like insurance, fuel, and vehicle maintenance.
If you’re saving for a car or other large purchase, opening a high-yield savings account may help move you toward your financial goals. Exploring the Raisin platform will let you compare competitive rates in one place.
Developing a monthly savings plan
Calculating your timeline
Once you’ve estimated how much you’re comfortable spending, it can also be helpful to calculate the amount of time it will take you to save up for the car. Some people may prefer to save enough money for just the down payment while others may prefer to save money for the down payment as well as several months’ worth of loan payments. The option you choose will typically depend on your specific financial situation and goals.
The 20/4/10 rule
If you’re unsure how much to save, you may find it useful to consider the 20/4/10 rule. This is a guideline that suggests making a 20% down payment and obtaining a loan term that lasts no longer than four years. It also suggests aiming for a monthly transportation spend of no more than 10% of your income.
Adjusting your budget
If possible, you may want to review your existing budget to determine if you have any “extra” income that could be allocated toward saving for a car.
Strategic ways to build your fund
Opening a dedicated savings account
Some people may find that opening a dedicated savings account for a car purchase may be helpful in reaching their savings goal.
Automating transfers
Automatically transferring money into a savings account, either by direct deposit or through your bank, may be another helpful tool in reaching your goal.
Utilizing trade-in value
It may be possible to trade in your current vehicle with a car dealer. Depending on your current car’s value, that can help trim some of the cost from buying a new car.
New vs. used: Which fits your budget?
Assessing depreciation
New cars tend to depreciate by about 20% during the first year of ownership, with another 60% depreciation possible in five years of ownership. Used cars also experience a loss in value over time, but their depreciation rate may be slower than a new car.
Maintenance expectations
When saving for a car, it can be helpful to factor in estimated maintenance costs, whether you’re buying new or used. New cars may not have high repair expenses at first, but factoring in maintenance costs like oil changes can be helpful in setting a budget. New or leased cars may also come with a warranty that could cover some repair and maintenance costs. Depending on the history of a used car, maintenance costs might run slightly higher than new cars.
Improving your buying position
Strengthening your credit profile
Saving for a car may mean saving money to use for monthly payments on a car loan. Building or maintaining a solid credit history could mean more favorable loan terms, so it can be a good idea to review your credit habits. Striving to make at least the minimum payments on time on existing debt and managing credit utilization rates may be helpful ways to build your credit profile.
Aiming for a larger down payment
Saving up to make a larger down payment could help you obtain more favorable loan terms. It may also mean a lower monthly payment, and it could mean paying less interest since a larger down payment generally reduces the amount of the loan needed.
Bottom line
There are a variety of things to consider when saving up for a new car. Whether you choose to buy a new or used car, there are also a few ways to potentially make saving for the purchase a bit easier. If you’re planning to open a dedicated savings account, the Raisin platform can help you compare, fund, and manage multiple high-yield savings products at once.
Frequently asked questions
Is it better to pay cash or finance a car?
It isn’t necessarily better or worse to pay cash or finance a car purchase. This decision will depend on each buyer’s financial situation.
How much should I save for a down payment?
Different lenders may have different requirements for down payments. The 20/4/10 rule could be a starting point with its suggestion to make a 20% down payment.
Can I save for a car with a low income?
It can be helpful at many income levels to review your budget and trim expenses or reallocate extra money to your car savings fund. Setting a realistic budget based on your financial picture can be helpful in determining how much to save based on your income.
The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
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