While there’s no doubt that buying a new car is exciting, it’s also a potential risk for your budget. Overspending on a car can leave you burdened with years of hefty payments and high interest costs, leaving you less room to reach other financial goals.
This guide will help you learn how to save for a car. This way, you can hit the road with confidence, without draining your bank account.
Need help creating a personalized savings plan? Contact the team at ARQ Wealth by calling (480) 214-9572 for one-on-one guidance tailored to your financial goals.
Determine What Kind of Car You Need
The first step in your car purchase journey is to determine what type of vehicle best suits your lifestyle. Determining this will make it much easier to narrow down what car you ultimately want to buy.
There are two main types of vehicles:
- Sedans: Smaller, passenger cars designed for comfortable on-road driving and gas efficiency.
- SUVs: Larger, higher-riding vehicles built for versatility, typically offering more cargo space, elevated ground clearance, and often optional all-wheel or four-wheel drive.
Sedans tend to be a bit cheaper than SUVs, both in terms of initial purchase price and ongoing maintenance costs.
If you are interested in being as cost-efficient as possible with your purchase, you’ll likely want to go with a sedan. But if additional space is a necessity, then an SUV is likely best for you.
Figure Out if You Want to Buy, Finance, or Lease
There are three primary ways to structure your vehicle purchase. These include:
- Buying Outright: Paying for the entire cost of the car upfront, usually in cash from your savings. Buying outright means you’ll own the vehicle immediately and will have no monthly car payments, interest, or lender to worry about. But it also means you’ll have to save up more money.
- Financing: Taking out a car loan to pay for the vehicle over time, typically with interest. You’ll usually make a partial payment (known as a down payment) upfront and then make monthly payments until the loan is paid off, at which point the car is officially yours.
- Leasing: Essentially “renting” the car for a set period (usually one to three years) while making monthly payments. You don’t own the vehicle, but you can often choose to return it, upgrade, or buy it at the end of the lease term.
All three strategies have different benefits and drawbacks. For example, buying outright can help you save money in interest payments, but it also requires more cash upfront.
Financing can help you buy a vehicle in better condition, which could save you money in potential repair costs. But it also means you’ll have to commit to having a monthly payment for several years.
Meanwhile, leasing is usually the best option if car ownership isn’t important to you, such as if you want to upgrade vehicles every few years. But the major downside is that you’ll always have a monthly payment.
Should I buy a new or used car? If you don’t want a monthly payment, then you’ll likely want to buy a used car, which tends to be much more affordable. If you’re set on owning a new car, then you’ll likely need to finance the purchase and prepare for several years of having a monthly payment.
Establish Your Budget
Before you start scrolling through car listings, you’ll need to determine what you can comfortably afford.
This step is fairly straightforward if you’re planning to buy the vehicle in full. You can essentially afford as much as you can save, since you won’t have to worry about ongoing loan payments eating into your budget. We’ll discuss savings strategies in the next section.
If you’re planning to finance the vehicle, determining your budget is a bit more complicated.
- The 10% Rule: Experts recommend spending no more than 10% of your monthly take-home pay on your car payment.
- The 15% to 20% Rule: Experts recommend spending no more than 15% to 20% on your total car costs, including gas, insurance, and maintenance.
If your income is $5,000 per month, that means your car payment should be roughly $500 per month or less, and your total car budget should be roughly $750 to $1,000. From here, you can use a car calculator to determine your budget.
Based on your income of $5,000, your car payment should be about $500 per month. This means that you can afford a car worth roughly $32,000. However, there are two other factors to consider:
- Loan term: How long you’ll have to repay the loan
- Interest rate: How expensive the loan is
- Down payment: How much you pay initially
Again, playing around with an auto loan calculator is a great way to learn how all of these factors work together. You can also contact the team at ARQ Wealth Advisors for more personalized advice.
Establish and Commit to a Savings Plan
Once you know your approximate budget for a car, it’s time to start saving.
Again, if you’re buying the car outright, then you know exactly how much to save. For example, if you’re buying a $10,000 car, then you’ll need to save $10,000, plus sales tax and any other closing costs.
If you’re planning to finance the car, then you’ll only need to save your down payment.
How much should my down payment be? Experts recommend putting at least 10% down on a used car or 20% on a new car. As a general rule, the larger your down payment, the better off your budget will be in the long run.
So how do you start saving? The key is to automate your savings to stay consistent.
Step 1: Set a Target and Timeline
Decide how much money you need to save and when you want to buy your car. Then, determine how much you need to save per month.
For example, if you want to save $6,000 in 12 months, you’ll need to save $500 per month or about $115 per week.
Step 2: Automate Your Savings
The second step is to open up a separate account that can act as your “car savings fund” and set up an automated transfer. While this step isn’t 100% necessary, it’s usually helpful for two reasons:
- Removing Temptation: The automated transfer helps ensure that you’re contributing to your car fund before you get tempted to spend your entire paycheck. Having two separate accounts also helps reduce your desire to dip into your car fund when times are tight.
- Simplifying Your Finances: Separating your funds also makes it much easier to tell how much is in your fund and how much more you still need to save.
If your current savings account isn’t earning much interest, you may want to explore a high-yield savings account or even a short-term investment vehicle. ARQ Wealth can help you explore low-risk investment options that can grow your money faster while keeping it accessible.
Step 3: Be Prepared to Cut Some Expenses
To reach your savings goal, you may need to clear out some room in your budget. This usually means cutting down on other expenses to help make room for your weekly or monthly savings commitment. Here are a few easy places to start:
- Canceling unused subscriptions
- Cooking at home 1 to 2 extra nights per week
- Downgrading your streaming or phone plans
Redirecting small expenses like these to your car fund can help reduce the amount of time that it takes to reach your savings goal.
Next Steps: Put Your Car Savings Strategy in Motion
Saving for a car isn’t just about setting money aside. It’s about creating a plan that protects your wallet long after you drive off the lot. Saving for a car boils down to four basic steps:
- Determine the kind of car that you want
- Figure out if you want to buy outright, finance, or lease
- Establish your budget
- Establish and commit to a savings plan
By determining what kind of vehicle fits your lifestyle, weighing the pros and cons of buying, financing, or leasing, and creating a consistent savings plan, you can make your purchase confidently and responsibly.
Whether you’re saving for your first car or upgrading to your next one, a thoughtful approach today can help you avoid costly mistakes tomorrow.
Ready to map out your car savings plan? Contact ARQ Wealth Advisors today to build a personalized strategy that fits your goals, lifestyle, and budget.