How Much Should You Save for a New Car?

You’ve decided that a new car is in the near future.

And, you’re making the sensible move to save up for it.

The next part:

Actually building your savings for the next car purchase.

Find out how you should plan out your savings plan for this particularly big purchase — so that you don’t have to go into (too much) debt for it.

How Much Do You Need to Save?

This is a tricky question to answer because it depends on what you’re looking for in your next car and how you intend to pay for it.

New vs. used

The fact is:

New cars will cost more used cars.

If you’re going with a brand new vehicle, you’ll want a savings goal with a larger target amount.

But, while used cars are relatively cheaper, they can still be pricey if you’re considering luxury brands and/or more expensive models.

Pay in full vs. financing vs. leasing

After you’ve narrowed down the price for your next car, you have to think about how you want to pay for it.

Obviously:

When you plan to put up all the cash upfront to pay for the car in full, you have a clear savings target.

Commendably, this route also means that you don’t have to worry about incurring any debt or any restrictive leasings terms.

Now:

If you want to apply for a car loan to finance your purchase, your main goal would be to save up for a down payment.

Conventionally, for a new car, you’d want to have a down payment of 20 percent of the car price.

For a used car, a 10 percent down payment should be the minimum. However, if you want to lower your monthly payments, do your best to save up for a bigger down payment.

Finally:

If you’re leasing the new car, the typical down payment is a few thousand dollars.

But, you may qualify for special deals with zero down payment.

You still have to pay fees and taxes.

More importantly, you have to be able to manage the monthly payments to come. With savings, you have a buffer to ensure that you’re able to make these monthly payments.

Your current car

Remember to include any value that you can extract from your existing vehicle.

Can you sell it for a good amount?

Even if you’ve got an absolute beater with 200,000 miles on the engine, your old car could still fetch a few hundred dollars when you send it to the scrapyard.

When Do You Plan to Buy Your Car?

With the foresight to begin saving for a new car, you might already have an idea of when you expect to ditch your old car for a new one.

Take this time frame to help you determine how much you should save every month to hit your target savings goal on time.

Divide the required amount to be saved by the months until you plan to buy the new car.

Here are some examples based on how you plan to pay for the car and various car prices:

Pay in full

With the goal of avoiding debt and paying for the entire car in cash, you may have to put more into savings. But, the rewards is a debt-free car.

Used car price: $6,000

  • 12 months – Monthly savings goal of $500
  • 24 months – Monthly savings goal of $250
  • 36 months – Monthly savings goal of $167

Budget new car price: $18,000

  • 12 months – Monthly savings goal of $1,500
  • 24 months – Monthly savings goal of $750
  • 36 months – Monthly savings goal of $500

Mid-sized new car price: $32,000

  • 12 months – Monthly savings goal of $2,667
  • 24 months – Monthly savings goal of $1,334
  • 36 months – Monthly savings goal of $889

Luxury new car price: $55,000

  • 12 months – Monthly savings goal of $4,584
  • 24 months – Monthly savings goal of $2,292
  • 36 months – Monthly savings goal of $1,528

Car loan

With a car loan, you want to aim for the 20 percent down payment target as a minimum (exception is the used car, which we use the 10 percent down payment amount).

If you can save more for a bigger down payment, again, it can help reduce monthly payments (and total interest paid).

Used car price: $6,000 ($600 down payment)

  • 12 months – Monthly savings goal of $50
  • 24 months – Monthly savings goal of $25
  • 36 months – Monthly savings goal of $17

Budget new car price: $18,000 ($3,600 down payment)

  • 12 months – Monthly savings goal of $300
  • 24 months – Monthly savings goal of $150
  • 36 months – Monthly savings goal of $100

Mid-sized new car price: $32,000 ($6,400 down payment)

  • 12 months – Monthly savings goal of $534
  • 24 months – Monthly savings goal of $267
  • 36 months – Monthly savings goal of $178

Luxury new car price: $55,000 ($11,000 down payment)

  • 12 months – Monthly savings goal of $917
  • 24 months – Monthly savings goal of $459
  • 36 months – Monthly savings goal of $306

Leasing

The difference between leasing and buying a car can be major when it comes to how much you need to save to get the car in your possession.

Rather than list monthly savings goals for various kinds of vehicles, we’ll simply use fixed down payment amounts.

$1,000 down payment

  • 12 months – Monthly savings goal of $84
  • 24 months – Monthly savings goal of $42
  • 36 months – Monthly savings goal of $28

$2,000 down payment

  • 12 months – Monthly savings goal of $167
  • 24 months – Monthly savings goal of $84
  • 36 months – Monthly savings goal of $56

$3,000 down payment

  • 12 months – Monthly savings goal of $250
  • 24 months – Monthly savings goal of $125
  • 36 months – Monthly savings goal of $84

If you find that the monthly savings goals are not achievable by your income, you might have to live with the fact that your income simply cannot afford the car that you want.

Where to Build Your Savings

Sure:

You can use any regular savings account to build up your savings.

But, they’re not the best option.

A typical savings account from a big bank may come with the potential of a monthly fee. And, the interest rate is likely to pay close to nothing on your savings.

Rather, an online bank — and an online savings account — is a better choice.

Most online savings accounts don’t have any monthly fees.

The best part:

Their interest rates are among the highest that you can get anywhere.

Once you’re done using an online savings account to save up for a new car, it is good enough to keep around for your next major savings goals (such as a wedding, vacation, or home down payment).

How to Save Effortlessly

With a savings goal in mind and a savings account to help you accomplish it, it’s time to build your balance in time for the new car purchase.

There are two recommended methods to do this with as little work as possible:

Split direct deposit

Your employer may allow you to split your paycheck so that part of it goes directly to a different bank account.

Set up a partial direct deposit to your online savings account so that you never see the money in the first place.

That way, you don’t miss it.

Recurring fund transfers

Another popular savings method is to configure a recurring fund transfer that will take money out of your checking account (or any other bank account) and move it to your savings account.

Again, you don’t have to do anything yourself so you can rest assured that you’re slowly working towards the savings for the car.

Conclusion

Many factors go into the calculation of how much you need to save up for a car.

This procedure will assist in narrowing down your options.

When you finally come up with a rough estimate, you can focus on the part that requires the most diligence — saving.

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