How To Save For A Car: A Complete 6-Step Guide

With prices for new and used cars historically high, figuring out how to save for a car can be challenging.

According to Kelley Blue Book per NPR, the average price for a new car was $48,763 as of March, while a used vehicle was costing an average of $26,510. Experts largely attribute the high prices to the post COVID-19 supply chain and automakers focusing on their more expensive models.

For car buyers, it’s important to start saving long before you plan to buy your next – or first – car. With this in mind, here’s what we’ll explore in this article:

1. Understand The Total Cost Of Car Ownership

As tempting as it might be to focus almost entirely on a car’s cost, aka the purchase price, it’s important to look deeper into the total cost of ownership.

For example, a base model Tesla Model 3 electric vehicle (EV) priced at $39,999 has a total cost of ownership similar to a Toyota Camry priced at around $25,000. The electric car requires less maintenance, uses cheaper energy and qualifies for government incentives. The Model 3 has a total cost of ownership of 49 cents per mile, while the Camry costs approximately 46 cents per mile.

Below are some additional costs to consider when shopping for your next car.

Car Insurance

Some cars cost more than others to insure. A car’s price influences its insurance costs, and the same is true for the vehicle’s age, safety ratings and likelihood of being stolen.

The driver also matters. Age, credit history and previous driving violations might affect auto insurance premiums. You may be able to find ways to save money on car insurance, even with a new vehicle.

Maintenance

It’s smart to consider routine and unexpected maintenance that a warranty or special deals may not cover. Most vehicles need oil changes at regular intervals and require maintenance when they reach certain milestones. These expenses can add up, especially for major checks at 60,000 or 100,000 miles.

Fuel Or Electricity

Gas prices have been volatile in recent years, with prices in California reaching a national high of $5.36 per gallon, on average, in September 2023. Charging costs vary for EVs. Some charging stations offer free electricity, but you’ll pay more at some fast-charging stations than you would for an equivalent amount of gas.

You’ll need to consider your driving habits, the efficiency of your car and the cost of energy to estimate how much you should budget to keep your car moving. You may also want to consider the cost of installing an EV charger at home.

Parking

In some areas, you may need to pay to park at home or at work. In Boston, for example, parking in a lot close to City Hall can cost nearly $500 per month. Depending on where you live, parking can have a major impact on the cost of the car.

Incentives

The federal government and some state governments provide incentives for vehicles that use clean energy. The Inflation Reduction Act of 2022 offers significant tax credits for certain battery-electric vehicles, while incentives vary widely at the state level.

These incentives can impact the cost of having a car.

Sales Tax And Registration

As with insurance, many factors are involved in taxes and the cost to register a vehicle. Sales tax varies by municipality, so some savvy car shoppers may buy from dealerships in cities with lower tax rates.

Some states have a flat fee for registration. Other states may consider the car’s value, weight, age, fuel efficiency and even horsepower.

2. Decide Whether To Lease Or Buy

If you’re short on cash, leasing a vehicle can be appealing. Leasing can also be a good option for drivers regularly craving new vehicles or seeking emerging technology. Those who lease, though, often face mileage restrictions.

If you can afford a car down payment and have a good credit score, an auto loan frees you from mileage restrictions.

If you have enough money to pay fully in cash, you’ll be able to skip paying interest, too.

3. Calculate A Down Payment, Loan Amount And Monthly Payment

Once you know the total cost of ownership and whether you’re leasing or buying, you can consider a down payment and monthly car payments. This is a good time to create a monthly budget if you don’t already have one.

Car research website Edmunds.com recommends keeping your car payments at no more than 15% of your take-home pay. Keep that in mind when determining the price range of the right car for you.

Generally, a larger upfront payment will require a smaller car loan amount. That, in turn, can result in lower monthly loan payments or a shorter loan term. Some experts recommend a down payment covering 20% of the vehicle price.

Your credit score will also matter to lenders, so it’s best to make sure you’re paying your other bills on time. Staying current on your debt payments can help you land a better interest rate that will save you money over the life of the car loan.

4. Create A Savings Goal

Some experts recommend creating a separate bank account for your new car fund. You can even automate your finances to automatically deposit money into that account rather than your checking account. Also consider any expenses you can trim. Monthly subscriptions and memberships are great places to cut your monthly expenses and improve your personal finances.

Your bank may have automated solutions for adding funds to your car savings account. Some third-party apps may also be worth considering.

5. Sell Or Trade Your Current Car

If you already have a car, you also have a potential source of funds for a decent down payment. Those who want to maximize their funds often opt to sell their vehicle.

Meanwhile, those who prioritize convenience may trade their vehicle in. Typically, drivers get less for their vehicle as part of a trade-in. A dealership may also be less flexible on vehicle price when a trade is involved, but the dealer will usually handle any paperwork and legal requirements that come with selling a car, making it easier on you.

6. Negotiate A Price For Your Car Purchase

Factors to consider when negotiating the purchase of a car include your credit score, whether you’re financing or paying cash, where you’re getting your loan and the popularity of the model you’re buying.

Fortunately, resources like the Kelley Blue Book can help you research the vehicle you want to buy. It’s possible to compare purchase prices of similar vehicles and check inventory at nearby dealerships. You can also get dealerships to bid for your business.

For those who don’t like negotiating, many dealers offer “no haggle” pricing. You may not get the best deal, but this may be the most stress-free option.

FAQs: Saving For A Car

Here are questions people often ask about saving for a car.

How much money should I save for a car?

The amount you need to save for a car depends on your budget and income. Rather than a dollar figure, consider starting with a percentage of your monthly income. Car research website Edmunds.com recommends keeping your car payments at or below 15% of your monthly take-home pay.

What is the best way to save for a car?

While there are plenty of tried and true ways to save money, here are the best ways to save for a car:

• Open a car savings account. If your savings goal is a large enough sum of money, it makes sense to create a dedicated account just for this. That way, you can easily track your progress and save for a car without pulling from your emergency fund.
• Automate your savings. When you have a dedicated car savings account, you can automate a portion of your paycheck to go to your car fund. With a little bit of math, you can enjoy the satisfaction of knowing the date you’ll meet your goal. As you make extra contributions to your fund, you may even meet your goal ahead of schedule.

How much should I save before looking at a car?

A down payment of 20% is considered a solid savings goal. If you save even more for your down payment, you could save even more on monthly payments and interest. In addition to your down payment, be sure to include maintenance and a cushion for emergencies in your savings. Also remember to factor in the value of your old car if you plan to trade that in – you can put that money toward your new car.

How long should it take to save up for a car?

The longer you save, the more money you might have for a down payment. Once you hit the 20% that many car experts recommend for a down payment, you’re likely ready to start car shopping.

The Bottom Line: Your Vehicle Choice And Financial Situation Impact How Much To Save For A Car

The car buying process should begin with evaluating your needs and your finances. Start with the total cost of ownership and decide whether to lease or buy. From there, it’s all about finding the best loan and lowest purchase price.

Need help saving for a car? Download the Rocket Money℠ app today to automate your savings and eliminate costly subscriptions.