I knew my old Nissan Altima was failing when I couldn’t turn on the air conditioning. And again when it shut off at a red light.
After patching each problem only to be stranded by another, I finally gave up on it.
I didn’t have the money for a new car yet, so I started saving and rode my bike or carpooled in the meantime.
I was carless for months.
I hadn’t purchased a vehicle since 2004, so I was a bit indecisive on what to buy and what I needed. So I spent a few months saving, researching and planning until the time was right to buy the 2018 Kia Sorento I had my eye on.
If you’re in a similar situation, you pretty much have two options: pay for the car outright with cash or take out a loan.
How to Save Money for a Car in 6 Steps
Whether you need a car immediately or have a few months to save money, planning ahead will save you from going broke or falling victim to a sneaky salesperson. Follow these six steps.
1. Figure Out How Much Can You Afford to Spend
Knowing is half the battle. Once you pinpoint how much you can afford, you’ll know what to save.
Calculate all your basic monthly expenses. These include your rent or mortgage, utilities, phone bill, credit card and student loan payments, and insurance. Do not include extras like cable, groceries or gym memberships.
What do you have left over? This is the working number that you’ll use to figure out what you can reasonably afford for a monthly loan payment or how much you need to save toward a one-time purchase.
Example: Jane makes $1,500 a month, or $18,000 a year. Her basic monthly expenses are:
- Rent: $500
- Utilities (water, electric, gas, internet): $200
- Phone: $60
- Credit card: $100
Left over: $640
Jane’s car budget is not $640. It will be considerably less than that.
Remember, she will need to fork over extra funds for expenses like insurance premiums, gas, maintenance and repairs.
Jane also needs to eat and will likely have other expenses. We’ll discuss how to cut down on those variable costs in the last step.
2. Determine What Kind of Car You Want
We all want cars that run, but zeroing in on the right car for you will help give you a target budget.
Some questions to consider when buying a car include:
- Do you want a compact, sedan, van, truck or SUV?
- Will you use it for work, travel or school?
- What features are important, and which can you live without?
Be honest with yourself. If you make $18,000 a year, stay within your means and skip the Lexus.
Once you nail down what car you’re purchasing, you can look up the fair purchase price for new and used cars through Kelley Blue Book.
3. Decide if You Want a New or Used Car
There’s value in buying a car that’s brand new, from warranties and lower interest rates to the comfort of knowing the true vehicle history.
But new cars are expensive and depreciate relatively quickly, and they often come with higher insurance premiums. Plus, you’ll be strapped to monthly payments that go on for years before you can officially own your car. Not everyone can afford this commitment.
Ain’t no shame in going the used route, either.
Lower monthly payments, insurance premiums and registration costs might make buying a used car more appealing. And if you save up, you can purchase a used car in one shot.
But if you buy a car without a warranty, you may pay extra for maintenance and repair costs. Know what compromises you’re willing to make ahead of time.
4. Calculate the True Cost of Owning a Car
Now that you know what is affordable, it’s time to calculate down payments, monthly payments (if you’re financing) and associated costs.
How Much to Put Down on a Car
The general rule for how much to put down on a car is 10% of the sale price for a used car and 20% for a new car.
If the used car you have your eye on costs $6,000, that means you should put down at least $600. For a $20,000 new car, plan to pay at least $4,000 upfront.
Remember: There will be fees for tags and title, so give your down payment savings a buffer to allow for these initial expenses.
Calculating Your Monthly Car Payments
If you put $600 down on a $6,000 car, you will finance $5,400 into a series of monthly payments. The most common auto loan terms are 36, 48 or 60 months.
Use an online auto loan calculator to estimate your monthly payments. These can vary based on sales tax, interest rates and the trade-in value of your old car, which we’ll discuss in the next section.
For a $5,400 loan with a 5.15% interest rate and 7% sales tax over 48 months, your monthly payment would be $134.
Using the Jane example above, we know that she can afford this payment with her current income.
Loans can be secured from a dealership but also from a bank, credit union or other lending company. Credit unions and smaller lending companies could be especially helpful if you finance an older used car, because larger banks often won’t finance a car that’s more than 10 years old.
Budgeting for Additional Car Expenses
Recurring costs like insurance, gas and maintenance are mandatory if you want those four wheels to go anywhere.
Insurance premiums vary depending on make, model, year, location, driving history and the car’s safety features. There’s a maze of options when deciding on car insurance coverage, but you can shop around and get free quotes to find the best deal.
Gas prices fluctuate wildly, but you can approximate what you’ll need weekly and leave wiggle room in your budget for the go-go juice.
If you buy used, consider a warranty or maintenance plan. They’ll cover the costs of certain repairs or service jobs, depending on your specific warranty or plan. You can purchase one from the car dealership or a third-party vendor.
If this isn’t an option, set money aside each month to maintain your vehicle, and be prepared for an unexpected repair. Patrice Banks, auto mechanic and founder of Girls Auto Clinic, recommends car owners save about $100 per month if their vehicle has over 100,000 miles on it.
All of your monthly car related expenses combined — loan payment, insurance, gas, maintenance — shouldn’t exceed 10% to 15% of your take-home income.
5. Evaluate Your Current Car’s Worth
If you have a car to trade in, it is an asset. The value of that car will lower the sale price — and your monthly payments if you’re buying a car with a loan.
Every little bit you can take off the sale price counts.
Another option might be to sell it yourself locally or use a third-party service like Peddle. Save that cash toward your down payment, or add it to the car repair emergency fund.
6. Save Up for Your Car
Remember when I said, “Knowing is half the battle”? Well, doing is the other half.
If you really want a car, you’re going to have to make sacrifices and commit to saving money. Here are some ways to get started.
Cut Back on Your Expenses
Think about wants versus needs to decide what you can forgo as you save money. A few ideas:
- Consider cutting out that gym membership and using the great outdoors for your exercise.
- Limit your streaming subscription services.
- Start doing your own nails.
- Stick with the essentials when you grocery shop, and avoid splurge items, eating out and ordering in.
Don’t tighten your straps too hard, or else you’ll be headed for a binge. An occasional treat to reward yourself is deserved — just don’t lose sight of your goal. Small changes in your spending habits will make your car fund grow rapidly and keep you committed to saving.
Earn Extra Income
As Penny Hoarders, we’re well-versed in getting that side hustle on. Of course, you might be limited without a car, but there are plenty of opportunities to make money by working from home, selling your stuff or finding nearby gigs in your city.
Every little bit counts; just $20 here and there can add up when it’s time to buy.
Use a Savings Account
Between cutting back on expenses and earning extra income, you’ll have to store that money somewhere, preferably out of reach. Use or open a savings account, and regularly contribute to it.
If you know what you can comfortably afford for a car payment, start adding at least that amount to your account every month. Trick yourself into saving by setting up automatic transfers to a savings account, or use a budget savings app that will do all the work for you.
Stick to Your Savings Goals
Staying disciplined makes things easier. It’ll be a tough adjustment at first, but it gets exciting to watch your savings tick upward, and having goals will help you limit your excess spending.
Just focus and be diligent about saving up for your next set of wheels. Skipping the budget and savings plan will put the brakes on your car-buying intentions, and all Jane, you and me want is to cruise on that open road.
Stephanie Bolling is a former staff writer at The Penny Hoarder. After her recent purchase, she hopes to not buy a car for another 14 years.
Senior Writer Nicole Dow contributed to this post.