How to Save for a Car and Still Have Enough Cash to Fill Your Tank

Tina Russell/The Penny Hoarder

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 the past 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 if you want to buy a car: pay outright with cash or take out a loan.

Those options become more difficult if you’re in college, don’t earn much or have no savings.

Whether you need a car immediately or have a few months to save, planning ahead to figure out your price range and vehicle choice will save you from going broke or falling victim to a sneaky salesperson.

How Much Can You Afford to Spend on a Car?

Knowing is half the battle. Once you pinpoint how much you can afford, you know what to save. Follow these steps.

Figure Out Your Basic Budget

Calculate all your basic monthly expenses. These include your rent or mortgage, utilities, phone bill, credit card or 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

Total: $860

Left over: $640

Jane’s car budget is not $640. It will be considerably less than that.

Remember, you might have to fork over extra funds for taxes and tag, title and dealer fees on top of other expenses like insurance premiums, gas, maintenance and repairs.

Also, Jane needs to eat, but her grocery bill is flexible, which we’ll discuss in the last section.

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.

Questions to consider include:

  • Do you want a compact, sedan, van, truck or SUV?
  • Are you planning on purchasing new or used?
  • 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, stick 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. These estimates will allow you to set savings and financing goals.

New vs. Used Car: Decide Which Works for You

There’s value in buying a new car, 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. 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.

Calculating the True Cost of Owning a Car

Now that you know what is affordable, it’s time to calculate down payments, monthly payments and associated costs.

Thankfully, the internet has tons of resources to help you come up with an estimate.

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 a buffer to allow for these initial expenses.

Calculating Your Monthly Car Payments

If you put $600 down, you will finance $5,400 into a series of monthly payments. The most common 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 discuss in the next section.

For a $6,000 loan with a 4.74% interest rate over 48 months, a $600 down payment, no trade-in and 7% sales tax, the monthly payment would be $133.

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 credit union, bank or other lending company. These could be especially helpful if you finance an older used car.  

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 safety features. There’s a maze of options when deciding on car insurance coverage, but you can shop around and get free quotes to get the best deal.

Gas prices fluctuate wildly, but you can approximate what you’ll need weekly and leave wiggle room for the go-go juice on your budget.

If you buy used, try to a get a warranty or maintenance plan. If this isn’t an option, set aside money each month to maintain your vehicle and be prepared for an unexpected repair.

All of your monthly car related expenses combined — payment, insurance, gas, maintenance — shouldn’t exceed 10% to 15% of your take-home income.

What’s Your Current Car Worth?

If you have a car to trade-in, it is an asset. It lowers the sale price, financing and monthly payments.

To find out the trade-in value of your current vehicle, you can have it appraised online so you know what to expect if you trade it directly with a dealer.

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.

How to Save Up for a 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.

Cut Back on Your Expenses

Think about wants versus needs, and use that to guide you on what you can forgo as you save up.

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

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 that amount to your account every month, if not more.

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 you’ll have the comfort of knowing you’re covered.

Having goals will help you limit your excess spending. There’s no penalty to paying off your loans early, but there’s also no need to go broke by being too ambitious.

So just focus. 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 staff writer at The Penny Hoarder. After her recent purchase, she hopes to not buy a car for another 14 years.


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