How to Save for a Car

Owning a car is an exhilarating experience indeed, especially if it’s your first car. One thing that most first-time car buyers fail to understand is that purchasing a car requires planning. The best way to plan for a new car is to start saving. But how do you save for your dream car? This article will explain the basics of long-term savings and how to save for a car.

Why Save for a Car?

If you’re a first-time car buyer who plans to purchase a car soon, it’s important to start saving today. This is because buying a car is an expensive affair. You’re likely going to spend several thousands of dollars on a brand new car. Many people, even those with a well-paying job, find it difficult to come up with that much money at once. That’s also the reason equated monthly installments (EMIs) and loans are so popular. These give you access to a large sum of cash within a short period.

But both EMIs and loans come with hefty interest rates. These can substantially increase the total car price by 10% to 15%. Unless you’re okay with paying extra, you should start saving as early as possible. By the time you’re finally ready to purchase your dream car, you’ll have the cash or at least 75% of the total car value.

Know Your Wants and Needs

Before you start saving, there’s another thing you need to consider — why are you buying a car? Do you want a car for your work commute? Do you plan to go on a road trip? Do you like going to the countryside and need a vehicle to make those trips?

Each of these cases will call for a different car. Hatchbacks are ideal for the everyday commute, while SUVs and minivans are what you should be buying if you’re planning a road trip.

Your needs can be even more granular. Do you need the safest car on the road? Or do you want the fastest?  How about the most fuel-efficient?

Answer these questions first and pick a car model based on your answers. This exercise will also help you gain clarity on the price range.

5 Steps to Save for Your Dream Car

Saving to buy a car is not rocket science. It’s not even proper science. In fact, it’s common sense and a little bit of dedication. There are a few steps you need to take to start saving from today onwards. Over time, these will return great rewards and satisfaction. Those steps are:

Calculate the Total Car Price

The first thing you need to do is calculate the price of the car. Please note that the car price shown on the brochure or website is not the car’s actual price. That is the MSRP or Manufacturer’s Suggested Retail Price. Also known as the sticker price, this is the selling price suggested by the car manufacturers.

Then there’s the invoice price. This is the price that the dealerships pay to the manufacturer. Often, this is higher than the MSRP. This depends on what additional services the dealership offers or the demand for that particular model. The invoice price is not the price you pay, either. Dealers make money by keeping the amount after paying off the invoice amount.

When considering purchasing a car, you should know about both these prices. This will let you have a realistic idea of how much to save. You’ll also benefit when negotiating for a better price.

Therefore, you should research and calculate the market value of the car.

Calculate the Down Payment

There are two options for buying a brand new car. You can either pay the amount in full or get a loan. If you’re planning for the former, then the down payment is zero. If you opt for taking out a loan, then the down payment is the cost you pay to the car dealership. While taking out a loan is discouraged, a mix of a high down payment and a small loan is ideal.

You can pay somewhere between 20% and 80% of the car price as a down payment. The rest is converted into a loan. Since loans come with interest rates, you need to calculate this to arrive at the car’s total cost.

You should talk to multiple banks before finalizing your loan amount. If you’re lucky enough, you can find a loan that charges zero interest. Just pay the rest of the car’s amount and claim full ownership of the car. At times, dealerships can also help in finding a financier for your needs.

Decide When You’ll Be Buying the Car

Once you’ve determined the price of the car and if you’ll be using a loan, you need to decide when to buy the car. Keep in mind that car prices change from time to time. Thus, by the time you are ready to buy the car, the price might have increased. Or it may also have gone down; the demand and competition from other brands drive the car price.

If you don’t want to deviate too much from your set total, then you’d aim for a shorter time frame. If that’s not really a concern, you can set a longer time frame.

Set a Monthly Savings Goal

To successfully accumulate enough cash to buy your dream car, you need to stick to a monthly goal. You need to formulate a plan and follow it for several months in a row. This may be as simple as, “I’ll be setting aside 20% of my paycheck for savings.” You can keep these in a savings account to earn interest on your account balance. This will further increase your amount by the time you’re ready to purchase a car.

Dedicate Yourself to the Savings Plan

It’s important to meet the goal every month. This also means being strict with your spending habits and lifestyle. Tracking expenses is also a good option. Many apps help you track your expenses. You should limit unnecessary spending and focus on increasing the savings percentage if possible.

But it’s also important not to go too hard on the savings. It shouldn’t affect your everyday lifestyle to a point where you’re suffering.

Conclusion

Buying a car is a responsibility. After you’ve bought the car, you must also plan for its maintenance and everyday expenses. At the end of the day, every dollar saved will benefit you in the future.

Frank Gogol

I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.

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