How to save for a car in five easy steps

Follow these five steps to save for your next car.

Buying a car is one of the most important transactions that most consumers make in their lives. You can buy a car in cash or decide to finance it. But in either case, saving for a car in advance is essential. Even if you plan to get a car loan, saving for the down payment will help you keep the debt to a minimum. This guide offers simple strategies to generate savings to buy a vehicle directly or generate a substantial down payment before starting to buy.

Step 1: Decide what type of car you want.

Before you start saving for a car, it’s a good idea to set a goal for how much you need. I know from experience that I get what I propose when I have an exact plan in writing, with start and end dates. You are 42% more likely to achieve your goals if you write them down [1].

First of all, ask yourself if you want a second-hand car or a new one. To find the prices of a new car, you can go to the manufacturer’s website or to a local dealership to see its offers. Keep in mind that the prices in those ads are usually for a single car, and yours will probably be a different model with different equipment and, therefore, another price (probably higher).

For second-hand cars, see sites such as Kelly Blue Book [ING] or Edmunds [ING]. They have lists of cars dating back to the early 1990s. If you want to buy a classic or old vehicle built before 1990, you can visit Hagerty [ING]. When you are in those places, make sure you have the exact brand, model, and options to get the most accurate price.

Once you have the purchase price of the vehicle you want, you can go to step 2 to determine how much you need to save.

Step 2: Evaluate how much you need to save to buy a car.

Depending on the price of the vehicle you want to buy and your budget, you have to decide if you want to give an advance and finance the rest or pay for the car in full.

Whatever method you choose, you will have to plan how much money you need to save to achieve your goal. Let’s look at the two possibilities to see the advantages and disadvantages of both.

Pay in full.

Paying in full is great because you will not have any additional debt and there will be no monthly obligations, but it can mean having to settle for an older car. Having to pay for a modest but more reliable vehicle (new or used) could be the best choice for you.

Even if you are going to pay the cost of the car in full, you will have to create a budget and make regular “payments” while saving. But at least these payments go directly to you, so there are no interest charges. Remember that you will have to pay taxes and other fees when buying the car. Add about 10% to the cost of the vehicle to take this value into account.

If you are going to pay in full, take the total price of the car, plus taxes and fees, and divide it by the number of months you are willing to wait to get it. This sets your monthly savings goal.

For example, suppose you want to buy a $5,000 used car. With the estimated taxes and fees, it would be $5,500 in total that I would have to pay. If you plan to buy the car in a year, you would need to save at least $458 a month to reach that goal.

Financing of the purchase

Car financing adds debt to your income statement. But as long as you manage the debt effectively, it could be good for your finances, even if the cost is higher. Making regular payments on a guaranteed loan (an auto loan is a guaranteed loan) and then paying it in full will improve your credit rating.

Furthermore, you may be able to purchase a car of a later model that has better mileage and is safer.However, you will be obliged to pay that monthly fee for quite a few years, and you have to make sure that you can make the payments.

According to credit experts, the initial payment must be 20% in the case of a new car and about 10% in the case of a used car [2], so you can use that as a guide to plan the amount you need to save. For example, if you want to buy a new car that costs $25,000, you must make a down payment of at least $5,000. If you want to buy the car in six months, that means that you need to save at least $416 a month to reach that goal.

That said, it may be a good idea to look at the overall picture when it comes to financing before deciding how much you need for your down payment. You may be interested in putting more money down to be able to get better financing and monthly payments that better fit your budget. Here’s how to do it:

Pay attention to the factors affecting your loan.

Some of the important factors that influence monthly payments are the down payment and the credit score [ING]. The approval of loans is also based on the relationship between debt and income. The debt-income ratio (DIR) compares how much you owe each month with what you earn. The lower that relationship, the more likely it is to be approved for a new loan. The lender will calculate the DTI taking into account the new payments, so, in general, it is advisable that the DTI be around 36% before submitting the application.

You may want to consider paying off your debt before applying for a loan.

Check your credit rating.

Before determining the amount you should contribute, you should know how much your monthly payments will amount to. Make sure your credit score is good, or at least that it is improving. You can get free credit scores from services such as Credit Karma . Keep in mind that this type of service may not give you the score that the car lender is going to see, but at least you can get an estimate to see what situation you are in.

It is important to know your credit score because it will affect the interest rate of your loan. In turn, that will affect your monthly payments. This table provides the estimated interest rates you can expect to pay on new and used cars depending on your credit score: [3]

Decide on your monthly fee and calculate the initial payment.

Once you know the price of the car and what your credit rating is, you can use an auto loan calculator to see what your monthly payment will be and thus determine how much you want to save for the initial payment.

You can reduce monthly payments to fit your budget by putting more money into the loan, or you can reduce the down payment amount you need as long as you can afford higher monthly payments. Don’t forget to add additional fees and taxes when using the calculator. As with the full payment, you can expect the rates to add 10% to your total cost when financing.

Now that you know how much you need to save, it’s time to have a little fiscal discipline.

Step 3: Set a monthly savings goal for the car.

The next step is to set a monthly savings goal. Simply take the cost you have determined in step 2 and divide it by the time you have before you want to buy. In this way, you will get the minimum amount you must save each month to reach your goal. Now you just have to figure out how to achieve that goal every month. These tips can help you:

• Limit your unnecessary expenses.
• Start examining your shopping habits and remember to ask yourself the next time you buy something: “Do I need this item, or can I put the money in my savings account?” Try to turn this into a habit so that you begin to question each spending decision.
• Make a budget and stick to it.

The more you can save, the faster you can buy the car. And although your monthly goal may seem like a lot to save, remember that once you have the vehicle, you will have to cover the monthly payments of the car loan, unless you buy it directly. Therefore, setting an aggressive savings goal can help you get used to what you will pay once you get the loan.

Consider creating a specific savings account.

Whether you are going to pay the entire loan or if you are going to save for the down payment, you should open a specific savings account. This is especially true if you discover that you have problems not spending the money you save in your usual savings account. Applications such as Qapital [ING] can be useful tools to save money for specific objectives.

Automate your savings.

You can automate the savings process by automatically transferring from your main bank account to the account where you are saving for your car. This will teach you not to forget to put money in savings and will train you for the day you have your first monthly payment. When that happens, you will not have to adjust your budget at that time because you will have already put it into practice.

Just make sure to stop the automatic transfer to savings and set the automatic payment for the car instead. In this way, you are much less likely to feel overwhelmed by finances and stop paying off your loan or other debts.

Keep saving

You can continue with the good habit of saving automatically every month even after buying your new vehicle. It makes no difference whether you paid cash or financed.Set aside a little money every month in your savings account for the car. Essentially, you are creating an account for a down payment in the future and for any emergency repairs.

Step 4: Use motivation to achieve your goal.

Most of us need reminders and motivation to achieve our goals. We need to remind ourselves how important the goal is and what will happen when we achieve it. Setting goals, having visual reminders, and having experiences can all help you stay motivated.

Enjoy a birthday or a holiday.

Set the date. The objectives need dates and goals. You must write down the amount you must have in your account on a specific date and, finally, when you will make the purchase. Birthdays and festivities are great times to set goals.

Use images of your car to get motivated.

Take a screenshot of the car and put it on your phone, tablet, or laptop. Every time you use one of your devices, it will remind you of your goal. There are also some “goals” applications that offer you a countdown timer. The time to reach your goal will come sooner than you think.

Try a car

Another step to making your dream come true is to sit in the car and take a test drive. Consider the day you will purchase the car.Think about that feeling when you put extra money in that account and decide not to spend money on other things.

Step 5: Earn extra money.

In addition to your usual salary and constant deposits into your savings accounts, look for other ways to get extra money that you can dedicate to this goal.

Bring the money that you have.

Don’t limit yourself to automatic deposits; when you have plenty of cash, also put it in your account. The more money you have in your account, the better. If you don’t use that entire account for the down payment, having an emergency fund is a very smart policy. This practice prepares you to be a saver.

Look for a second job.

If you want to increase your savings account for the car, consider looking for a parallel job or an “extra” one and saving all the money obtained.

Sell personal items that you don’t need.

If you have outdated technology, you can also sell it in applications like LetGo or Gazelle [ING].Look for objects that you no longer use, clothes that you no longer wear, and items that have been too small for children.

Work overtime

In addition to working in parallel and selling things you don’t need, consider working more hours. If your work offers overtime, you can take advantage of it. Again, be sure to keep the extra money in your account and not spend it.

Other steps you must take to save for a car

Find your lender.

Establish tax relations with a bank or a credit union, or with other financial lenders. Check if your company has a credit union or if it can join one. Check if your credit card company offers loans. Talk to some banks in your area. While saving, work to improve your credit rating, especially if you have bad credit. Even if you don’t finance it, insurance can be 100% more expensive if you have bad credit [4].

Repair your credit

While you save for your car, or even before, start working to repair your credit. The better your credit score, the better the interest rate and the conditions of any loan. Even if you don’t take a loan, you could find considerable savings with your insurance. Credit repair is the process of reviewing your credit reports and eliminating errors that affect your credit score. Before applying for any loan, you should review your credit reports. You can repair your credit for free.

Paying debts

The faster you can pay off your debts, the more you can save to buy a car. If you have a lot of debt, you can consider paying it off before buying your next vehicle. After paying each debt, take the money you save and add it to your savings account for the car.

The payment of debts will improve your debt-to-income ratio, which will make it easier for you to approve a car loan if you plan to finance the purchase. In general, lenders will ask for a DTI index of 36% or higher. If it is above that percentage, the loan could cost you more due to the higher interest rates.

Paying renewable debts, such as those from credit cards, will also improve your credit score. In fact, an important factor in your credit score is how much you owe on your credit card accounts. Your credit utilization rate represents 30% of your credit score.

In addition, when you pay off your other debts, you will have more cash flow to make the payments on your car.