How should you save for a car?

Answer 1

The manner in which one saves for a car depends largely on (1) the price of the car (after negotiation), (2) how far into the future one wants to buy the car and (3) if will one use auto financing to complete the purchase.

First, the price of the car provides insight into how long one must save and the price is going to be driven largely if one is buying new or used. If one has selected a $20,000 car and believes that they can get the price down to $16,000, it will take (does not include interest earned on the savings):

60 months when saving $267 per month

48 months when saving $333 per month

36 months when saving $444 per month

24 months when saving $667 per month

12 months when saving $1,333 per month

If the price of the car after negotiation is only $5,000 then it will take:

60 months when saving $83 per month

48 months when saving $104 per month

36 months when saving $139 per month

24 months when saving $208 per month

12 months when saving $417 per month

Now, to determine what you can afford per month, one must create a budget which clearly shows the required spend (e.g., rent/mortgage, electricity, groceries) and the discretionary spend (e.g., buying music, going out on the town, etc.). From the discretionary spend, one will have an idea of what they can afford to save (and must trade off with what they want to buy).

Once one has decided to embark on a savings program, the amount to be saved is now REQUIRED spend and may not be used for discretionary activities. With that amount, one may also determine the number of months it will take to save enough by dividing the negotiated price of the car by the amount saved per month.

For example, using the $5,000 example above, if one can save $250 per month, it will only take 20 months for one to save enough to purchase the car.

Finally, should one finance the vehicle or not. When financing a vehicle, lenders like to see at least 25% of the price as a down payment for new cars and 40% of the price as a down payment for used cars. If you have good credit and are comfortable with a car payment (not everyone likes to use loans to finance their needs/wants), perhaps financing the vehicle makes sense.

SO, with the $16,000 car example above, assuming it is a new car (requiring a down payment of 25%), one would need to save $4,000. If one can save $250 per month, one would be able to buy that car in 16 months.

For the $5,000 example, assuming it is a used car (requiring a down payment of 40%), one would need to save $2,000. If one can save $250 per month, one would be able to buy the car in 8 months.

Remember, also, to budget for car insurance, gasoline and maintenance on the vehicle after one has purchased the vehicle.