A car is a big purchase, regardless of if you buy new or used. And it’s not just the car that comes with it–a vehicle also comes with insurance, maintenance and repair costs.
Most of us don’t have thousands of dollars lying around for a new vehicle which means we’ll have to save up in order to afford it. We also understand the economic impact of COVID-19 has made it very difficult for many of us to put extra money away. While it may be hard to save right now, it’s okay to think about your goals for the future.
We’ve put together 10 tips to help you save money for a new car. From budgeting and determining your needs to setting your savings goal, we’ll give you everything you need to start saving effectively (and get good at it).
1. Know what you can realistically afford
Before you even start your car search, take an honest look at your financial situation. What is your monthly income? What do you spend each month on bills? How much do you have left over for extra spending?
Sit down and create a budget spreadsheet so you can see where your money is going. Track your expenses and pinpoint areas you can potentially cut down on. A good rule of thumb for spending/saving is the 50/30/20 rule.
Here’s how it works:
50% of your monthly income goes towards needs
30% of your monthly income goes towards wants
20% of your monthly income goes towards savings and debt repayment
Once you evaluate your current spending habits and structure your budget, you’ll have a better idea of what you can afford to spend on a new car.
2. Decide your must-haves in a vehicle
Take some time to write down what you absolutely need in a vehicle. You could write a list of must-haves and would-be-nice’s, if your budget allows it. Say you have four kids–guaranteed you’ll need enough space for all of them. It will 100% be a factor in your vehicle decision.
Thinking about necessary features and vehicle qualities will help you narrow down your search given what you can afford. It can also help you decide if you want to buy new or used.
3. Account for all car-related expenses
When we think about buying a car, we mostly think about the sticker price. But there are many more expenses that come with owning a vehicle.
Here are a few of them:
- Sales tax
- Winter tires
If you’d like to plan for these costs, you can add a total vehicle-expense estimation onto the sticker price of the vehicle so you can see an estimated total car cost. Building these expenses into your budget will help you plan for them as they come up in the future.
4. Plan for a down payment
Most experts will recommend you should aim to put 20% down on a new vehicle and 10% down on a used vehicle. If you’re able, putting a down payment on a vehicle can be very beneficial. It can help you qualify for a loan and even result in a lower interest rate and lower monthly payments. When you pay more up front, you’ll have less to pay off over time which means there’ll be less money coming out of your bank account each month.
If you’d like to explore different monthly payments and loan terms, you can try our Car Loan Calculator to help plan your budget.
5. Set a saving timeline
Once you’ve figured out how much money you’re working with and how much you’ll need to buy a car, set a savings goal to help you get started and keep you accountable.
6. Open a savings account
You’ve done your planning and now you’re ready to start saving! It’s a good idea to keep your money in a separate place where you can let it grow without touching it. This could be a high-interest savings account, a tax-free savings account (TFSA) or otherwise–you can choose which works best for you.
To make your life easier, you can automate your payments so a set amount is added to your vehicle fund each month. You can choose a percentage of your paycheck that you feel comfortable moving into savings and once it’s automated, you won’t even miss it.
7. Limit frivolous spending
Once you’ve created a budget and started saving, try to cut down on your wants or “fun purchases” that are not essential needs. This could be things like clothes, entertainment or dining out. If there are areas where you can cut down so you can put more into savings, it’s worth a shot.
8. Sell or trade in your current car
If you’re buying a new vehicle as an upgrade, sell or trade in your current car. When you sell, you can put the money towards a down payment for your new car. Or if you trade in your current car, that money can be put towards the purchase-price of your new car. Some dealerships may take it as a form of down payment or apply it to monthly payments, but that’s something you’ll have to confirm when you buy.
9. Save bonus paychecks
Any time extra money comes in, whether that’s a work bonus or a gift, think about putting it towards your car savings fund. If it helps you get to your goal faster, it may be worthwhile to put it towards your new vehicle.
10. Make sure you have enough money to live
Even if you want a new car, it isn’t worth it to stretch yourself too thin. The key to saving is to ensure you still have enough money to live as you are (or cut down a bit if it makes sense for you) and to save an appropriate amount given your current expenses.
It’s much easier to save money when you have a plan and these tips should help you do just that!