How to Save Money For a Car - The Full Guide
When you pass your driver's test, you will often do so in an old banger that belonged to one of your parents. It is rare for people to buy a brand-new car before they pass their driver’s test, and this is what makes buying your first new car truly special. That feeling of buying a new car (whether it is brand new, or new-to-you) never really goes away, no matter whether you are buying your first car, or your fifth car.
But, there is one negative thing that is commonly associated with buying a new car, and that is the cost of it. Cars are not cheap, and until you decide to buy one, you don’t really appreciate just how expensive they are.
A lot of people dream of paying cash for their car, but without saving up, this generally is not possible. That is why so many people end up turning to car finance. However, if you can save money to buy a car, this is always the best option. So, what is the best way to save money for a car?
In this guide, we’ll be taking a look at how to save money for a car, and why you should do this instead of using car finance. So, to find out, keep on reading.
Also read: How to Have Multiple Streams of Income
Should You Save Money For a Car?
In an ideal world, yes, you should always aim to save money for a car. Where possible, it is best to pay cash for most large purchases because it means that you will not be relying on credit. However, a lot of the time this is not possible. Cars are not cheap, especially if you are looking to buy a new car. This is why a lot of people tend to buy cars using finance. But, this isn’t the best choice.
Yes, cars are expensive, but they are a lot less expensive than houses. So, while you will likely need a mortgage to pay for your home, you should be able to save enough money to pay cash for a car. If you can do this, then your credit score will not be negatively affected by the purchase of that car. Likewise, you will not get in any debt for that car. So, when you pay for the car, it is completely yours.
Saving for a car can seem like a daunting prospect, and it is not always possible. Especially if you end up needing to buy a new car urgently. However, if you are planning on buying a new car, it is best to save the money for yourself. But, how much should you be looking to save? Let’s take a look.
Also read: How Many Savings Accounts Should I Have?
How Much Money Should You Save For a Car?
Ultimately, the amount of money that you should save in order to buy a car will depend on the car that you want to buy. Cars vary greatly in value, and things such as the make, model, and age of the car will have a big impact on the amount that you should expect to pay for the car that you are looking to buy.
Some people choose to create a car savings fund without having a make or model of car in mind. This is very common among people who have second hand cars that could break down at any point. In this case, the ‘car fund’ works similarly to a sink fund. So, they will add money to a savings account until it reaches a certain figure. This figure can then be used to purchase a new car when they need one. Typically, people will aim to save around 10% of their annual income to go in this car fund.
Alternatively, if you have a specific car in mind, then you can do your own research to find the average cost of these cars. Once you have a figure, then you can aim to save this. There are lots of budgeting methods that you can use to save this figure, such as the 50 30 20 rule. But, it is still recommended that you spend no more than 10% of your annual income on your vehicle.
Also read: Make a Budget in Excel
How to Save Money for a Car
There are two ways that you can save for a car. You can either save the money to buy the car outright, or you can save the deposit for the car and still use car finance. Most of the time, you will only be able to buy the car outright if you are buying a new-to-you car. Whereas, if you are buying a brand-new car, it is almost impossible to save the full amount. So, car finance will be the better option.
No matter whether you are looking to save the full amount for your car, or simply the deposit, you will still have to use budgeting methods to save that money. With that in mind, let’s take a look at the best ways to save money for your car. Generally, you have two options. You can either use a targeted saving method, or a general budgeting tool.
You will use targeted saving if you have a specific car in mind that you want to buy. With this make, model, and age in mind you will be able to find out the average cost for one of these vehicles. Once you have this figure, you can then set a savings goal for it.
If you are looking to buy a brand-new car, then you can easily find out the cost of a deposit for one of these vehicles by speaking to a dealer. Once you have this figure, you should then set a goal for when you want to buy that car. If you want to buy that car in 6 months, then you should divide the cost of the deposit by 6. This will tell you how much you have to save each month in order to afford the deposit for that car.
Alternatively, if you are looking to buy a new-to-you car, then you will need to calculate the average cost for the manufacturer, model, and age of car that you want to buy. To do this, it is worth speaking to used car dealers, and researching on the internet. Once you have calculated the average cost, you can then divide that by the number of months until you want to buy that car. Save this a month, and then you will be able to buy your new car when you want to.
Alternatively, if you are just saving money for a ‘car fund’ then you might choose to use general saving to do this. As we said earlier, you shouldn’t expect to spend more than 10% of your annual income on a car. So, if you can save this across a year, then you will have a substantial car fund.
One of the best methods for this is the 50 30 20 rule. This rule states that you spend 50% of your income on needs, 30% on wants, and 20% on savings. If you contribute 10% of the 20% savings to a car fund, then at the end of the year you will have more than enough money to buy yourself a new car.
Also read: 7 Best Ways To Invest Money Wisely
In short, the best way to save money for a car is to figure out how much you want to save, and then set a target for your savings goal. You can then divide the amount that you need to save by the number of months until your goal. If you save the correct amount of money a month, you will end up with more than enough money to buy yourself a new car at the end of the period. This method works for saving the full amount for a car, but also for saving a car deposit too.
Also check out our pay stub generator where you can generate pay stubs so they can be printed and used.