How to save for a new car

We’ve all been there… convinced ourselves we would just “window shop” at a dealership for a new car, only to wind up sitting across from an overly enthusiastic salesperson who is spouting out all kinds of numbers and payment scenarios.

While the “just wingin’ it” strategy does ultimately get you into a new ride, it may not be your best bet if you haven’t come prepared with a clear financial picture and a decent chunk of change you’re ready to spend. Here are some steps you can take to avoid this scenario and put yourself in a stronger negotiating position.

How much should I spend on a new car?

A good starting place is estimating what you think you might spend on a vehicle by establishing some criteria and researching your top options. For example, what’s the cost for top-ranking reliability standards, fuel economy, additional passenger capacity, brand preferences, etc.

From there, you can determine how you plan to pay for your new vehicle: completely by cash, via auto loan financing, or a mix of the two. If you’re like the majority of people, you will likely need to secure some form of financing.

There are two schools of thought on how much of your income you should spend on a new car.

The rule of 36: No more than 36% of your income should go towards car payments.
No more than 15% of your take-home income should go to car expenses.

Determining these amounts, including repairs, fuel, and even tolls if you have a city commute, allows you to take into consideration if you can afford a new car or a new-to-you vehicle.

Set a down payment goal

If you’re getting an auto loan, that brings up the question of the down payment. According to Nerdwallet, you should “aim to put to put 20% down on a new vehicle and 10% down on a used vehicle.”

Keep in mind that the more money you’re able to put down, the better deal you will likely walk away with. You’re financing less and typically securing a lower interest rate and ultimately, lower monthly payments. Of course, you must also remember to factor in the additional cost of sales tax and fees, which can be a significant amount for a purchase of that magnitude.

Remember, at most dealerships, your trade-in will count towards your down payment. However, if your current car isn't paid off and you want to trade it in, you should do some quick math. Trading in a car with a remaining balance doesn't make the loan go away. If the remaining balance is higher than what the dealership is offering you, it typically doesn't make sense to make the trade.

Budget like a boss

Now that you have a goal in mind, you can put together a proper game plan. If you aren’t already on a budget, it’s time to get on one (a good practice that extends well beyond auto buying). A budget supports your finances like a foundation supports a house; it provides a basis that you can build off of and modify accordingly. Some good rules of thumb when formulating a budget are outlined in Make a Personal Budget in 6 Easy Steps from The Balance:

Gather every financial statement you can
Record all of your sources of income
Create a list of monthly expenses
Break expenses into two categories: fixed and variable
Total your monthly income and monthly expenses
Make adjustments to expenses
Review your budget monthly

If you’ve always wanted to be better at budgeting but otherwise lacked the logistical wherewithal, you can even look into automated budgeting tools (aka does the tracking for you), such as Mint.com.

Formulate a savings strategy

Once you have the building blocks in place, you’re ready to move on to the actual saving part. There are many ways to work on your savings. Here are a few ideas:

Establish a separate account for your savings. This sounds basic, but establishing a place JUST for your auto savings funds will help ensure they remain available for just that: your new car.
Automate your savings. Having a savings account is all well and good, but it won’t matter if you aren’t putting anything into it. If you’re serious about saving, an effective way to get there is by setting up automatic transfers into your account. You can typically do so through your employer by splitting up your direct deposit designations or by utilizing automatic account transfers through your financial institution.
Look for simple things you can cut. Another way to free up some cash is to take it from other places. You can do so by looking for things you can cut out — ideally, small sacrifices that won’t leave you feeling deprived and backtracking shortly thereafter. Some ideas could include cooking at home more often or canceling cable in lieu of more affordable options.
Consider a locked-in CD. If you have the time to stash away some cash, you might want to consider putting it away into a CD. Certificates of deposit typically pay a higher interest rate than savings accounts, not to mention that CDs are pretty effective at keeping you from touching your money before it matures.
Invest your savings. You’re working hard to put money away; you might as well make that money work for you. There are so many schools of thought when it comes to investing, but the important thing is to find one that works the best for your situation and you feel comfortable with. For some ideas, you can explore tips on how to invest your money for the short and long term or of course, speak to a financial advisor.

Build some new car cash flow

When it comes to setting aside for a new car, saving is key, but generating a little extra cash doesn’t hurt either. A few ideas that could help you reach your goal quicker:

Get a rewards checking account that makes you money. A checking account that offers you cash back or interest on your balance can help boost the money you have to set aside. Most of the time, you won’t pay a monthly maintenance fee, and you’ll earn significantly higher rates than with a regular checking account, which is an overall shift in a positive direction.
Sell your current vehicle or other assets. Replacing an old car? Selling it yourself or trading it in are both options that can generate funds to put toward the next car. Keep in mind that you’ll probably make more doing a private sale. However, certain risks and additional work is often associated with going that route, as compared to selling to a dealership.
Assess your value and skills. More and more people are finding ways to work from home. Consider what skills you have that you might be able to tap to raise a little extra cash in addition to your day job. Hello, Etsy!
Take on a side gig. A great way to set aside more money is to make more of it, on the regular. If you’re looking for some simple ways to boost your bottom line, you can check out these side-hustle ideas.

A car is a significant purchase. The amount of thought put into the make, model, and details when buying a new car comes easy. The time and energy invested in the financial portion of auto buying might take a little work.

Although less exciting, there is a silver lining to creating a solid saving strategy: the more you’re prepared upfront, the more attainable all the bells and whistles become in the long run.

Don't sweat it if the numbers don't add up – you can always refinance your current vehicle (yes that's an option) and put that savings plan into place to get your next vehicle wisely.

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