Is it time to buy a new car?
The average price of a new car now costs about $40,000. It’s a big reason why people are turning to loans that last seven years. By that time, you could end up with a car with little value and still owe thousands of dollars on the loan.
Even the cost of a used car is creeping up because of high demand. People want to buy a used car during the pandemic rather than take public transportation.
You’ll need to set a short-term financial goal to offset the high purchase price of the car. How do you do that and save money for a new car?
Read on to find out what your financial options are when you’re saving for your next car.
The First Car Buying Decisions
You have a few decisions to make early in the car-buying process. Do you want to buy a new car or a used car? Is your plan to have some money set aside to cover the down payment and then finance the rest?
That will impact how much money you need to save. You also need to decide what type of car you want to buy. A hybrid might cost a little more than a compact car, but you’ll save on maintenance and fuel costs.
Buying a new car is a good thing because you know what you’re getting. You won’t need to spend a lot on maintenance and repairs for the first few years.
Set Your Savings Goal
Once you have an idea as to what type of car you want, you can set your savings goal. A good goal to set is 20% of the purchase price of the car.
You’ll be able to save a lot on interest by saving that much. Don’t forget to factor in your trade-in, too. That will lower the amount of money that you need. The other option is to save up about 20% in addition to the trade-in.
You also have to take into account your current credit score. A high credit score works in your favor. You can get a higher loan amount at a lower interest rate.
A low credit score can be enough for banks to turn you down for a loan. You’ll need to save more money for the car purchase or get a loan for low credit scores that have astronomically high interest rates.
Take the amount that you need and divide it by the number of months you have to save for your car.
For example, if you’re getting a car that costs $18,000 and you want to save 20%, then you need to save $3,600. If you’re planning on buying that car in six months, you need to set aside $600 a month.
Adjust Your Budget
Let’s take a close look at your budget. You have to begin to look at how much you earn now, how much you spend each month, and where that money goes.
If you’re like many Americans, you don’t have much leftover at the end of each month to save. That’s OK, you just need to take a look at creative ways to shift your spending and/or earn more money.
How much do you spend on cable? The average bill is over $200 a month. You can take a big step towards your savings goal by cutting the cord and streaming your favorite programs.
You can find ways to earn more money. You can pick up a side gig selling art, writing, or doing graphic design. That’s a simple way to bring in more income.
Create a Car Savings Account
The easiest way to save for a car is to create a separate bank account. This way, it becomes much harder to spend the money you save on other things.
Every time you get paid, set aside a certain percentage of your check to your savings account. That ensures you meet your savings goal.
Make Saving Money Easy
There are ways to make saving money even easier. You can sign up for a finance app that helps you save money. Some apps will take your spare change and put it into savings.
Here’s what that looks like. You make a purchase on your debit card for $5.10. The app rounds up the purchase to $6.00 and deposits the remaining $.90 in savings.
If you make a lot of purchases on your debit card, this is a great way to supplement your savings plan and reach your short-term financial goal faster.
There may be times during your savings plan where you get an unexpected bonus or money. You may have had a big tax refund. Whenever you have an unexpected windfall of money, put it aside into your savings account.
Track Your Progress
Each month, you should check to see how well you did with your plan. You might find that you’ve been able to stick with it very well.
You could have had an unexpected medical bill that threw you off. Don’t give up, you can recover from that and still reach your goal. You just might have to reassess your budget and make some changes.
Reach Your Short-Term Financial Goal
Buying a car is expensive. If you want to cut down on the loan amount or pay for the car in full, you need to have enough in savings to make it happen.
It’s tough to set a short-term financial goal when you’re barely getting by each month. It’s possible but you need to create a plan and stick with it. You might find that it’s easier to reach your goal to buy a used car or to have enough money down for a smaller car.
Check out the Finance section of this site for more tips to help you reach your financial goals.