How to save for a car

Saving money to buy a car can make your auto purchase much more affordable and reduce the amount you'll spend on interest payments for your loan. If you're wondering how to go about saving up for your down payment, there are a few simple steps you can follow. Get started by working out your budget, then find ways to reduce your monthly spending so you can set more money aside.

Determine what you can afford to spend on a car

Before you start saving, you should figure out how much you can afford to spend on a car or SUV. A good place to begin is to take a look at your monthly budget so you know how much money you have to spare. One helpful rule to follow is to set aside 50% of your monthly income for essentials, 30% for recreation and fun, and 20% for savings. This guideline is sometimes referred to as the 50/30/20 budget.

Once you have a rough idea of how much money you have to spare each month, you can research the cost for a range of new and used cars. By using an online payment calculator, you can enter the estimated cost of your desired car and the length of the loan you'd like to have so that you can get a sense of what your monthly payment could look like.

If you're planning on taking out an auto loan to purchase a vehicle, financial experts recommend that you aim to make a 20% down payment for a new vehicle or 10% for a pre-owned car. For example, a 20% down payment for a new SUV costing $40,000 would be $8,000, while 10% of a used car costing $15,000 would be $1,500.

Making a down payment can help you secure better terms on your loan, which can translate into lower monthly payments. The end result is that you could have more money in your checking account to spend on other obligations, such as your mortgage or student loan debt.

A large down payment can also act as a safeguard against you ending up owing more money on your loan than your vehicle is worth, which is known as negative equity.

Include auto-related costs in your calculations

Another step you'll want to take before finalizing your savings goal is to consider the auto-related costs you'll have to pay. In addition to monthly loan payments, you'll have to cover insurance premiums, which can vary depending on the extent of the coverage you take out. You'll also need sufficient funds for gas costs, vehicle stickers and plates.

These auto-related costs are often overlooked, but they can quickly add up. A reasonable guide to follow is that your total auto-related spending should be between 15% and 20% of your monthly income if it's a new vehicle, or 10% to 15% if your car is pre-owned. Sticking to these guidelines can help prevent you from taking on financial obligations that you can't afford.

Decide whether leasing or buying makes the most sense

Now that you have a clearer idea of what your budget is, you can consider whether purchasing or leasing a vehicle is the best option for you. Lease agreements usually require you to make a smaller down payment than for an auto loan, and the monthly payments are generally lower.

Leasing a car comes with some restrictions, however. You'll have a limit on the number of miles you can drive each year. In addition, you won't own any part of the car when the lease agreement comes to an end. If owning a vehicle seems like the right choice for you, consider a more affordable model than your first choice—if you're concerned about fitting the costs into your monthly budget.

Once you've decided whether to buy or lease your chosen car, you should be in a position to finalize the amount of money you'll need for your down payment.

Set up a savings account

After you've determined your savings goal, it's time to begin setting aside money on a regular basis to reach it. Even if you can't spare much money each month, setting up a regular automatic transfer to a savings account is a good way to start saving. Keeping your funds in a separate account may make it less likely that you'll spend the money on other things.

If you're not planning to buy a car in the immediate future, you could put your savings in a high-interest savings account so that your funds can increase in value more rapidly.

Adjust your budget to increase your savings

To boost your savings, you can closely examine your monthly budget for areas where you can reduce spending. Returning to the 50/30/20 budget guideline we discussed earlier, you could try cutting back on some of your luxury spending so you can direct it into your savings.

You may have some spending commitments that could be postponed until you purchase a car. For instance, you may want to go on vacation with your friends in the summer. However, the best decision may be to do something together closer to home so you can put the money you'd have to spend on flights and accommodation toward your car fund. Even if you don't have future vacation plans, you can cut your monthly spending by reducing how often you go out to eat or ending some subscriptions that aren't essential for you to have.

Another way to give your budget a boost is to look for a side job. For example, you could find part-time work delivering groceries or performing online tasks.

Finally, you should aim to put any extra money you receive toward your savings goal. If you're lucky enough to secure a bonus at work or a tax return, try to avoid the temptation to spend it immediately. Instead, give your savings account a boost by depositing it there.

Trade your current vehicle

If you already own a car, another way you can add to your savings is by trading it in. You either have the option of selling your vehicle privately or agreeing on a trade-in arrangement with a dealership.

Both of these options have their own benefits. If you sell your car privately, you're likely to get a higher price than you would from a dealership. On the other hand, trade-in programs offer more convenience because you don't have to go looking for potential buyers.

Get a step closer to your dream home

Looking for the perfect home? Alliant has mortgage loan options to fit any budget.

Want to learn more about saving money? Check out these additional articles:

• Three types of savings accounts for smart savers
• How to start saving money from scratch: A beginner's guide
• 5 ways saving money can boost your mental health