Are you in the market for a new (or even used) vehicle? If you are, then you may be wondering how to save for a car? The truth is there are an endless number of ways to begin saving for your next automobile purchase. You just need to find the option that is best for you and begin developing a savings plan.
Even with historically low interest rates, saving for a car is important for one’s personal finances. Instead of rushing out to buy a new car every two or three years, try planning out your next purchase and avoid paying tons of interest.
Tips on How to Save for a Car
If you are interested in buying a new vehicle, consider using some of the tips below on how to save for a car. Each of these tips includes real-life examples of how my wife and I are planning for our next car purchase.
1 – Make a Fake Car Payment
Have you have recently paid off an older car or don’t currently have any monthly payment? If so, you could begin making a fake car payment (to yourself) every month as a way to begin saving for your next automobile. Instead of sending your payments to your lender every month, make a payment to yourself. Try investing these funds into a high interest savings account to earn a little interest on the money you are saving.
After a couple months’ time, you can quickly save up several hundred to over a thousand dollars that can be used as a down payment. This practice not only teaches you how to save for a car but also gets you in the routine of making that monthly payment (assuming you finance your new vehicle). Selling your old car your self online to companies rather than trading it in is another great way to increase the down payment on a new one.
Personal Note – My wife and I have been making a $250 monthly car payment back to ourselves for over the past year. Once we paid off our last vehicle, we kept making these payments as a way to save up for our next car purchase.
2 – How Much Can You Afford?
Before you save a single penny towards a new vehicle, you must first figure out how much you can afford. Whether you pay cash for a used car or finance a brand new car, you should have an idea on what can fit into your budget. Too many people have bought or leased brand new vehicles in which they could not afford. Don’t let this happen to you.
It is also important to note that just because you can afford something doesn’t mean you should purchase it. Make sure you are comfortable with your purchase and don’t forget gas mileage. There is no doubt that price of gas will remain high, so make sure you can afford to fill up your vehicle when it costs $5 per gallon.
Personal Note – My wife and I would love to buy a new van with our next purchase to fit our growing family. However, with the high price tag that comes with a van, we will probably opt for something a little cheaper that still fits our needs.
3 – Start a Side Hustle
This may sound obvious, but starting a side hustle or finding extra income can play an important role in saving for a car. Finding extra funds can really help to accelerate the savings process and put you one step closer to that new vehicle. If your number one goal is to figure out how to save for a car, then consider adding a temporary side hustle.
Even an extra $100 per month can go a long way towards your new vehicle.
Personal Note – My wife and I were able to pay off our last vehicle two years early by using extra income we were making. We were able to pay down our principal by allocating the couple hundred dollars I was making on various freelance activities. Since the vehicle is paid off, we are now using these money to save for a new vehicle.
The three tips listed above are actual steps that my family is currently taking to save for a new car. As mentioned before, there is an endless number of actions you could take to begin saving for a car or any other large purchase (i.e. house). Hopefully these tips serve as motivation for you to plan out a large purchase like a car and then take action on your goal.
15 thoughts on “How to Save for a Car”
If you have significant investments that are accessible and liquid, and need/want to purchase a car that you would have to finance, you can use an “asset swap” to make your interest tax deductible, at least in Canadian tax law.
1. Figure how how much you need for the car.
2. Withdraw that amount from your investments, and buy the car.
3. Take out a loan (or use a LOC) for a similar amount, and invest it in similar investments, taking care that it is clear that the borrowed funds went into this new investment.
4. Set up repayments to the loan/LOC similar to car payments, to have it paid off in 5 years or whatever time period you would have otherwise had for a car loan.
You will have the same amount invested, the same amount owed, but because the debt is carried against an investment instead of a consumer purchase, the interest is tax deductible under Canadian tax law. If your LOC is at 3% and you’re at a 33% marginal tax rate, you’ll only be paying about 2% interest in effect.
I’m sure there’s probably something similar in the US tax code.
Of course, this is only appropriate in certain circumstances, and you have to be aware of the risks — you’re effectively leveraging an investment. Other things to consider include whether the timing is appropriate to sell the original investment, whether the car purchase makes sense in the first place, etc.
Anyhow… just one other little trick that may help some people…
Very interesting idea Jon! I knew about the Smith Manoeuvre here in Canada that allows for converting your mortgage to a tax deductible loan (HELOC) but had not thought about doing the same for a vehicle purchase.
I have a fake car payment. I bought my first new car pretty recently (an A3 -woo!) because I saved like mad. Maybe a year before I bought it I realized that making a fake car payment would be easier. I didn’t save up for the A3 in just a year but I did start putting 400/mo away for the car. That went along with other savings to pay for it.
I’ve reduced to 300/mo for the next new car, which will hopefully be about 10 years away. I don’t know what to expect from inflation, but I may increase to 400/mo again if it looks grim. Or I could just buy a Scion next time around.
Anyway, the car payment is the best method I’ve found – it’s easy with automatic deposits for my paychecks from work to earmark funds, and with ING I can have any number of savings accounts. I was doing similar stuff for a house fund until we decided that buying is silly (no plans to stay here 20 years). Now it’s just general savings.
Great to see that others are interested in some of these ideas as well and have been making them work.
The fake payments are a great idea. My wife and I are nearing the end of our payments for the first car we purchased. We have 6 payments left and I CANNOT FREAKING WAIT!
The idea of making fake payments seems like a great idea to me, but to be honest I know our extra $357/mo will go towards paying down consumer debt. Need to get out of this hole first, then I will think about buying another car…which will not be new by any stretch. I like the idea of not having car payments, makes my mortgage seem so much more affordable.
Thanks for the tips!
I’d love to do the fake payment route. Right now we do a percentage of what I used to pay, but it would be a great thing to be able to increase that. Definitely will be adding more as income builds. Luckily we have no intention of getting a new car in the next 3-5 years.
Making a fake car payment is one of the best tips out there. Even if you already have a car payment, making a 2nd, smaller, fake one will help you get your next car loan-free!
Great article with some great ideas Jon! I really should have a fake car payment set up and I will probably consider doing that sometime soon!
what about buying car at 0% interest it has all the merits of fake payment to yourself. Still companies offering 0% every now and then
I think the fake payments are done to allow you to save for the next vehicle all the while your lifestyle remains the same as when you were paying for the car.
I know that I plan to drive my current car until the wheels fall off! lol I bought it on credit one model year off and although I would like a new one once I pay it off, it will be really nice not to have a car payment.
These are all great ideas, especially the ‘fake car payment’ idea. We’ve done that before and it really works.
PS Love the old car picture!
We make “fake” car payments to ourselves even though our cars are paid off. That way we’ll have a nice nest egg when the cars do kick the bucket.
We’re in the middle of looking for a new mid size SUV right now, and because we’ve been paying ourselves payments we have a nice stash of cash to use towards the vehicle – as well as being able to sell our current car to use towards the purchase. The longer you do this, the better the cars you can buy and afford!