How to save for a car
I’m not afraid to say I drive a 13 year old car. It’s a 2004 Ford Territory that I absolutely love driving, and while it’s getting on in age, I’m proud to say I have owned it outright since the day I bought it over 6 years ago.
Unfortunately my car is ageing, and while it still drives well, that won’t last forever. On top of the age thing, my car also costs me a small fortune in petrol, and now that we are occasionally using it to tow our caravan it’s becoming even more of a problem. We have started to have conversations about upgrading my car in the not too distant future, and it got me thinking about how we will finance our next car. I’m not a fan of taking out loans to buy cars, so I thought I would share my tips on how to save for a car, and avoiding paying out a car loan for years to come.
There are 3 things you should always keep in mind when buying a car:
- Avoid buying new if you can – Buying a new car is the quickest way to basically throw away your money. A new car will lose around half it’s value in the first few years of it’s life. Can you really afford to say goodbye to around $10,000 a year, with only a depreciating car to show for it?
- Never finance something that depreciates in value – Cars will always go down in value from the minute they are sold. So it makes zero sense to take out a loan for something that isn’t even worth what you paid for it after a year. It’s not a great position to be in when you owe more for something than what it’s currently worth.
- Always save up and pay cash for cars – Can’t afford to buy that nice car without taking out a loan? Then the reality is you can’t afford the car. Either keep saving, or search for something that you can afford to buy with cash.
Set a goal
Before you go any further, set yourself a goal. If you have decided on a certain car, then do little research and work out how much that car will cost you, which will become your savings goal. If you haven’t yet decided on a model of car, decide how much you are willing to spend. Just keep it realistic. It’s going to take a very long time to save for an $80,000 car on a $50,000 income.
Now that you have your goal, it’s time to start saving.
Open a ‘car savings’ account
Since you are saving this money for a specific purpose, it’s a great idea to keep it separate to the rest of your savings. Open an online account specifically for your car fund, or better yet if you have an offset account attached to your mortgage, see if you can add another offset account. That way you can still keep your car savings separate, while also reducing the interest payable on your mortgage.
Assess your budget
Next, you need to determine exactly how much you can afford to put towards you car fund every month. Take a look at your budget and decide on an amount you feel comfortable taking from the savings section of your budget to be redirected to your car fund.
Don’t have a budget? Follow our tips on how to create a simple budget.
Find extra cash
Now that you have decided how much you are going to spend on a ‘new to you’ car, and how much you can put towards your car fund each month, how long is it going to take you to buy that car? If it’s longer than you would have liked, it’s time to start temporarily cutting down on other areas of your budget to redirect that money toward your car fund.
The easiest areas to reduce your spending are eating out, entertainment, new clothes and your grocery budget. Things like eating out and entertainment are not essential expenses, so if you really wanted to boost your savings your could cut these completely from your budget, at least until you have reached your car savings goal.
Do whatever you can to avoid a car loan
I completely get how much temptation there is to ignore everything I have written above and just buy that pretty, shiny new car complete with large car loan. But do whatever you can to avoid that temptation, it’s just not worth going into debt over. Just because you can afford the few hundred dollars a month in repayments, it doesn’t mean you can afford the car.
Let’s look at an example. While it’s not an overly expensive car to buy brand new, the Toyota Corolla is the best selling car in the world. A new 2017 Corolla Ascent Sport in my area would cost brand new with no extras would cost me $24, 600. A 2012 model of the exact same car would cost me around $12,000. That means they are only worth around half the original value 5 years on.
If I had taken out a 5 year, $24,000 loan 5 years ago to buy that car brand new, I would have only just finished paying $30,300 all up for a car that is now only worth $12,000. That’s a massive loss in anyones eyes.
It takes a fair bit of dedication and hard work to save for a car, but the effect it will have on your finances is the long term is well worth it.