Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.
Saving for a car is really not a heck of a lot different than saving for any big purchase—be it a dream vacation, a wedding, or a home of your own. It takes discipline to accomplish the first and most important principle of saving for anything: managing to spend a little less than you earn.
Questions to ask yourself before saving for a car
A little straight talk before we get to the brass tacks of saving for that car of yours. There are two super important questions you should ask yourself before you endeavor to save for a car:
Are you carrying significant credit card debt?
If the answer is yes, you should devote your savings to eliminating it before you begin to save for anything. Doubt that debt can ruin your life? Read this chilling account of a real couple who spent themselves into a 24/7 waking debt nightmare.
Do you have an emergency fund?
What happens if you fall ill or lose your job? Do you have three to six months of expenses tucked away somewhere safe to cover the period you won't be earning money? If the answer is no, considering devoting all your savings to creating one before moving on to a car. Many credit nightmares begin with an unforeseen event that will force a person to start living on plastic. It's a deathtrap.
How to save up for a car
Do you have what it takes to save for a car? Of course you do! A little financial discipline will take you far.
1. Take a step back
Saving for a car requires you to pause, step back, and study your monthly purchases all at one time. Take a good hard look at both your checking account and credit card statements. And go even deeper by inspecting your grocery store receipts. Look at that handwritten bill of sale from the general store (19th-century readers only). The point is: get a big-and small picture sense of how you spend your money so you can start immediately implementing some money-saving habits.
2. Select expenses you can cut back on
A close look at your statements will likely identify lots of stuff you don't need, automatically renewing subscriptions you don't really use anymore, visits to establishments that might not have seemed expensive at the time, but really add up. Inevitably, you’ll start seeing patterns in your spending and those patterns will reveal lots of ways to save money, starting right now. Congratulations, you’re a financial analyst! Take a good look at your bank account and get rid of anything that doesn't bring you pure joy! Looking for some inspiration? You've come to the right place.
Cut the cable cord.
Pretend all Starbucks floors are made of hot lava and brew your coffee at home.
Learn to love generic brand over expensive designer brands. Are you kidding me with the Gucci shirt!
Renegotiate credit card interest rates, cell phone contracts. You'd be surprised how much companies will be willing to bend to keep your business.
3. Find a decent place for your car savings
Now that you’ve become a savings jedi, you’ll want to make sure you put your money somewhere you'll get bang for your buck. Neither of which is under your mattress non in your checking account. They might seem like handy options, but neither offer much (if any) interest or return on your money. You'll probably be best served opening a savings investment account. Generally, they provide much greater returns than the other options. And since your money is stowed away from your regular spending pot you'll be less tempted to blow your car down payment on a $1,000 tasting menu.
Be smart when buying a car
You’ve certainly heard that old saying about new cars. Sure, it’s nice to have a steering wheel that’s been un-smeared by a strangers’ boogers, a car radio that’s not already programmed to only reggaetón stations (unless reggaetón’s your thing of course). But as you’ve probably heard before, a new car will depreciate in value 10% in the month after you drive it off the lot, or as you’ve not heard for good reason, according the recent Onion headline, “Experts Caution New Car Loses 90% Of Value As Soon As You Drive It Off Cliff.” Best dad advice we can offer: buy a used car and invest in a ten dollar bottle of “new car smell” spray.
If you’re scared that you might be buying a car that was refurbished after spent a couple months at the bottom of a lake, consider an automakers Certified Pre-Owned (CPO) program in which dealers put 1-6 year old used cars with low mileage through a thorough manufacturer-specified inspection before reselling them. Just like new cars, they come with a bumper to bumper warranty that will last one or more years.
How much will you need to put down to buy a car?
If you can afford it, it’s never a bad idea to buy your car in cash in order to avoid paying any car loan interest at all, though some experts argue that if you can get a car loan with a particularly low interest rate, you might be better served financially investing the money you’d otherwise by putting into the car.
If you do finance an auto purchase, you should plan on putting down at least 20% of the car’s sale price. Buying a sweet gently used SUV for $20,000? Save up until you have at least $4,000. What’s makes that 20% figure so important? Just as with a house, banks consider those who can’t come up with 20% percent of a purchase price to be riskier bets for repaying the loan. Banks charge premiums for taking on that risk in the form of higher interest rates. It’s not smart to pay a higher interest rate on something that won’t appreciate in value. If you’re unable to come up with 20% of the purchase price, consider it the universe breaking the news to you that you can’t yet afford the car.
Whether you're saving for a car, a home, or just need some help investing for your future, Wealthsimple can help. Every Wealthsimple client gets state of the art technology, low fees and the kind of personalized, friendly service you might have not thought imaginable from a low-priced investment service.