Is buying a car on your wish list? You may be in love with the latest model sports car or need a new vehicle after a recent accident or car trouble.
If you’re in the market for a car, the buying process can feel daunting. This is especially true when your unreliable car is your primary transportation to work. If you want to get the best deal on a car that you can afford, it takes a bit of planning.
A data report from automotive marketing company V12 showed that the average person spends between 5 and 12 weeks shopping for and choosing the right vehicle. It may take even longer to prepare financially for this purchase.
How to Plan to Buy a Car
The planning process for buying a car may vary slightly depending on your situation.
1. Determine your car budget.
It’s tempting to start your new car search with the fun part: picking a make and model. Watching car reviews on YouTube and test-driving prospects is exciting! It’s not so exciting to fall in love with a car that has a payment that may be out of your current realm of financial possibility.
To begin your car purchase planning, take stock of your budget. You can do this by simply totaling your monthly income from work, government benefits, and other sources of income, and subtracting your monthly expenses. You can use this basic formula to create a personal budget:
Income – Expenses = Flexible to Spend
From here, calculate how you use your “Flexible to Spend” dollars today. If you currently have a car, take note of your current car payment. Is this amount reasonable for you to continue to pay each month? Considering the rest of your expenses and what your “Flexible to Spend” dollar amount is, you may decide that you can allocate more or fewer funds to your car payment expense.
2. Determine If you will buy outright, make payments, or lease.
Depending on your financial situation, you may have many different payment possibilities to consider. You may choose to buy a used car outright from a private seller or to buy or lease a vehicle at a dealership. You may also decide that making a substantial down payment on a car and financing the remaining balance is the best choice.
Consider the pros and cons of each scenario and keep in mind the following:
- Car warranty in case of vehicle malfunction
- Age and mileage on the car
- Cost of insurance
- Fuel economy
3. Determine the total car cost you can afford.
NerdWallet recommends spending a max of 10% of your total take-home pay on a monthly car payment. Consider that if you bring home $3,000 a month, your max car payment would reasonably be $300.
Of course, you also have to factor in your interest rate and other fees associated with buying a car. These vary based on your credit score and laws in your state. If you plan to trade in a current car, your total car cost can change as well. You can use a tool like the NerdWallet Car Affordability Calculator to determine the total car cost you can afford with greater accuracy.
4. Start saving.
It’s often easier to save when you have a particular goal in mind. For example, knowing that you want to save $5,000 for a down payment toward a car that costs $32,400 can help you stay motivated to put money to the side.
To make things easier, you could choose to start a separate savings account for your goal. Setup auto-transfers through your bank or employer to push a certain amount of money to the account every paycheck, once a month, or on some other cadence. Then, watch the money grow!
5. Choose your new car.
Armed with this info about your budget, you’re now prepared for the fun part: shopping for a new car! Using the knowledge of your monthly payment budget and total costs for the car, you can begin searching for the right make and model for your needs.
When you have chosen the right car and have the funds stashed away, you’re ready to purchase!
The most challenging part of this process is likely the savings portion. How can you successfully put money away regularly? Here are a few methods that can help.
Practical Ways to Save Money to Buy a Car
In his article “How to Trick Yourself Into Saving For A New Car,” writer David Bakke talks about paying off his car in 5 years. When the car was paid off, he continued to “pay” his car payment, by putting the payment amount into a high yield checking account. He planned to continue as if paying for his car, but instead he was saving money to eventually buy a new car outright when the time was right.
You can use this trick on yourself as well. Once you have determined the approximate car payment you can afford, you can “pay yourself” that amount each month in preparation for your car purchase. Put the money into a separate high yield savings account like the ACE Flare™ Account by MetaBank®1 Optional Savings Account.2
This high-yield account offers up to 6.00% Annual Percentage Yield (APY) on balances up to $2,000 with qualifying direct deposit activity.2
Make Sacrifices in Personal Spending
If you want to reach your goals faster, cutting down on personal spending can speed up the process. We don’t recommend eliminating all the little luxuries that make life fun. However, cutting back for a period of time can give your new car savings a boost.
Cull your subscriptions. From monthly box subscriptions to vitamins and Netflix, you may have more small expenses than you realize. Take stock of which subscriptions you currently have and see if there are any you could live without for a short period.
Watch where you eat. If lunches out and takeout dinners are a part of your norm, consider how re-examining your grocery bill can contribute to your new car savings.
Turn your home into a secondhand store. Have a closet full of clothes you never wear? We all have secret storage spaces that we neglect. The good news is, they could be full of financial jewels that can contribute to your savings. Consider selling items online or with a yard sale and add the profits to your car fund.
Earn Extra Money Where You Can
Sometimes, it’s just not enough to cut down on your spending. Bringing in extra income can help with your car savings (and saving in general!) Check out side gigs or consider a second job if you can. Today there are many opportunities available in the real world and online:
- Mow lawns
- Sell items online
- Participate in focus groups
- Become a rideshare driver
Ready to buy a new car? With the right plan and patience, you’ll be on your way to car ownership!
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