A Step-by-Step Guide to Saving for a New Car
Welcome to your twenties – a time filled with exciting opportunities, personal growth, and, unfortunately, big financial decisions. One of the most significant milestones that many young adults aim for in their twenties is saving for a new car.
It’s not just about the vehicle; it’s about independence and the sense of accomplishment. You’ve started a new job, are finally making money of your own, and you want to continue to provide and support yourself. But how do you make this dream a reality when you’re still in the early stages of your career and navigating the complex world of personal finances?
There’s lots of gray areas when it comes to developing personal literacy, so that’s why I have a step-by-step guide on how to save for a new car in your early twenties while staying on top of your finances.
Setting a Goal for Saving for a New Car
The Importance of Having a Clear Goal
The first step in any savings journey is having a clear goal in mind. A big financial decision should not be made lightly, so you’ll want to do some research early on and set a goal based on your researched value of cars. Finding a car that you love and setting a specific target for saving for that car will help you stay motivated and focused. Ask yourself these questions:
- What kind of car do you want to buy?
- How much will it cost?
- When do you want/need to make the purchase?
By having a reasonable goal, you can create a realistic savings plan that aligns with your dream of buying a new car.
Research and Budgeting
To determine how much you need to save, start researching the cost of the car you want. Remember the ticket price of the car is not the only expense that comes with a car. Don’t forget to consider additional expenses like taxes, insurance, and registration fees.
Once you have a ballpark figure, you can set up a budget. There are three ways to set a budget:
- Save up to buy the car in full
- Lease the car and ensure the monthly payment DOES NOT exceed your predetermined budget
- Research lenders and make sure the loan payment DOES NOT exceed your predetermined budget
This is a critical step, as it will help you understand how much you need to save each month and if your current budget system will allow you to purchase the car you’d like.
Building a Solid Financial Foundation
Clearing Existing Debts
Cars are 9 times out of 10 a liability, meaning they depreciate in value and add to your expenses. Unless you pay the car off in full, you will be in debt by buying a car. Before you start saving for a new car, it’s wise to pay off any outstanding debts, especially high-interest loans or credit cards.
It’s understandable that you’ll likely need a car sooner than you’ll be able to pay off all your debts like student loans for example. But, you should make sure that you can 1. pay off any credit card debt and 2. continue to make the minimum payments on other debts before purchasing a new car. The burden of debt can significantly hinder your ability to save money effectively and live a stress-free financial life.
Emergency Fund
Create an emergency fund to cover unexpected expenses like medical bills or car repairs. The rule of thumb is to have 3-6 months worth of expenses saved up in an emergency fund in case a major life change prevents you from making money for a prolonged period.
Either you will want to have your emergency fund fully funded before buying a car, or you will want to make sure that your car note does not require you to stop funding your emergency fund.
Balancing you savings and spending is an important part of financial health. This buffer will ensure that you can still afford the car and don’t have to dip into your car savings when life throws you a curveball.
Setting Up a Separate Savings Account
A great way to focus your saving is by creating specific savings accounts for specific goals. Establish a dedicated savings account for your car fund. This keeps your car savings separate from your daily expenses, making it less tempting to spend that money on other things.
Any time you touch that money for an unrelated expense you’ll be forced to confront your priorities and if a new car is actually a goal you should be setting at this point in time.
Generating Additional Income
Sometimes the best way to create a budget that fits is by making more money. Of course, you shouldn’t count your chickens before they hatch, but if you can find a way to increase your income before making a large purchase you’ll likely be under less financial stress.
Part-Time Job or Gig Work
In your twenties, you may have the energy and time to take on a part-time job or gig work. Think about things you enjoy doing and how you can make a little extra cash by capitalizing on that. An idea that come to mind are working at a fitness studio as an instructor or at the front desk on the weekends. You may get a free membership (hello savings!) and some extra cash doing something you would’ve done anyway. This extra income can significantly boost your car savings.
Side Hustles
Consider turning your hobbies or skills into side hustles. The digital world offers endless opportunities and while none of them are necessarily “get rich quick” schemes, if you put in some time and effort, the benefits down the road could be life-changing. Whether it’s freelancing, selling crafts, or offering services, the additional income can go straight into your car fund.
Investment Opportunities
Explore investment options that align with your risk tolerance. If you have a year or two before making this big financial choice, you can try and invest in mutual funds and use the gains over the time period to fund the new car. There is always risk involved in investing, so make sure that you accurately assess the risk and don’t risk anything you couldn’t survive without. While investing can be riskier, it can offer higher returns that may accelerate your car savings.
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Cutting Down Expenses
Identify Unnecessary Spending
Be ruthless when it comes to cutting back on spending for things that don’t bring you joy. Take a closer look at your monthly expenses and figure out what things are controlling your financial decisions. What can you cut down or eliminate altogether? Are you spending too much on dining out, subscription services, or impulse purchases?
If you can move some of the excess spending into a car fund, how much sooner will you reach your goals?
Creating a Conscious Spending Plan
In the book I will teach you to be rich, Ramit Sethi emphasizes that you don’t need to budget you only need to be conscious about your spending. If you can prioritize your spending and only spend (money that you have) on things that you enjoy while saving in areas that don’t bring you joy, you’ll be well off financially and emotionally. You can read about the tips I learned from I will teach you to be rich in this blog post.
Being frugal doesn’t mean living without nice things, but it does involve being conscious of your spending. Set limits on excess spending and allocate the rest to your car fund. The things that bring you joy will be worth the sacrifice, so pay attention to haw saving for the car makes you feel.
Optimize Your Living Situation
Typically the biggest expense for anyone is housing. Rents and mortgages are by no means inexpensive so any way you can save in this area can put a lot of money back into your pocket. In your twenties there is a lot of pressure to feel like you have everything figured out, but you don’t have to. Consider living with roommates, staying at home after graduation, or moving to a less expensive area/unit to free up more funds for your car savings.
Maximizing Savings
Automate Savings
Set up automatic transfers to your car savings account as soon as you receive your paycheck. This ensures that you consistently contribute to your goal. The less friction that is associated with saving for a new car, the easier it will be to reach that goal.
Windfalls and Bonuses
Never count on money that you don’t have, but if you’re nearing the time of bonuses at work you can make a plan to put that extra money toward saving for a new car. Your final financial decision should not be based on money that has not yet hit your account, but you can always plan to add bonuses to your car savings instead of spending it elsewhere.
Any unexpected windfalls or work bonuses can provide a substantial boost to your savings. Commit to putting a significant portion of these unexpected funds into your car fund.
Track Your Progress
Regularly monitor your savings progress. Use budgeting apps like Rocket Mortgage or spreadsheets to stay on top of your finances and make adjustments as needed.
Staying Motivated
Visual Aids and Manifestation
Create a visual representation of your goal. Manifestation works. By putting your goal in front of you every single day, you’ll be less likely to push it to the back burner. It could be a vision board with pictures of your dream car or a progress chart that shows how close you are to achieving your goal.
Celebrate Milestones
Acknowledge your achievements along the way. For instance, once you’ve saved a certain percentage of your goal, treat yourself to a small reward. Saving money isn’t about depriving yourself of all the things you enjoy. By prioritizing a new car for a period of time, you should reward yourself with something you may have had to cut back on to get there. This will keep you motivated and make the journey enjoyable.
Share Your Goal
The easiest way to give up on a goal is by not making it known. An unshared goal is a goal that you can easily give up on without consequences. Telling friends and family about your car savings goal can create a sense of accountability and community. They can offer support, advice, and you may even inspire them to set their own financial goals.
Be careful not to let their opinions sway you in any direction. Always take advice, especially advice on how you should spend your money, with a grain of salt.
Financing Options
Loan or Lease
While not having any debt can be ideal, you might explore loan or lease options if you can’t wait any longer. Depending on where you live, cars are necessary. If you need a car to be able to work or get to basic life necessities, you may have to explore loans and leases. Be sure to research thoroughly and understand the terms and interest rates before committing.
Trade-In
If you currently own a car, consider trading it in as a down payment for your new car. This can significantly reduce the amount you need to finance.
When buying a new car, you shouldn’t need the old car anyway unless you planned to give or sell it to a friend or family member. It’s important to weigh the logical and emotional aspects of this decision and make sure you get the best deal for your personal and financial future.
Negotiate
Don’t hesitate to negotiate with the dealership. Dealerships are full of salespeople trying to hustle you for the most money possible. There are lots of tricks to make you believe the car you’re looking for is scarce or that they can’t get you a better price, so look into best practices to help you get the best deal. You may be able to secure a better price or financing terms, saving you money in the long run.
Hopefully, you’ll be dealing with a great dealership that isn’t using tricks, but it never hurts to be prepared and protect your savings.
Final Preparations
Test Drive
Before finalizing your purchase, take your dream car for a test drive. Ensure that it meets your expectations and needs. You don’t want to drive the car off the lot just to realize you hate how the steering wheel feels in your hands.
Insure Your Investment
Invest in car insurance that suits your budget and covers your new vehicle adequately. Even if you’re driving perfectly, things happen. It’s always best to be prepared for the unknown.
Review the Deal
Before signing the paperwork, carefully review the terms and ensure that there are no hidden fees or surprises. Also ensure that everything aligns with the deal you’ve talked and nothing was stealthily slipped into the terms.
Buying a new car in your twenties is an achievable goal with dedication, discipline, and a well-thought-out savings plan. Remember, it’s not just about owning a vehicle; it’s about achieving financial independence and smart financial decision-making.
By setting clear goals, building a solid financial foundation, generating additional income, cutting down expenses, and staying motivated, you can save for that new car while maintaining healthy finances in your twenties.
Whether you’re aiming for a sleek sports car, a reliable family vehicle, or anything in between, the journey to buying a new car is as much about the financial wisdom you gain along the way as it is about the car itself.
Share the first car you bought in the comments below!
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