Over the last few years, we’ve witnessed an unprecedented increase in vehicle prices. In 2022, the average new car loan amount is up $4,703 from 2021, and used car loans have increased by $4,487, according to credit reporting company Experian.
Thanks to inflation and scarcity, it now takes more money to purchase a vehicle than at any other time in recent history. This means careful planning is required to save what you’ll need to score a new car in your price range.
Determine How Much Car You Can Afford
You may have a dream ride in mind, but that doesn’t mean you should buy it. Dream within your means by first determining how much you can afford to spend on a car.
The Down Payment
You should assume a 20% down payment on a new car and a 10% down payment on a used vehicle.
In 2022, the average price for new and used cars comes in at $50,000 and $34,000, respectively. Using these averages, to hit your down payment you would need to save up $10,000 for a new car and $3,400 for a used car.
Selling or trading in your current vehicle? If you currently have a vehicle in good working order, this could help you reduce the amount you’ll need to save for a down payment. Use the valuation tools on the Kelley Blue Book and Edmunds websites to help determine the current worth of your automobile.
In most cases, you’re likely to make more money if you sell your vehicle directly to a private party. Before you go this route, however, it may be worth chatting with dealers. Given the shortage of used cars in today’s marketplace, they may be willing to pay you more for your trade-in to increase their lot’s inventory.
The Monthly Payment
Financial experts recommend spending no more than 10% to 15% of your net income (your take-home pay after taxes and deductions) on a vehicle. Let’s say your monthly take-home pay is $3,500. Following the 10%-15% guidance, you would be able to afford a monthly payment between $350 and $525 a month.
According to Edmunds sales data, in the first quarter of 2022 the average car payment for new vehicles hit $648 a month—an all-time record. A $ 648-a-month car payment would mean you need to bring home at least $4,370 a month after taxes just to meet your minimum monthly payment.
Factor in the Extra Expenses
One-time costs. When you initially buy your car, in addition to a down payment, you’ll need to cover the upfront costs of sales tax, title, registration, and other fees.
Ongoing costs. Your monthly car payment won’t be your only regular cost. You’ll also need to factor in the cost of gas (or electricity if you’re buying an EV), as well as car insurance, and regular maintenance. These extra costs can add up fast, so make sure you do your homework first to understand how much you’ll actually pay per month.
Get the Figures on Financing
Many financial experts recommend shopping around for auto financing to get the best price, just as you would a vehicle. There are several options for financing a car including your bank or credit union (which typically have the most competitive loan rates), and online lending sites like LendingTree.
Once you’ve done your homework, you can also take your financing offer directly to the dealer and ask if they can provide a better rate.
The Low Down on Loan Terms
If you’re financing your new ride it may be tempting to push your auto-loan terms out as long as possible so you can lower your monthly payment, or take on a higher loan.
A good rule of thumb, however, is to lock in your loan at 48-60 months. This helps you pay less when all is said and done – less in interest, and less in car insurance (lenders typically require you to have full coverage auto insurance when you’re financing a vehicle).
Once you’ve done your homework to understand the costs associated with buying a car, it’s a good idea to take a deep dive into your finances to ensure you’re not stretching your budget too far.
One of the most popular budgeting strategies, the 50/30/20 method, is a great way to assess your monthly money situation. If you’re unfamiliar with 50/30/20, those are the percentages you should allocate to needs (50% of your monthly income), wants (30%), and savings/debt repayment (20%).
Is the car you’d like to buy a need? Or is it a want? The answer is highly dependent upon your personal situation.
Do you have a reliable car right now? If the answer is no, you obviously need something better, meaning the costs should be bucketed into the “needs” bucket of your budget.
If the answer is yes, you merely want something nicer, then your car-related spending should be associated with the “wants” portion of your budget.
Once you’ve taken a hard look at your finances you may need to reassess how much car you can truly afford without taking on unnecessary financial stress.
Getting Your Spending Under Control
Saving up for a down payment, and being able to make the monthly payments, may require you to make some difficult choices. To budget more for your “wants” bucket, you might have to say goodbye to streaming services, nights out, takeout, or vacations—at least for a little while.
Going through debit or credit card statements is also a good way to help you identify frivolous purchases and recurring charges you can eliminate. Signing up for notifications from a money management site like Mint.com can also help you see just where your money is going.
Leverage Goal-Based Saving
Here at Allio, we’ll give you the option to automatically start saving for a goal. You can save for a vacation, rainy day fund, gift, down payment, security deposit, or a custom goal—like a down payment on a new car.
You'll input the amount of the goal and then we'll ask if you want to take more risk to potentially achieve the goal faster. How you answer will determine the portfolio we put you in — with the lowest risk portfolios constructed with absolute minimal risk (think Tips, short-term treasuries, etc.). With Allio, you could earn more than the 0.13% interest you’d receive from a typical savings account—which means you could reach your financial goals sooner.
And you can automate your savings efforts using Allio’s recurring transfers or enable round-ups to save money automatically every time you make a purchase with a linked debit or credit card.
Automating your savings can be a very effective means of keeping you on track as you work toward your down payment goal. That’s because automation reduces friction—you no longer need to think about it or make a conscious decision to save. It’s simply something that happens in the background.