There comes a time in every person’s life where their old car, or hoopty- as my brother in law calls it, needs to be retired.
This is something I’m currently experiencing.
My car is a 2001 Toyota Celica, that I proudly brag about. While it has served me well over the past 10 years, it’s time to start thinking about an upgrade.
Remember, I’m not a fan of debt, especially car payment debt. A car’s value drops like a rock and I’m not about losing money on something I will literally never see a return for. So, I wanted to share with you what steps I’m taking to save for a new car.
I have three general rules of thumb when buying a “new to you” car:
- Never finance something that goes down in value
- Save up and buy a car with cash
- Try to buy a car that is 3-5 years old (brand new cars lose 63% of their value in 5 years)
Set a goal
How much time do you have to save for a new car? I am anticipating purchasing a used car in around 7 months from now. I’ll be going into detail on how I’m doing this in the steps listed below, but know that 7 months is a fairly aggressive savings goal for me. I’m also willing to sacrifice and side hustle in order to achieve this goal, but some people may not be and that’s completely okay! You have to know what you’re willing to do in order to achieve the goal.
Be as specific as you possibly can be, and as realistic as you can be, given your budget.
Here is my exact goal: Buy a $7,000 car by May 2018.
Earmark a savings for your “Car Fund”
If you don’t already have a savings account set up for your car fund, go do that now. It’s important that you don’t group it with your other savings. Why? Well, think about this way. When you have a savings account specifically for your goals, and you group all your savings into one account, sometimes it’s harder to tap into the savings even though it serves a specific purpose. It can be really hard to separate with the cash. But when you have it clearly defined for a purpose you can usually spend the money without the extra guilt.
One of my favorite places to stash savings is Ally Bank. They have a high yield interest savings account that is currently paying 1.20% interest. It’s not a ton of money but it makes a bit of a difference compared to some traditional banks paying .025% interest.
Another bank I’m a fan of is Simple. They have the ability for you to create virtual envelopes and set savings goals very easily.
Frankly, I don’t care where you decide to bank and house your savings, as long as you are doing it.
Nerd out on your budget
Creating a basic budget is probably the most critical piece of this entire puzzle. You need to know how much money you have coming in and how much is going out each month.
Once you do, then you can see realistically, what you can afford to put aside for a car. It might only be $200 a month, which means you are likely a ways out from your goal. But that doesn’t mean you can’t be putting some money away for a car.
I personally manage my entire budget and net worth tracker in excel and make sure I’m checking in with my budget so I’m not overspending.
- Need help budgeting? Check out this course.
Cut crap out of your budget
If you are looking at your budget and want to be able to save more money, you might need to start reducing some categories in your budget.
Let me give you an example. I typically spend $100 a month on eating out and coffee. This by no means hurts my financial life, but I recognize it’s 100% unnecessary spending. So one of my sacrifices or budget cuts is reducing the amount to $50 a month. This gives me an extra $50 to put towards a “new to me” car.
Most common categories people can reduce are:
- Eating out
- Grocery budget
Eating out and cable are completely unnecessary expenses. If you are trying to buy a new car in a short time frame, you need to get a little drastic to see what it might do for you.
If you are trying to reduce your grocery budget, I HIGHLY suggest looking into online grocery shopping. Wal-Mart allows you to grocery shop online, seeing the total price tag before you purchase those items. If you need to take some things off your account, you can. Then you go pick them up at the store and never have get out of your car. #peaceoutimpulsebuys
*Temporarily* push pause on retirement
I personally, am pushing pause on my retirement accounts. I know that 6 months of not actively saving for retirement will not kill my financial future. Because once the car is bought and paid for, I can start to keep that same intensity for a few more months and put all that cash back into my IRA (individual retirement account).
This not only frees up a nice chunk of change every month, I can start to quickly boost my savings. If this gives you anxiety, I understand. But the way I see it- if your car craps out on you tomorrow and you have to finance a car, then that money would have been better spent on savings for a beater to get you by, instead of financing and paying a shit ton in interest.
*Note: if you are 1 year+ away from buying a car, reduce the amount into your retirement accounts, but do not push pause fully. You should always prioritize maxing out your IRA and paying off debt before buying a car.
Don’t play the car payment game
Look, I get it. When you are seeing that you can get a nicer, shinier, car for a couple hundred dollars a month, it’s easy to be tempted. But DO NOT fall into this trap. Being able to afford the payment doesn’t not mean you can afford the car. You are signing up for $200 a month over the course of 3-5 years and agreeing to pay interest to the loan provider. The other piece is you are covering the cost of depreciation on the car from your own pocketbook. Not smart.
Here’s what I mean- let’s say you buy a brand new car for $30,000.
- Cars value after driving it off the lot: $26,700
- Cars value after 1 year of ownership: $22,500
- Cars value after 3 years: $16,200
- Cars value after 5 years: $11,100
What does this mean? A brand new car generally loses 63% of it’s value in 5 years. Don’t be the idiot who loses 63% of your investment in 5 years. Unless you have already hit your million dollar net worth, you really can’t afford to lose that much money and overpay for a car.
- Use this calculator to see how much the car you’re thinking about will depreciate
Do the tough work now, save up money, keep driving your current car, and when you have enough cash, pay for a car that fits your budget.
Do not finance anything that goes down in value. Ever.
(Unless you want to be broke, then by all means, finance away!)
Between cutting my own personal budget, pushing pause on my retirement savings, and a little bit of side hustling, I’ll be saving $1,000 a month towards a “new to me” car and be able to buy my next car with cash.
I have no idea what kind of car I’ll be getting, but I’m really hoping for a decent crossover SUV. (If anyone has a reliable, well maintained SUV they want to sell me, let me know!) 😉