Saving for a car: how much to put aside each month.

Decide what you are saving for

There are two common plans, and they lead to very different numbers.

• Pay in full. You save the whole price and borrow nothing. It takes longer, so it suits a cheaper or older car, but you pay no interest.
• Save a down payment. You pay part up front and finance the rest. You can buy sooner, and each dollar you put down is a dollar you do not borrow and pay interest on.

Also think about a trade-in. If you own a car now, its value can count toward the down payment. The article on trade-in and down payment covers how the two combine.

Turn the goal into a monthly amount

Without interest, the formula is simple: (goal - already saved) / months. With a savings account that pays interest, deposits at the end of each month and monthly compounding at 4% a year, here are some examples:

The Savings goal calculator does this for you. Enter the target, the amount already saved, the number of months and an assumed annual rate (0% is fine if you want a cautious number), and it estimates the monthly contribution. It is an estimate: it does not move money or connect to your bank. For the general method, see how much to save each month.

What a bigger down payment saves

Here is a $30,000 car financed at 7.5% over 60 months, with different down payments. The figures cover the vehicle price only, so they leave out sales tax and fees.

Saving $6,000 first lowers the payment by $120.23 a month and the total interest by $1,213.66. Two years of saving $250 a month therefore buys you a lower monthly bill for the five years afterwards. Compare your own scenarios in the Auto loan calculator. It adds sales tax to the amount financed, subtracts the down payment and trade-in, and shows the monthly payment and total cost. It does not include registration, title, dealer fees or insurance unless you add them to the price.

Do not rely on a long loan

A longer loan makes the payment look easier but raises the total cost. Borrowing $24,000 at 7.5%:

Stretching from 48 to 72 months drops the payment by $165.33 but adds $2,023.21 in interest. A long loan can also mean you owe more than the car is worth for longer, because cars generally lose value as they age. See 60 vs 72 month car loans for more.

Budget for the cost of owning the car

The price and the loan payment are only part of it. Insurance, fuel or charging, maintenance, tires, registration, parking and repairs continue every month. Insurance in particular can change with the model you choose and your location, so get a quote before you commit.

Add these to your monthly plan in the Monthly budget planner so you can see whether the total fits. A commonly quoted rule of thumb is to keep total car costs to a modest share of take-home pay, but there is no single right figure. Your other obligations decide. The article on how much car you can afford walks through this in more detail.

Where to keep the car fund

• Separate from everyday spending. A separate savings account or a named pot makes it harder to dip into.
• Easy to access, low risk. For a goal 1 to 3 years away, many people avoid investments that can fall in value just before they need the money.
• Automatic. A transfer on payday means you save before you spend.
• Check the rate. Compare the APY on different accounts. Interest is a small help on a short goal, as the table above shows.

Repairs and replacement are better handled by a sinking fund than by the car fund. Keep an emergency fund separate too.

A simple plan

1. Pick a target price range and a purchase date.
2. Decide how much you want to put down (or whether to pay in full).
3. Use the Savings goal calculator to get the monthly amount.
4. Check the amount against your budget, and add running costs.
5. Test loan terms and down payments in the Auto loan calculator.
6. Get lender quotes before visiting a dealer, so you can compare the real rate and terms with your estimate.

All of the figures here come from fixed-rate formulas. Real offers depend on your credit, the lender and the vehicle.

Frequently asked questions

How much should I save for a car down payment?

There is no single amount, but each dollar you put down is a dollar you do not borrow with interest. On a $30,000 car at 7.5% over 60 months, a $6,000 down payment saves about $1,213.66 in interest.

How much should I save each month for a car?

Divide the goal by the months you have. To save $6,000 in 24 months you need $250 a month with no interest, or about $240.55 a month at 4%.

Is it better to pay cash or finance a car?

Paying cash avoids interest, while financing keeps cash available. A middle route is a large down payment and a short loan. Compare total cost and your other needs for cash.

What costs should I include besides the car price?

Include sales tax, registration and fees, insurance, fuel or charging, maintenance and repairs. Put them in your monthly budget before you decide on a price.