How to save for a car

For many of us, a car in an essential purchase. Work commutes, food shopping and picking up your kids at school make up the fabric of a daily routine. If you're planning to buy a new car, or new-to-you, soon, you'll want to come up with financial strategies to help you save for such a large purchase. You may need to rework your monthly budget to put a new ride within reach. Don't know where to start? Check out the tips below and learn how to save for a car.

Research car prices

Before you test drive the brand-new models sitting in the dealer's lot, spend some time narrowing down your options. Look over your current budget and research cars that fall within an affordable price range for you.

Next, assess your transportation needs. Do you need something reliable and efficient for a daily work commute? Has your family recently grown out of a two-door and into the realm of a minivan or SUV? When making a list of possibilities, consider what you really need in a car vs. added features that may break your budget. Are there optional items you can cut to save money? Would a lower-priced model suffice? Should you look at a pre-owned or used vehicle with a warranty attached?

Before you go car shopping, you'll want to review not just the vehicle's price, but all driving-related expenses in your budget. The costs of car insurance or vehicle maintenance can vary between makes and models. Find out how much replacement tires cost and how often you'll need to change them. Calculate the miles you expect to drive each year and estimate the cost of powering your vehicle with gas or electricity. Write down a list of questions and make sure you get the answers before you buy.

Look at your current budget

As with any large financial purchase, you'll want to take your time to make sure you get the car you want, at a price you can afford. Check your budget to calculate how much you're currently paying for transportation each month.

When thinking about how to save for a car, consider which budget line items could change. To increase your savings to pay for your car, review your current income and expenses. Is there an extra amount you can add to your savings account for your car purchase? If you want to pay $10,000 in cash upfront to lower your monthly car payments, compute a realistic amount you can save each month, and the time you'll need to reach your goal.

Consider your payment options

You'll generally have three options when paying for a car: cash, taking out an auto loan or leasing.

Option 1: Cash

Making a cash down payment for some or all of your vehicle can lower your monthly payment. With a smaller loan, you'll also pay less interest. However, if you don't have the time to build your savings because you need a car sooner rather than later, paying for some or all of your car with cash may not be possible for you.

Option 2: Financing

If you plan to finance the cost of your new car, you may want to consider an auto loan, personal loan or line of credit. The dealer may offer financing to you at the time of purchase. Alternatively, you can access a personal loan or line of credit at your bank.

If you expect to use a loan to help pay for your car, it's a good idea to take steps to improve your credit score. Before you begin the car buying process, pay off existing loans and try to avoid late payments on credit cards. Bringing a good credit history to the bargaining table can potentially result in a financing incentive from the dealer or a lower interest rate.

Also, don't forget to factor in your trade-in value when buying a new car. Ask the dealer how much they would be willing to pay for your old vehicle. You can apply this amount toward your purchase price and lower your payments on your new car. To maximize your trade in, you'll want to have a good idea of how much your current car is worth. Get several estimates from dealers before agreeing to a trade in price.

Option 3: Leasing

Leasing is an alternative to buying and owning your own car. Car dealerships offer customers the ability to lease a car over a short-term, such as a two- to four-year period. The payments for a car lease may be lower compared to the costs of monthly financing payments. But you won't own the car, and when the lease ends you'll typically be given the option to purchase it at that time, or return it to the dealer. You may also be subject to a mileage limitation during the lease period.

Savings tips when you need a new car

If you'd like to start saving for a new car, here are some strategies to consider:

• Direct deposit into a savings account: Ask your employer if you can deposit a portion of your paycheck directly into an interest-earning savings account.
• Automatic transfers: Link your savings and checking account, then schedule an automatic transfer each month.
• Create a second savings account: Open an account strictly for your car purchase to track your savings progress.
• Purchase a CD: Build your car fund with longer-term savings options that offer a higher rate of interest.
• Cut expenses like coffee or meals out: Reduce discretionary budget items for a few months and funnel extra money into your savings.
• Pick up a side hustle: Ask about overtime hours at your current job or start a side gig to make extra income.

Change your plans as necessary

Life happens and cars sometimes break down without notice. If your engine refuses to roll over, or your transmission dies, you may need to shift gears and revise your long-term savings plan. Depending on the condition of your current vehicle, it may make sense to use some of your emergency savings to cover the repairs. By squeezing another year or two out of an older car, you'll gain additional time to save up for a newer, more advanced model in the future.

Start saving for your new car now

Get into the habit of saving by setting goals for a large future purchase, like a new car. Having money on hand can make the buying process less stressful and allow you to drive away with a car that makes the most sense for you.

Open a Citizens savings account and earn interest to build your new car fund even faster.