How to Save for a Car

1. Decide to Lease or Purchase

The first car-buying decision to make is whether you should lease a car, finance a car or buy a car outright since it will impact how much you need to save. Here's an overview of how each one works, along with pros and cons.

Learn more:First-Time Car Buyer Guide

2. Calculate What You Can Afford

If you decide to buy in cash, check your savings to determine how much you can afford. If you're going to lease or finance a car, the general rule of thumb is to spend no more than 10% to 15% of your net income (income after tax and deductions) on transportation costs.

Example: If your take-home pay is $5,000 per month, you could apply the 10% to 15% guideline to calculate a target transportation budget of no more than $500 to $750 a month. You should aim for your lease or loan payments and other related expenses, such as insurance, gas, maintenance and repairs, to all fit within this budget.

Once you have a ballpark monthly payment figure, you can start looking at car types to determine which ones you can afford payments for and what down payment you will need. When shopping for cars, be sure to factor in the cost of tax, title and fees because these charges will likely be tacked onto the listed price. You can use a payment calculator to estimate your monthly payments based on the car price and additional fees, plus how much you expect to put down on the car.

Car payment calculator

3. Factor In Other Car Expenses

While considering a car price you can afford, also calculate how insurance and gas will fit into your long-term budget. Gas costs can vary based on the type of fuel a car needs and how much fuel the car takes. Car insurance rates can also vary based on factors like the type of car you buy, your driving history, where you live and your gender. You can use Experian's car insurance comparison tool to quickly compare auto insurance rates from multiple providers.

Tip: Shopping around with at least three insurance companies can help you compare rates and driver discounts. Some insurance companies offer discounts if you bundle multiple policy types, set up autopay or use your car infrequently, for instance.

Learn more:How to Save on Car Insurance

4. Set a Monthly Savings Goal

Next, take the amount you want to have for the purchase and turn it into a monthly savings goal based on your car-buying timeline. Do this by dividing your savings goal by the number of months you have to save.

Example: If you want to save up $3,000 to buy a car in three months, you would need to save $1,000 per month to make it happen. If you get paid biweekly, you could break that up further into a goal to save $500 out of each paycheck into a car down payment fund.

If your monthly savings goal feels difficult to achieve, you may need to explore other possibilities. If you have the flexibility to do so, extending your car-buying timeline can make it easier to save up a larger sum. The benefit of putting down a larger amount is that it can reduce your monthly loan payment and long-term interest costs.

Learn more:How to Set Financial Goals

5. Adjust Your Household Budget

Consider revisiting your household budget to make changes to accommodate your new car savings goal. Meeting a $3,000 goal in three months, for example, could mean cutting back to a bare-bones budget to eliminate all entertainment spending and other nonessential bills temporarily. Just keep in mind that slashing all "fun money" from your budget isn't generally sustainable as a long-term plan. So, be sure you're aiming to achieve balance, even as you apply yourself to your saving goal.

You may be able to trim back spending and save money by:

• Canceling unwanted subscriptions
• Switching to generic brands when you buy groceries
• Meal-prepping or making dinners in bulk and eating leftovers
• Looking for discounts and couponing
• Joining a local "buy nothing" group
• Curbing your impulse spending

What if you don't currently have a budget? Now's the perfect time to start one. Reviewing your bank and credit card statements is a way to start pinpointing where you're currently spending extra money so you can reroute that cash to car savings.

Tip: One of the easiest ways to set up a budget from scratch is to use a budgeting website or app, particularly one that lets you automatically import and sort your spending. Once you have a strong grasp of where your money's going, you may feel more empowered to tweak your spending in different categories and put more toward your car savings goal.

6. Open a Savings Account and Automate Savings Transfers

Set up a new savings account to stash away car money so you can monitor your progress separately from other savings. Opening a high-yield savings account is a way to secure a higher annual percentage yield (APY) on your funds, and every extra bit of interest earned can help you work toward meeting your car savings goal.

Many banks also offer recurring savings transfer tools where you can automate deposits into savings on a schedule, like weekly or monthly. Automating your savings is a smart way to grow your car fund without having to remember to make biweekly or monthly deposits. Your employer may even allow you to deposit your paycheck into multiple accounts so the money you want to set aside goes straight to your car fund.

Learn more:How to Use Sinking Funds to Save Toward Your Goals

7. Consider a Side Hustle

When funds are tight, earning more is a way to reach your financial goals faster. Think about what skills you possess and how they could be turned into an income source. If you get stuck thinking of a way to earn extra income, you can always turn to traditional side hustles, such as:

• Babysitting
• Caring for pets
• Selling items you don't need online
• Tutoring in a subject you have expertise in
• Freelancing using the skills you already have

Sites like Care.com, Rover and TaskRabbit are marketplaces where you can connect with parents, pet owners and people who want to hire someone to complete tasks. Fiverr and Upwork are other freelance marketplaces you could sign up for to find freelance jobs in fields like writing, graphic design, website design, transcription and more.

Learn more:Ways to Make Extra Money From Home

8. Improve Your Credit Score

Working on your credit while saving can help you land better auto loan rates and lower payments when it's time to borrow. Here are a few steps you could take to improve your credit score:

• Review your credit report. Pull your credit reports from all three major consumer credit bureaus (Experian, TransUnion and Equifax) at AnnualCreditReport.com. You can also sign up for free credit monitoring through Experian for regular access to your credit report and FICO^® Score^☉, as well as alerts when there are changes to your report.
• Dispute credit report errors. When you pull your credit reports, confirm the information on all your credit accounts is correct. While rare, if you find errors on your credit reports, you have the right to file disputes with each credit bureau reporting the inaccurate information to have it corrected, updated or deleted.
• Pay down credit card balances. Credit utilization is the percentage of your available revolving credit limits you're using and is one of the most important factors in your credit score. Reducing balances on your credit cards can lower your credit utilization and may increase your score.
• Always make payments on time. The most important factor affecting your credit is payment history, so be sure to make all other loan and credit card payments on time leading up to your car purchase.

Learn more:How to Get the Best Auto Loan Rates

Stay the Course

Saving up a large amount for a car might not happen overnight, but with consistent saving, you can get the down payment you need to buy a car you afford. You also don't have to save alone: Using tools like automated transfers and budgeting apps are ways to reach your goal with less effort. Before you know it, you could be driving off the lot in a new ride.