How to save for a car (and how much you need)

To save for a car, set a goal that covers the down payment plus taxes, title and registration, divide what's left by the months until you buy, and move that amount into a separate savings account each payday. Aim for at least 20% down, or the full price for a cheaper used car, so the loan is small or not needed.

Set the price first

Decide the most you'll pay for the car, out the door, before you look. That number sets your down payment goal and the size of any loan.

Taxes and fees add up

Sales tax, title, registration and dealer documentation fees are often due at purchase. They vary by state and dealer, so look up your state's sales tax and fees and add them to your goal.

20% down is a common target

Putting about 20% down on a financed car keeps the loan smaller than the car's value for longer. For a used car under a few thousand dollars, saving the full price avoids a loan entirely.

Car savings is not emergency savings

Keep the car fund separate from your emergency fund. If a surprise drains the car fund, you can delay the purchase. If it drains your emergency fund, you're exposed.

How much to save for a car

Start with the price you're willing to pay. For a financed car, a common target is 20% of the price as a down payment. On a $16,000 used car, that is $3,200. Many people round up, as Chris does with $4,000, to keep the loan and payment smaller.

Then add the costs due at signing. In most states that includes sales tax, a title fee and registration, plus any dealer documentation fee. Together these can be several percent of the price or more, depending on where you live. Look up your state's sales tax rate and fees and add them to your goal.

Turning the goal into a monthly number

Subtract what you already have saved for the car, then divide by the months until you plan to buy. If the monthly number is too high, you have three choices: wait longer, pick a cheaper car or put a little less down and accept a bigger loan.

Once you have the number, automate it. Set a transfer from checking to your car account for the day after payday. Send any windfalls there too, like a tax refund or a bonus, and the date moves closer.

Paying cash vs taking a loan

Paying the full price in cash means no interest, no monthly payment and no lender rules about insurance. It is easiest for a reliable used car. If cash would drain your emergency fund, though, a small loan is the safer choice.

If you borrow, a shorter loan costs less overall. On a $12,000 loan at an example 7% APR, a 3-year term costs $1,339 in interest, while a 6-year term costs $2,730. The longer term lowers the monthly payment but raises the total, and you may owe more than the car is worth for longer.

The costs after you buy

The purchase is only the start. Budget for insurance, gas or charging, oil changes, tires, repairs and yearly registration. A newer driver or a sporty car can mean much higher insurance, so get a quote on the exact car before you commit.

For a used car, pay an independent mechanic to inspect it before you buy. A vehicle history report can show past accidents or flood damage, but it won't catch mechanical problems. Check the Buyers Guide sticker on a dealer's used car to see if it is sold as is or with a warranty.

Where to keep car savings

Keep it in an insured high-yield savings account. It is safe, earns interest and is easy to reach when you find the right car. Avoid the stock market for money you'll spend within a few years, since prices can fall right before you buy.

If you know you won't buy for at least 6 to 12 months, a CD that ends shortly before your target date can lock in a rate. If the date might move, savings is the better choice, since breaking a CD early costs a penalty.