How do you save for your next car?

[Jules13]

Both of our cars are 2006 models.  We've never had a car payment, we pay cash.  The sedan has low mileage for it's age, about 85k.  The minivan has pretty high mileage (160k I think off the top of my head).  I think the minivan would go first, it's definitely seeing the most wear and tear.  I like the minivan while we have kids and are hauling multiple ones around and traveling. 

Every month I put money aside in an account earmarked for the next van, for when this one finally kicks it, so we don't have to get a loan or take too much from our emergency fund.  I have almost $10k saved now. 

My question is, is this the best way to do it?  Does anyone else do something different in preparing for their 'next' car?  Thinking I would also be better off adding this money to my Vanguard fund where our emergency fund is (I know the advice is not to have your emergency fund in that type of account) so it can actually earn some interest as opposed to just sitting in savings.  My hope is that I won't have to buy a new car in the next few years, but car problems have a way of sneaking up on you. 

Would love to know what others do on these 'short term' savings goals like this.

Thanks!

[moof]

If the loan rate is less than you can get in return on a bond fund, finance it.

If the loan rate is higher, pay cash.  I have a bunch in my taxable account  that I could cash out in a few days and be just fine.  I am not a fan of having a large emergency fund just sitting idly by.

[Freedomin5]

Is there a high interest savings account you can stick it in to at least match inflation? Not being American, I’ve never paid attention to those threads, but my recollection is that there are a few decently high interest rates on some of the online banks.

[shinn497]

I save for a car by moving closer to work and not needing a car.

[swampwiz]

I'd finance it, and put that $ to work in the stock market.  Capital One keeps on begging me to take out a car loan, even with my Chapter 7 still on the report.

[Jules13]

I would never buy a new car.  Can you get 0% financing on a used car?  And what is the typical interest on a used car loan if not a zero percent loan?  I don't really fancy the idea of a car payment.  Also, this is not something we are purchasing right now, just saving up for when it happens.  I put about $400 in that account each month as it is.

And shinn497, we'd love to not need a car.  When we lived in Brisbane we had no car for 18 months and then one car that we used only on weekends.  Not possible where we are now unfortunately.

[GuitarStv]

The same way I save for everything . . . put my money into investments at the asset allocations I've decided are appropriate.  When I need the money I sell some of those investments at the same asset allocations.

Putting money into a savings account is most likely to lose you money because you aren't earning a return.

[Goldy]

I invest my “car payment” into my taxable savings and since my old car keeps on running this money has grown to a nice sum.  Once it does finally die i’ll Look to finance it if I can find a loan under 3%.  Otherwise i’ll withdraw from the taxable and write a check.

[shinn497]

I would never buy a new car.  Can you get 0% financing on a used car?  And what is the typical interest on a used car loan if not a zero percent loan?  I don't really fancy the idea of a car payment.  Also, this is not something we are purchasing right now, just saving up for when it happens.  I put about $400 in that account each month as it is.

And shinn497, we'd love to not need a car.  When we lived in Brisbane we had no car for 18 months and then one car that we used only on weekends.  Not possible where we are now unfortunately.

So move.

The question is how we would save up for a car. And that is what I did. I moved so I didn't need a car. Now I have more freedom to save and buy a car on my terms, not because I need one. I also sold a bunch of things.

And honestly, this is great. I'd recommend it to everyone. I elected to live a super optimized life that gives me freedom and choices. And I don't see why you would do anything different.

[BlueMR2]

No special funds or anything.  I've got my allocations set between cash and investments.  If I need something (car or anything else) I evaluate what I need, how much money I can take from where at the time, and then buy appropriately.

[SpareChange]

The same way I save for everything . . . put my money into investments at the asset allocations I've decided are appropriate.  When I need the money I sell some of those investments at the same asset allocations.

Putting money into a savings account is most likely to lose you money because you aren't earning a return.

+10

[shinn497]

I hope my answer wasn't too harsh. I'll think more of what id do in your shoes.

First off 10k is already enough for a decent car. If you are worried about reliability, talk to a mechanic. One that is trusted. Preferably one that specializes in your make or model and has a stellar reputation. Ask them what to watch out for and what needs to be done to maintain the cars going forward. At some point it won't make sense to keep them. Like a need to change out all of the bushings. Transmission. Or new engine. Or the cars are so unsafe that it doesn't make sense to drive them.

At that point, I would buy another one, Used. And in cash. It doesn't matter how. It doesn't matter how you save. Personally I would use a taxable investment account that has a 30/70 stock bond ratio and adjust it to have a higher bond tilt as the liquidation date approaches.  I use betterment and this is done automatically for me. I would probaly save for a 15k car, or even 20k. That is more than enough for another van. I'd get the ugliest van possible. And make sure it is japanese. And check some safety. Might consider a crossover. I like subaru crosstreks and would probably go with that if it drives decent.

I'd get it private sale. Negotiate. Then get it inspected by a mechanic and do the same thing. I'd already have enough saved for an maintence and emergency fund so i could have a higher deductable.

I'd make sure everything could be paid for and saved for while staying within my 55% savings rate. This way my FIRE date is not really effected by my purchase of a car. And that is the key. Understanding risks, understanding budgets, and understanding the outcomes and being prepared. Personal Finance is behaviour and emotion, not math (welp most of the math is simple).

As for me personally. I am saving up for a BRZ ~20k. And planning on something similiar. I could finance it tommorow if I wanted to. But I'm not because I would rather pay cash. It forces me to think very very critically if this is something I want. If it can fit into my retirement aspirations. And to understand what percentage of it is a need and not a want (its entirely a want and I accept that). Furthermore, if something happens, I can just use the saved money and not effect my retirements. OR, if i change my mind in 2 years, then I'm not in debt.

[trollwithamustache]

this is basically what we do we well. I like to see our costs spread on a monthly basis since we make income on a monthly basis.

Is it the most efficient? In a low interest rate environment what other posters are saying is true... but if interest rates keep rising you wont want to be taking a car loan out.  So, since this strategy works psychologically for us, we will keep doing it.

[RWD]

I would never buy a new car.  Can you get 0% financing on a used car?  And what is the typical interest on a used car loan if not a zero percent loan?

We got a 1.69% loan on a used car earlier this year (from our local credit union). Our Ally bank savings account pays 1.90% so it was literally free money for us to finance.

As for me personally. I am saving up for a BRZ ~20k.

We own a BRZ. Nice little car, good handling and fuel economy (we've averaged over 30 mpg). Surprisingly roomy besides the back seats being worthless for passengers. Acceleration leaves a lot to be desired.

[shinn497]

We own a BRZ. Nice little car, good handling and fuel economy (we've averaged over 30 mpg). Surprisingly roomy besides the back seats being worthless for passengers. Acceleration leaves a lot to be desired.

Haha I would so buy a supercharged BRZ. I see them every once in a while on forums and on FB. But hey. It could be a while until this happens and I want to do research on the maintenence to see if its worth it.

Also I'm single so who needs back seats?

[Jules13]

Thanks for all the answers/advice.  Going to move it over to a taxable account that will earn more money.  Probably should have done this in the first place. I'm looking to get another Toyota Sienna or something comparable, so will probably need at least 20k (from the research I've done) by the time our current ones dies.  Cheers to all.

And shinn497, thanks for updating your answer.  3rd time was the charm.  Much more constructive and definitely more helpful.  ;)

[NorthernBlitz]

The same way I save for everything . . . put my money into investments at the asset allocations I've decided are appropriate.  When I need the money I sell some of those investments at the same asset allocations.

Putting money into a savings account is most likely to lose you money because you aren't earning a return.

I think that the conventional wisdom is that savings accounts can be useful vehicles for large (inflexible) purchases that are required in the short term.

The trade-off here is stability vs. long term appreciation. But if you need the money in the short term, the long term appreciation doesn't matter as much.

I think that historical data says that you usually finish ahead in the stock market if your time horizon is greater than ~10 years. If you're thinking about a 5 year horizon or less, savings accounts might be an attractive choice, no?

Depending on average annual mileage and expected lifetime, the van with 160k miles on it may not have another 5 years in it.

Also, if you live in a place that salts the roads in the winter, 12 years might be getting close to the age at which your frame will start to show considerable rust. That might mean the car with 85k miles might have less life than you'd guess based on mileage alone.

Ultimately, it would suck if that $10k went up 5% this year, then down 25% next year right when your van died.

I think it's best to focus on savings rate here and put money earmarked for large short term investments in a high yield savings account (even though you'll just get ~ inflation).

[radram]

Thanks for all the answers/advice.  Going to move it over to a taxable account that will earn more money.  Probably should have done this in the first place. I'm looking to get another Toyota Sienna or something comparable, so will probably need at least 20k (from the research I've done) by the time our current ones dies.  Cheers to all.

And shinn497, thanks for updating your answer.  3rd time was the charm.  Much more constructive and definitely more helpful.  ;)

I would seriously consider lowering your price comfort zone on vehicles. If you are committed to a Sienna, that is fine, but why go up to $20,000.

I am seeing pages of these 8-10 year old cars with around 100,000 miles, priced from $5,000- $7,000. Do you really think your $20,000 car would outlive buying FOUR of these, purchased 5 years apart?

Plus the other $15,000 is earning more the whole time. Plus you can drop comprehensive, adding $25 per month toward the purchase of your next car. Plus you are depreciating 75% less vehicle sitting idle 95% of the time in your driveway.

[Money Badger]

@Jules13,   A recent empty nester here...  Risk versus return versus the timeframe you need the funds are no different for cars than anything other certain expense...  And if you have kids and are old enough to have put 160K on the van already, the chances that *someone* needs a car in less than 5 years is almost certain.   And for an "almost certain" expense coming that soon, a couple of CDs in a ladder (that you can add funds to each year as they mature) makes more sense than equities just for this expense.   Rates are rising the next year or so the way it's headed, so we all have to get used to interest rate vs. equity risks again...   Put other money that you want to risk (30% or more in an extended down market) into equities.    You're doing the important thing to set the funds aside which is the main thing.   Oh, and don't be surprised if your spouse doesn't want another van when this one dies...   Mom's often want to be "cool again" at that stage... don't ask me how I know!  ;-)

[GuitarStv]

The same way I save for everything . . . put my money into investments at the asset allocations I've decided are appropriate.  When I need the money I sell some of those investments at the same asset allocations.

Putting money into a savings account is most likely to lose you money because you aren't earning a return.

I think that the conventional wisdom is that savings accounts can be useful vehicles for large (inflexible) purchases that are required in the short term.

The trade-off here is stability vs. long term appreciation. But if you need the money in the short term, the long term appreciation doesn't matter as much.

I think that historical data says that you usually finish ahead in the stock market if your time horizon is greater than ~10 years. If you're thinking about a 5 year horizon or less, savings accounts might be an attractive choice, no?

Depending on average annual mileage and expected lifetime, the van with 160k miles on it may not have another 5 years in it.

Also, if you live in a place that salts the roads in the winter, 12 years might be getting close to the age at which your frame will start to show considerable rust. That might mean the car with 85k miles might have less life than you'd guess based on mileage alone.

Ultimately, it would suck if that $10k went up 5% this year, then down 25% next year right when your van died.

I think it's best to focus on savings rate here and put money earmarked for large short term investments in a high yield savings account (even though you'll just get ~ inflation).

If you put money into a savings account rather than your investments, you're timing the market.  You're saying . . . I think that the markets are going to tank enough that removing my money in five years will hurt me more than removing my money now.  Personally, I'm not smart enough to time the market, so all my savings go in  . . .  and then when I need to buy something they come out.  This is also the same thing I'll be doing in retirement.

[shinn497]

The same way I save for everything . . . put my money into investments at the asset allocations I've decided are appropriate.  When I need the money I sell some of those investments at the same asset allocations.

Putting money into a savings account is most likely to lose you money because you aren't earning a return.

I think that the conventional wisdom is that savings accounts can be useful vehicles for large (inflexible) purchases that are required in the short term.

The trade-off here is stability vs. long term appreciation. But if you need the money in the short term, the long term appreciation doesn't matter as much.

I think that historical data says that you usually finish ahead in the stock market if your time horizon is greater than ~10 years. If you're thinking about a 5 year horizon or less, savings accounts might be an attractive choice, no?

Depending on average annual mileage and expected lifetime, the van with 160k miles on it may not have another 5 years in it.

Also, if you live in a place that salts the roads in the winter, 12 years might be getting close to the age at which your frame will start to show considerable rust. That might mean the car with 85k miles might have less life than you'd guess based on mileage alone.

Ultimately, it would suck if that $10k went up 5% this year, then down 25% next year right when your van died.

I think it's best to focus on savings rate here and put money earmarked for large short term investments in a high yield savings account (even though you'll just get ~ inflation).

If you put money into a savings account rather than your investments, you're timing the market.  You're saying . . . I think that the markets are going to tank enough that removing my money in five years will hurt me more than removing my money now.  Personally, I'm not smart enough to time the market, so all my savings go in  . . .  and then when I need to buy something they come out.  This is also the same thing I'll be doing in retirement.

What you need to do is look at the return + volatility with a percentage of stocks and bonds. Do this and probably you'll find that something likee a 30% or 40% Stock portfolio would beat any savings account.

[GuitarStv]

The same way I save for everything . . . put my money into investments at the asset allocations I've decided are appropriate.  When I need the money I sell some of those investments at the same asset allocations.

Putting money into a savings account is most likely to lose you money because you aren't earning a return.

I think that the conventional wisdom is that savings accounts can be useful vehicles for large (inflexible) purchases that are required in the short term.

The trade-off here is stability vs. long term appreciation. But if you need the money in the short term, the long term appreciation doesn't matter as much.

I think that historical data says that you usually finish ahead in the stock market if your time horizon is greater than ~10 years. If you're thinking about a 5 year horizon or less, savings accounts might be an attractive choice, no?

Depending on average annual mileage and expected lifetime, the van with 160k miles on it may not have another 5 years in it.

Also, if you live in a place that salts the roads in the winter, 12 years might be getting close to the age at which your frame will start to show considerable rust. That might mean the car with 85k miles might have less life than you'd guess based on mileage alone.

Ultimately, it would suck if that $10k went up 5% this year, then down 25% next year right when your van died.

I think it's best to focus on savings rate here and put money earmarked for large short term investments in a high yield savings account (even though you'll just get ~ inflation).

If you put money into a savings account rather than your investments, you're timing the market.  You're saying . . . I think that the markets are going to tank enough that removing my money in five years will hurt me more than removing my money now.  Personally, I'm not smart enough to time the market, so all my savings go in  . . .  and then when I need to buy something they come out.  This is also the same thing I'll be doing in retirement.

What you need to do is look at the return + volatility with a percentage of stocks and bonds. Do this and probably you'll find that something likee a 30% or 40% Stock portfolio would beat any savings account.

I 'm 60/40 stocks/bonds . . . but yeah, that's generally what someone should do.

[ketchup]

I don't save for it.  I just cashflow it, but we drive cheap cars (=<$2000).

[radram]

If you put money into a savings account rather than your investments, you're timing the market.  You're saying . . . I think that the markets are going to tank enough that removing my money in five years will hurt me more than removing my money now.  Personally, I'm not smart enough to time the market, so all my savings go in  . . .  and then when I need to buy something they come out.  This is also the same thing I'll be doing in retirement.

I disagree. It is not saying I think it will tank in 5 years, it is saying I do not have a clue. NONE of my money I foresee using in the next 3 years is in the market. While I was working that was 6 months, but I can not easily replace losses taken within the next 3 years, like I could while was working.

With 3 years worth, I can slow spending during a crash to allow my stashe some time to recover.

You have SOME comfortable amount in cash, don't you?

[GuitarStv]

If you put money into a savings account rather than your investments, you're timing the market.  You're saying . . . I think that the markets are going to tank enough that removing my money in five years will hurt me more than removing my money now.  Personally, I'm not smart enough to time the market, so all my savings go in  . . .  and then when I need to buy something they come out.  This is also the same thing I'll be doing in retirement.

I disagree. It is not saying I think it will tank in 5 years, it is saying I do not have a clue. NONE of my money I foresee using in the next 3 years is in the market. While I was working that was 6 months, but I can not easily replace losses taken within the next 3 years, like I could while was working.

With 3 years worth, I can slow spending during a crash to allow my stashe some time to recover.

You have SOME comfortable amount in cash, don't you?

We keep about 5 grand in cash, which is plenty comfortable while we're still accumulating.

[Million2000]

I was literally thinking about this question yesterday, I'm glad this topic was raised. Recently I started putting aside in cash each month a certain amount for yearly or semi-annual expenses (mainly large insurance premiums) so they don't screw up the budget of whatever month they land on. I reckon at minimum I can get 5 years more out of my car and was thinking how best to handle this certain but still temporarily undetermined expense. I don't like putting cash into the market at my asset allocation given the risk of loss in 5 years time. I see many here have faith in their ability to sell investments when needed, but after nearly 10 years of this bull market I think my sanity would be served keeping it in a more conservative way.

After reading this, I think I'll start putting aside some cash for a new (to me) car in VTINX or some other similar investment. It's heavy on bonds but has exposure to stocks. The risk of principal loss in lower but 5 years in my opinion is a long time to be in cash.

[radram]

If you put money into a savings account rather than your investments, you're timing the market.  You're saying . . . I think that the markets are going to tank enough that removing my money in five years will hurt me more than removing my money now.  Personally, I'm not smart enough to time the market, so all my savings go in  . . .  and then when I need to buy something they come out.  This is also the same thing I'll be doing in retirement.

I disagree. It is not saying I think it will tank in 5 years, it is saying I do not have a clue. NONE of my money I foresee using in the next 3 years is in the market. While I was working that was 6 months, but I can not easily replace losses taken within the next 3 years, like I could while was working.

With 3 years worth, I can slow spending during a crash to allow my stashe some time to recover.

You have SOME comfortable amount in cash, don't you?

We keep about 5 grand in cash, which is plenty comfortable while we're still accumulating.

Agreed.

[Schaefer Light]

I just try to make my emergency fund bigger.  In other words, the money is in a savings account.

[mm1970]

I would never buy a new car.  Can you get 0% financing on a used car?  And what is the typical interest on a used car loan if not a zero percent loan?  I don't really fancy the idea of a car payment.  Also, this is not something we are purchasing right now, just saving up for when it happens.  I put about $400 in that account each month as it is.

And shinn497, we'd love to not need a car.  When we lived in Brisbane we had no car for 18 months and then one car that we used only on weekends.  Not possible where we are now unfortunately.

So move.

The question is how we would save up for a car. And that is what I did. I moved so I didn't need a car. Now I have more freedom to save and buy a car on my terms, not because I need one. I also sold a bunch of things.

And honestly, this is great. I'd recommend it to everyone. I elected to live a super optimized life that gives me freedom and choices. And I don't see why you would do anything different.

Kids, schools, friends, house prices, cost to sell a house (assuming you own), location of 2 jobs that aren't going to be the same forever.

There are many many valid reasons to not move.

I can't speak for the OP.

[swinginbeef]

I just try to make my emergency fund bigger.  In other words, the money is in a savings account.

This is what we do. Our emergency fund is large enough to replace both of our vehicles if we had to. If we have to draw down from that account, we build it back over the next few months. It's more $$ than I'd personally like to keep in a CU savings account, but it's a number that makes the wife feel warm and fuzzy. And a warm, fuzzy wife pays extreme dividends at home.