You might have read a lot of articles about saving for a car that are really judgy. This won’t be one of them.
The stories that advocate getting rid of your car, or saving up until you can pay for a car in cash, have merit. But they’re just not realistic.
The fact is, as a Canadian you probably need a car. Unless you live downtown in one of the few major centres with decent transit, a car is a necessity to get to work, go shopping, and live your life. And even if you do live in the city, a car is a convenience that can potentially make your life easier in a lot of ways.
But cars are expensive. Monthly payments, gas, maintenance and car insurance all add up. Depending on how much you drive, gas and insurance alone could add up to a few hundred dollars a month.
The only portion of the car’s expense that’s really within your control is the monthly payment. And if you want to reduce it you have two options—buy a cheaper car or save up.
So how do you save for a car?
Start by determining how much you need to save. A good place to start is by deciding what kind of car you want. You might need a small car that’s good on gas, a truck that can be used to haul equipment, or a minivan to carry your kids and all of their stuff. The cost will also be decided by whether you buy new or used—and if used, the age of the car. The older the car, the more repairs it’s likely to need so the sweet spot in terms of value tends to be a two- to three-year-old used car.
When you know what kind of car you want, do your research on prices. There are a lot of comparison websites that can help you get an idea of what’s out there.
Next, look at your budget and decide on the monthly payment amount you’re comfortable with. For example, if you want to spend no more than $500 per month on your car, and you estimate monthly costs of $125 for insurance and $200 for gas, that leaves you $175 for your payment. You can use a car loan calculator to play around with different term lengths and down payment amounts that get you to your desired payment. The down payment is how much you need to save.
For example, a car that costs $20,000 including taxes and fees, paid over five years at an interest rate of 4.99% will require a down payment of $10,725 to get you to a monthly payment of $175.
Next, do the math on how much you need to save each month to reach your savings goal. Your time horizon will depend on why you need a car. You might have a specific deadline (for example, the arrival of a new baby), a rough timeline (for example, an older car with a year or two left in it), or you might be limited by your ability to save.
Using the example above, a nine-month time horizon will require you to save $1,192 a month. A two-year time horizon requires you to save $447 a month. If you can only afford to save $175 a month, it’s going to take you more than five years to save $10,725.
If these numbers sound difficult to achieve, you might need to plan for a lower purchase price on your new car.
Once you’ve determined the amount you need to save each month, it’s time to get to work.
You’ll want to find the best account to save your money to earn some interest while you wait. There are a few different accounts you can choose.
A high-interest savings account is a good option that offers flexible access to your money whenever you need it. Interest rates are good and you can currently get savings rates as high as 2.5%.
Just don’t be fooled by your bank—many big banks offer savings accounts that pay very little interest. Others offer teaser rates that look like a good deal but actually pay less interest over time than an account with an everyday high interest rate. A savings account calculator can help you compare how much interest you’ll earn in different accounts. You’ll find the best deal by looking outside of your regular bank.
A TFSA is another excellent option that offers tax savings at the same time. You can actually hold various kinds of investments in a TFSA, not just cash. If you do choose a TFSA, be aware that there’s a TFSA contribution limit. Also, take a look to see whether lower interest rates offered in TFSA savings accounts outweigh the tax benefits. And finally, stocks are best suited for a long time horizon. So steer clear of risky investments if you’re planning your car purchase for less than a year or two from now.
GICs can help you keep your hands off your money if you have trouble leaving your savings account alone. By locking in your money for a set time period (anywhere from 30 days to five years), you can earn a set interest rate and keep your money where you can’t reach it. It’s the grown-up version of putting your piggy bank on top of the fridge. Just make sure your GIC term length is compatible with your time horizon; if you think you need to buy in a year or two, don’t lock your money in a five-year GIC. The best GIC rates in Canada will pay you around 2.4% for a one-year commitment.
When you finally get your new car, it’s a good time to start saving up for the next one. Cars only last so long, especially when they have to endure harsh Canadian winters. And the more you can save up now, the more flexibility you’ll have when it’s time to look for something new.
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