What’s the Best Way to Save for a New Car?

best savings accountsAlthough we just got a new to us car earlier this year, our other vehicle is ten years old with over 150,000 miles. Unfortunately, it won’t run forever. It’s time to start planning our next vehicle purchase. What’s the best way to save for a new car?

Buying Used Saves Thousands

Actually, it won’t be a brand new car. We learned the hard way that factory fresh cars are usually a waste of money. I know there are many people who believe in buying new and driving the car for many years, but we think it’s smarter to buy vehicles that are a few years old with low miles. We bought Jim’s Toyota Tacoma back in 2006 when it was a year old with about 10,000 miles. It saved about $4,000 and was practically new.

The truck still runs fine, and we hope to have at least two or three, maybe more years until we have to get something else. Just in case it’s sooner rather than later, we need to make plans.

Taking on a Car Payment

Mathematically speaking, with a low interest loan, having a car payment isn’t a bad idea. If we invest the chunk of change designated for car buying into high yield investments, we’ll surely come out ahead in the long run. In the past I have used handy car calculators like this one that helps me determine what the monthly payment will be.

Mentally, though, we are not willing to take on any sort of debt that doesn’t earn money. With that criteria, buying a cash flowing rental property would qualify as a reason to take on more debt. Purchasing a depreciating asset, like a car, does not. Even if we find a zero percent loan, we won’t go there. This car purchase has to be in cash.

 Best Place to Save Cash

While I’d love to be able to earn some interest while saving enough money to buy a new truck, there just isn’t much to be found with traditional savings or money market accounts. It looks like the best you can get right now is around 1%.

We could invest in a 12 month CD for a little over 1%. It looks like Synchrony Bank is currently offering 1.25% for a 12 month CD with a minimum investment of $2,000. However, we would like to be able to add to our balance, which most CD’s don’t allow.

We could invest the money in stocks or into our Betterment account. Since it will likely be at least two years until this purchase, this might be a good plan. Average returns are better than a savings account, but what if we need the money during a down turn? That’s the risk you take by investing short term in stocks.

Alternative Ways to Earn Money on Cash Savings

Since interest rates are paltry and stocks can be risky, another way to earn a little money on cash savings is to open accounts with banks offering bonuses. It takes a bit more time and attention to the rules, but if you’re smart, it’s easy to earn a few hundred dollars a year on  money that would normally be earning very little.

The easiest route I’ve found to getting a bonus for opening accounts is through Capital One 360. They don’t charge any fees or have deposit minimums for the most part. There are several  other offers on the list that don’t have difficult requirements. Depending on where you live and how much you have to stash, there is probably an opportunity out there to earn money while saving money. When hopping for bank bonuses, keep in mind that the account must stay open for a set period of time, generally 90-180 days. If you need the money sooner, you lose the bonus.

It Might be OK to Raid Your Car Fund

There might be times when it’s smart to raid your car savings fund. Since we have a separate emergency fund and don’t need a car immediately, I raided the $6,000 we had saved so far to put into my solo 401k during the recent stock market downturn. Obviously, if our goal was more immediate, this would not have been a good plan.

 Best Place to Save for a New Car Purchase?

I’m still on the fence about the best way to save for a new car purchase. This is what I’ve decided based on the options available for short term savings.

  • Easiest-Savings account
  • Best Safe Interest-CD, but you can’t add to the balance.
  • Highest Interest-Stocks. I wouldn’t use this method if you’ll need the money in a year or less.
  • Most money without investing in stocks-Using bank bonuses. This way takes more effort, though.

I think we’ll take advantage of a few hundred dollars in bank bonuses and then  park our money in a savings account as we get closer to our actual purchase. Here’s to hoping our current truck lasts several more years.

How far in advance do you plan new car purchases? Have you ever taken advantage of bank bonuses for opening new accounts? Any other thoughts on where to keep savings?

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Written By
Sydney White is a Texas-born stay at home mom who enjoys spending time with her family, bargain hunting and, of course, writing. She is currently the editor-in-chief of Snipon.com.

7 Comments

  1. I think it’s a great idea to have a separate car account in a “higher” (right now 1% is “high”) interest savings or money market account that is easily accessible. If the purchase is not imminent, this account can act as a secondary emergency fund and you can tap into it for longer term savings or use it for car repairs and maintenance on the old car when the amount gets high enough.
    If you need help selecting the right car or getting a great deal and saving time let me know. I help busy people and companies with the car buying process.

  2. “Mathematically speaking, with a low interest loan, having a car payment isn’t a bad idea. If we invest the chunk of change designated for car buying into high yield investments, we’ll surely come out ahead in the long run.” Couldn’t you *technically* earn money on this if you invest the money in dividend-paying stocks? I mean, I understand the desire for cash flow but I think it’s easy to devalue the benefit you can gain from rising stock prices.

  3. A few years back we bought a 5 year old Lexus with only 15,000 miles on it. We bought it from my brother in law under sad circumstances and we just put new tires on it so we plan to keep it a while. Our other vehicle is a pick-up truck over 10 years old but still with only about 40,000 miles. We have had people ask to buy both from us. My hubby actually hates having vehicles that are out of warranty so having these two definitely causes him to fret a little. He is not into the status of having a new car, but he hates paying for maintenance. We’ve actually leased in the past which I know is a big no-no in the personal finance advisor’s world, but it has worked out ok for us.

  4. I struggle with this too; my wife and I both drive rebuilt salvage title cars, and will need replacements in the next couple years.

    While I’d like to think that I will just sell stock in our taxable account, I think I’ll have a really hard time pulling the trigger on it after working so hard to put it in the account.

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