If you're planning to buy a car, saving up for it is more important than ever. The average new car price was $48,528 in May, according to Kelley Blue Book. Used cars aren't cheap, either, selling for an average of $27,256.
You can get an auto loan to help cover the cost, but interest rates are on the high side. The average auto loan interest rate ranges from about 6.9% to 17%, depending on your credit score. So, it makes sense to put down as much of a down payment as possible to avoid taking on too much costly debt.
But what's the best place to keep your car savings? This isn't money you should invest, because the market can go up and down. You don't want your car savings to be worth less when you need it. Fortunately, there's one type of financial account that's ideal for your car fund.
A high-yield savings account is a good option
For security and flexibility, high-yield savings accounts are the best choice. These are like any other savings account, with one important difference -- they pay much higher interest rates. The average interest rate for a savings account is currently 0.42%. Many high-yield accounts are offering upwards of 4%.
To put that difference into perspective, if your savings account pays 0.42%, a $10,000 balance would earn you about $42 in annual interest. With a high-yield account that earns 4%, that same balance would earn you about $400. From a personal finance standpoint, it's an easy call.
You can withdraw your money from a high-yield savings account at any time. That makes it perfect if you're not exactly sure when you're going to buy a car. You could take out your money after one week, one month, or one year. It's all up to you.
If you're wondering how secure these accounts are, most are FDIC-insured just like accounts from the big banks. That covers up to $250,000 per eligible account in the event of a bank failure. You can confirm that an account offers FDIC insurance on the bank's website, by contacting the bank, or by contacting the FDIC.
You could also get a money market account or a certificate of deposit
There are a couple of potential alternatives to consider, if you're not sure a savings account is right for you.
Money market accounts have the benefits of both savings and checking accounts. Many of the top money market accounts have similar interest rates to high-yield savings accounts. In addition, they also let you use your money with a debit card, checks, or both, like you can with checking accounts.
This makes it easier to access your money. With a savings account, you'd normally need to transfer your money to a checking account first. With a money market account, you could write a check directly from that account when buying a car.
If you want to lock in your interest rate, you can do that with a certificate of deposit (CD). Savings accounts and money market accounts have variable interest rates that can go up and down. They've gone up quite a bit over the last year and change, but there's no telling how long they'll stay that way.
CDs are accounts you open for a fixed time period and with a fixed interest rate. Terms generally range from six months to five years. And the best CD rates are sometimes higher than the highest savings account rates, so you could lock in a fantastic rate this way.
However, you can't deposit more money into a CD after setting it up. You'd need to open a new CD, meaning this may not be a convenient option if you plan to consistently add to your car savings. But it can work well if you have a large chunk of money saved already and want to ensure that it earns a high interest rate.
Building your car savings
To sum it up, a high-yield savings account is a great place to save for a car. If you want more withdrawal options, money market accounts are worth considering. And CDs work well for getting a fixed interest rate on your savings.
If you're going to need an auto loan, also take this time to work on improving your credit score. That can help you get the lowest interest rate on your loan. Once you're ready to buy, make sure to compare auto loan options, as you could find that some lenders offer much better deals than others. Cars may be expensive, but a large down payment and a reasonably priced auto loan still make a big difference.
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FAQs
Some good options would be a savings account at your bank or a money-market mutual fund. With either of those, you won't risk losing money, and you might even earn a little interest. Make it automatic.
How much money should I have saved to buy a car? ›
The 20/4/10 rule is a general guide to car buying. It advises that you put 20% down on a 4-year auto loan and spend 10% of your salary on transportation costs. So, if you're interested in a $20,000 car, you would put 20% down, or $4,000.
What is the best amount to save for a car? ›
Normally, it is between 10% and 20% of the car purchase price. But even if it's not a requirement, there are at least three major reasons to save before taking out a car loan: A bigger deposit reduces the amount you need to borrow, making your payments more affordable or the repayment term shorter.
How to save for a $40,000 car? ›
Set A Monthly Savings Goal
Divide your goal by the number of months you intend to save. Say you want to buy a vehicle that will cost roughly $40,000 after taxes and fees, and want to save for a 20% down payment, getting a monthly payment amount that agrees with your budget. That means you'll need to save $8,000.
Should I use a high yield savings account to save for a car? ›
A high-yield savings account can be a smart place to save for a down payment and other car-related expenses. Consider setting up automatic transfers to move a certain amount of your paycheck into your car account (that way, you won't be tempted to spend it elsewhere).
How much should I spend on a car if I make 100000? ›
50% of Your Income Across All Vehicles
Similarly, if your family earns $100,000 per year total, the total value of all of your vehicles shouldn't be worth more than $50,000.
Is $10,000 enough for a decent car? ›
Buying a used car for less than $10,000 can get you behind the wheel of a reliable and good-looking ride without costing you a fortune. However, you must prepare for potential repairs that can empty your wallet even though you might not break the bank with upfront costs.
What is the 50 30 20 rule? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
Is paying 500 a month for a car too much? ›
How much should you spend on a car? Whether you're taking out an auto loan or a personal loan to pay for your car, it's a good idea to limit your car payments to between 10% and 15% of your take-home pay. If you take home $4,000 per month, you'd want your car payment to be no more than $400 to $600.
Where to put savings for a car? ›
Some good options would be a savings account at your bank or a money-market mutual fund. With either of those, you won't risk losing money, and you might even earn a little interest. Make it automatic.
If you wanted to stick to this rule of thumb and buy a $50,000 car, you would need a monthly take-home income of at least $7,240 if you got a car loan at a below-average rate and stretched out your payoff time for a long time. Many people will find that purchasing such an expensive car really isn't affordable.
How much income to afford a 40k car? ›
To afford a car that costs $40,000, financial experts suggest that your annual income should be at least 2.5 times the purchase price. This means you would need to make at least $100,000 per year1. Additionally, it's recommended to not spend more than 35% of your gross annual income on a car2.
How much money to comfortably afford a car? ›
Financial experts recommend that your monthly payment should be around 10% to 15% of your monthly take-home pay. Additionally, your total monthly car expenses should be no more than 20% of your monthly income, and this includes your car payment, insurance, maintenance and gas.
Should I deplete my savings to pay off my car? ›
Depending on how much you owe and your current financial situation, paying off your car loan early might cause undue hardship. If paying off your car loan would deplete your savings, it's probably better to build your emergency fund or pay off debt instead.
Can I lose my money in a high-yield savings account? ›
You can't lose your money because, just like your regular checking and savings accounts, the money is insured by the Federal Deposit Insurance Corporation up to $250,000.
Do millionaires use high-yield savings accounts? ›
Millionaires Like High-Yield Savings, but Not as Much as Other Accounts. Usually offering significantly more interest than a traditional savings account, high-yield savings accounts have blown up in popularity among everyone, including millionaires.
How much of your salary should go to buying a car? ›
According to our research, you shouldn't spend more than 10% to 15% of your net monthly income on car payments. Your total vehicle costs, including loan payments and insurance, should total no more than 20%. You can use a car loan calculator to calculate a monthly payment within your budget.
How much money do you need to buy an average car? ›
The average cost of a new car in 2022 in the U.S. was reported to be about $48,000 and for a used car about $35,000. Most car owners will provide an initial cash down payment of 10-20% of the car's cost, after which they then have a monthly loan payment.
What car can I afford with a 40k salary? ›
on the price of a car. is not to exceed 35% of your gross income. That means if you make $40,000 a year, the cars price should not exceed $14,000. If you make $80,000, the cars price should be below $28,000. And at 150 k salary, that means your max car price should be 50 2500.
