I love my car but its mileage is starting to get up there. What is the best way to start saving for a new car? Should I start putting aside more money than usual from my paycheck in my savings?
What a terrific question! I'm very glad to hear that you are planning for a future purchase before being "forced" to find a new mode of transportation when the current one runs out of its useful life. When we have time to plan, we tend to make better decisions for our financial future. First, take a critical look at your vehicle and your needs. Vehicles today are lasting longer than the vehicles of the past. With regular maintenance and a bit of care, many vehicles can last well beyond 100,000 miles and perform very well with minimal costs. So let's make sure the decision for a new ride is the right one and not just a new shiny thing for the driveway.
Assuming it is indeed time for another vehicle purchase, think about what you'll need. Certainly look for some bells and whistles but be cautious because those items can really add to the price. Once you know you needs, we can start looking at affordability of vehicles for you. Now in an ideal world the financial planner in me would love to see you be able to pay cash for the car and avoid any monthly payments. If you can make it happen without depleting your emergency funds, then I'd encourage you to do so. However, most people will be financing at least part of the vehicle cost. Think about keeping the total cost of ownership of the vehicle between 10 - 15% of your take home pay. Remember that total cost of ownership includes things like insurance, gas, and maintenance - not just the monthly payment on a car.
So now that you've looked at your true needs, and affordability, and whether or not you'll need to finance the vehicle, you'll need to find a great way to save for either the down payment or the total cost of the car. If you're financing, we recommend you save up at least 15% - 20% of the value of the vehicle as a down payment. So what is the best way to save? As you mentioned in your question, saving a larger portion of your income for the vehicle is a great idea. Since you're planning on a purchase relatively soon, I wouldn't recommend anything with investment risk. We don't want the dollars you've saved to be lost to a market downturn just when you need the money for the purchase. Accounts like savings accounts and money market accounts are a great place to keep your savings safe while adding a little bit of interest along the way and you'll have immediate access to your money when you need it.
If you find that you have a bit more time, you may find a little higher interest rates in Certificates of Deposit (CDs). CDs offer slightly higher interest rates but you give up a bit of access to your funds. You can purchase 3 month, 6 month, 12 month, or more periods for your CDs. The longer the time frame, usually you'll find a bit higher interest rate. So this option is usually better suited for when you know you'll not need the money within the chosen time frame. And it's usually better if you have a "lump sum" of money to put into the CD. Monthly funding of the CD is usually not permitted.
I congratulate you on planning ahead for the purchase either way you choose. You're certainly showing great financial planning skills already! Keep up the great work! And let USAA help along the way. We can assist in determining the affordable price of the vehicle for you, help you find one that fits your needs with a terrific dealer near you, and make it easy to finance it along the way.
Click for the Auto Savings Goal Planner at usaa.com to get started.