How to budget and save up for a car
Buying a car, particularly if it’s your first car, can be a milestone and like many South Africans you might have to save up for it before you can afford it.
It takes a lot of discipline to be able to stick to a savings plan, but you’ll soon realise that having your own transport is a necessity and hopefully that’ll motivate you enough to reach your savings goal.
Whether you’re a spender or a saver, here are some steps to take when saving up for a car:
Establish a budget
Work out how much of your earnings you can afford to put towards your car (i.e. 30% of your annual gross salary) and stick to it. Be realistic and don’t neglect your other expenses like your rent, food etc. Don’t forget to include running costs such as petrol, maintenance etc into your budget.
Also read: Which of these cars could your salary afford?
Most financial advisers suggest that you take inflation into consideration when planning your budget. WikiHow recommends adding about 2% to 4% more to the total savings goal that you establish.
Start a savings account
The sooner the better. Once you’ve established how much you can afford to start saving towards your car, open up a savings account as soon as possible. If you’re more of a spender than a saver, Old Mutual advises that you choose a savings plan that will provide you with the discipline you may need.
Make saving your priority
Once you’ve set a clear goal, don’t make exceptions for unnecessary expenses like social activities.
There are ways to enjoy saving without feeling deprived from life’s joys. Find ways to substitute unnecessary expenses, like opting for a movie night at home with friends instead of paying for movie tickets. Make a point of telling friends and family that you’re saving so that they know to support your lifestyle by doing braais instead of eating out at expensive restaurants, and perhaps they’ll even contribute a little bit towards your savings for your birthday.
If you’re going to be using a finance or loan option, try to save up for 20% of the car’s total value to put towards the deposit. The more you can put towards a down payment, the lower your monthly installments will be.
Do your homework
When it comes time to buying a car make sure your spend time researching its resale value, how economical it is, different payment options and don’t rush into buying it.
Les Mc Master, Chairman of the Motor Industry Workshop Association (MIWA), urges prospective buyers to research their options thoroughly.
He encourages consumers to also include other costs associated with buying/leasing vehicles such as maintenance and insurance costs when considering your finance options.
Also read: Car finance: Do your homework first
“Now more than ever, a vehicle purchase should be thoroughly-researched and properly thought out. Always keep the practical use you want out of the vehicle in mind and consider your average mileage and the increasing cost of petrol.”
Top 5 Dos and Don’ts
Do…
- Draw up a budget to establish affordability.
- Leave enough spare cash in your budget to absorb rising costs such as fuel and interest rates.
- Take the time to read and understand your finance contract.
- Contact the bank if you are in a situation where you cannot meet your financial commitments.
- Make sure you always have comprehensive insurance on your financed vehicle.
Don’ts…
- Overextend your budget.
- Provide the bank with false information about your affordability.
- Cancel insurance when you are in a financial bind.
- Rely on a large balloon payment to make your installments more affordable.
- Forget to include all costs in your mobility budget: petrol, insurance, and maintenance.
Balloon payments
“A balloon payment will require you to pay a lump sum at the end of the contract period. This might require a new loan, thus extending the amount of time you are paying interest on the car. Or you might have to sell the car in order to settle the balloon payment – starting the debt cycle all over again. Try to avoid balloon payments, and choose the shortest possible term for the loan. The sooner you pay off the vehicle, the sooner you are without this debt – and you’ll be in a better position to buy your next car.” WesBank
Also read: The uncertainties of car finance…be prepared!