Recently, a listener named Jean Theo reached out with a question about saving for a new car. Jean Theo is currently saving and investing 25% of their income but needs to purchase a new car.
First, it’s important to determine the reason for needing a new car. Are you upgrading to a nicer car or do you need a new car for basic transportation? The answer to this question will guide you in determining how much you need to save for a down payment. If you need basic transportation, you’ll likely want to have a 20% down payment, which should be part of your emergency reserve. This reserve should be equal to three to six months of living expenses.
On the other hand, if you’re looking to upgrade to a nicer car, you’ll want to make sure your eyes aren’t bigger than your wallet. You should only purchase a luxury car that you can pay for in cash, avoiding a high car payment. You’re in a great place if you’re already saving and investing 25% of your income, as this puts you at step seven of the Financial Order of Operations. This means that you may be approaching step eight, which is the time to consider prepaid future expenses, such as a fancy new car or a nice vacation.
It’s important to understand that cars can be a difficult item to save for because we often blur the lines between what we need and what we want. Moving from a car that is five or six years old to a newer one may be a necessity if your family is growing and you need more space. However, upgrading just for the sake of having the newest technology is not a necessity.
In conclusion, when considering a new car, it’s important to determine whether it’s a need or a want, and then make a plan based on that information. By balancing your savings and investment goals with your need for reliable transportation, you can make a wise financial decision.
To learn more check out our Financial Order of Operations course.