Saving for a car comes down to two decisions: new or used, and cash or financing.
The number itself is bigger than the sticker price suggests. Sales tax, title and registration, and your first insurance payment all come due around the same time as the down payment, and they're the costs most savings plans leave out.
How much should you save for a car?
Three things decide your number: what a new car costs against a used one, how much of it you're expected to put down, and the fees nobody quotes you at the dealership.
New vs. used car costs
The average new car costs $50,089, according to Kelley Blue Book, a number that's out of reach for many first-time buyers. If you're just starting to build credit or working with a tight budget, a used car can be a better choice.
The average used car runs closer to $27,240, but plenty of reliable options exist well below that. You can often find solid vehicles in the $10,000 to $15,000 range from private sellers and smaller dealerships.
Down payment benchmarks
A common benchmark is 20% down on a new car and 10% on a used one. Both are rules of thumb rather than requirements. But they can protect you from being ”underwater" on your loan, which is when you owe more than the car is worth. Putting little or nothing down makes this more likely, and often means a higher rate.
Run the numbers >> Use Kikoff's auto loan calculator to see how your down payment and loan term change your monthly payment and total interest.
Don't forget taxes, registration, and insurance
Sales tax
Sales tax varies by state, and Alaska, Delaware, Montana, New Hampshire, and Oregon don’t charge it at all. Where it does apply, here’s what you can typically expect to pay:
- Low (under 6%) — Hawaii (4.5%), Wyoming (5.4%), Maine (5.5%)
- Moderate (6-8%) — Florida (6.98%), Iowa (6.94%), North Carolina (7.10%)
- High (8%+) — Oklahoma (9.06%), Washington (9.57%), Louisiana (10.13%)
On a $25,000 used car, a 5% tax rate adds $1,250 to your total, while a 10% rate adds $2,500.
Title and registration fees
Each state charges fees to register a vehicle and transfer the title, but the amount varies based on factors like a car's value, weight, and age.
Some states charge a flat fee — for example, Georgia's annual tag is $20, while Illinois charges $151. Others treat registration as an annual tax on what the car is worth, which is why California adds a 0.65% vehicle license, and why Colorado and Connecticut drivers can pay several hundred dollars or more each year.
Title transfer is a smaller one-time charge, from $4 in Arizona to $165 in Illinois, with most states between $10 and $75. Check your state's DMV for its actual fee schedule before you set a savings target.
Car insurance
Insuring the average vehicle cost drivers $1,282 in 2023, according to NAIC, the most recent year of state regulator data. For a policy carrying liability, collision, and comprehensive, the average premium was $1,438. Premiums climbed 14% in 2023 alone, so budget for more than that today depending on:
- The type of car
- Where the car is parked
- Your personal driving record
- The coverage level desired
Most insurers and insurance marketplaces allow you to get a quote before you buy a car, to ensure the insurance payment fits within your budget.
How to save money for a car in 5 steps
1. Set a savings goal and timeline
Decide on your car budget and how much you want to put down. Add in your state’s taxes and registration fee, then divide by the number of months you’re planning on saving for.
For example:
- Car price: $25,000
- Savings target: $3,750 ($2,500 down + $1,250 for state taxes and registration)
- Timeline: 12 months
- Monthly savings target: $312 ($3,750 / 12 months)
2. Create a dedicated car savings account
To avoid dipping into your emergency fund, open a separate high-yield savings account (HYSA) for your car savings fund.
A HYSA works like any other savings account, with one difference that matters: the rate. These accounts often pay several times the national average, and the money is just as accessible and just as federally insured. The higher the rate, the faster your money grows.
3. Cut expenses to save faster
Pull two to three months of bank and credit card statements to discover where you might be able to save.
Look for things like:
- Impulse purchases
- Coffee and meals out
- Streaming services and subscriptions you rarely use
- Phone plans you're overpaying for
- Car, renters, or home insurance you haven’t shopped around for recently
- Gym memberships you're not using
- Brand-name groceries you could swap for store-brands instead
These small changes can compound quickly. For example, trimming just $50 a month puts an extra $600 toward your car fund over the course of a year.
4. Boost your income temporarily
If cutting expenses alone won't help you save fast enough, a short-term income bump can help, including:
- Picking up gig work
- Freelancing in a skill you already use at work
- Selling unused stuff on eBay or Facebook Marketplace
None of these requires a long-term commitment, and even a few months of extra effort can add up fast.
5. Automate your savings
Set up a recurring transfer from your checking account to your HYSA. Most banks let you link to an external account and schedule regular deposits. Start with whatever amount is manageable and remember that a small, consistent transfer beats a larger, unreliable one every time.
Run the numbers >> Use Kikoff's compound interest calculator to see how much your savings could grow and how much of that growth comes from interest alone.
Should you pay cash or finance?
Paying cash means no monthly payments or interest, but the funds should come from your dedicated car savings. If buying a car wipes out your emergency savings, then you're better off financing it, as long as the monthly payment fits your budget.
How your credit score affects financing
Your credit score plays a major role in the interest rate you’re offered on an auto loan.
Here's how average rates break down by credit tiers:
A super prime borrower financing a $20,000 loan at 5.08% for 60 months would pay $2,689 in total interest. A subprime borrower at 12.84% on the same loan would pay $7,206 – more than $4,500 in additional interest. Run the numbers on your own target price to see what different rates might cost you.
The bottom line
Ultimately, saving money for a car comes down to knowing your goal, opening a high-yield savings account to build your savings faster, and staying consistent.
Your credit history carries real weight in the car financing process. Kikoff's Credit Account reports your on-time payments to all three credit bureaus, helping you build the payment history lenders look for. No credit check required, with plans starting at $5 a month.
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Disclaimer: The information provided in this blog post is meant for informational purposes only and does not constitute financial advice.
