How to Save Money for a Car (and for Your Kids)
Updated June 2025 · A car bought with cash costs less than a car bought on credit — by thousands of dollars in interest.
Skip the fluff — TL;DR
Step 1 — Set your target and deadline
A sinking fund is a savings account dedicated to a specific, known future purchase. You don't wait and see what you have — you calculate what you need, divide by the months until you need it, and set that as your monthly transfer. It turns a large purchase from a financial shock into a scheduled event.
Example: You want to buy a $16,000 used car in 18 months. $16,000 ÷ 18 months = $889/month to the car fund. Add HYSA interest (at 4.5% APY) and you actually need slightly less. Use the savings goal calculator to get the exact number.
If $889/month isn't realistic: extend the timeline, lower the target price, or find ways to increase income. Don't finance what you can't save for — the interest on a car loan adds $2,000–$6,000+ to the total cost depending on rate and term.
Step 2 — Open the right account
Use a high-yield savings account earning 4–5% APY. Open it separately from your emergency fund — name it "Car Fund" in the app. When you see "Car Fund: $8,450" and your target is $16,000, that's motivating. When it's all one big savings number, you lose the signal.
Many HYSAs let you create multiple savings buckets or "goals" within one account — SoFi Vaults, Ally Savings Buckets, and Marcus Goals all do this. If yours does, use the feature. If not, open a second HYSA at a different bank specifically for the car fund.
Step 3 — Automate and inject windfalls
Set up the automatic monthly transfer on payday. Then have a simple rule for windfalls: tax refunds, work bonuses, side income, gifts, and anything you sell on Facebook Marketplace goes directly to the car fund. Every $500 injected is roughly half a month of timeline shaved off.
The average tax refund in 2024 was about $3,100. One refund going to the car fund instead of discretionary spending can shorten a 20-month savings plan to 16 months.
New vs used: the financial case for used
New cars lose 15–25% of their value the moment they leave the dealer lot and 50–60% in five years. A 3-year-old car has absorbed the steepest depreciation and typically still has years of reliable use ahead. Certified Pre-Owned (CPO) vehicles often include extended manufacturer warranties — giving you some of the new-car peace of mind at a much lower price.
The math: a brand-new Toyota Camry at $30,000 vs a 3-year-old Camry with 35,000 miles at $20,000. If both last you 10 years from purchase, the used car gives you 7 years of value at $10,000 less. Financed at 7% over 60 months: the new car costs an extra $12,700+ in interest. That's the true cost of new.
Saving money for your kids
For general savings (car, first apartment, emergency fund)
A custodial account (UGMA/UTMA) lets you save and invest on behalf of a minor child. You manage the account; the assets legally belong to the child and transfer to them at 18–21 (varies by state). You can contribute cash and invest in ETFs or index funds. The "kiddie tax" rules apply — unearned income above a threshold is taxed at the parent's rate until the child is 24 if a student.
For college savings: 529 plans
A 529 plan is the most powerful college savings tool available. Contributions grow tax-free, and withdrawals for qualified education expenses (tuition, books, room and board at eligible institutions) are completely tax-free. Many states offer a state income tax deduction on 529 contributions. You can use the savings goal calculator to estimate what you need to contribute monthly to hit a college savings target.
Starting at birth and contributing $200/month at 7% average growth: you'd have roughly $80,000+ by age 18. Starting at age 10: about $32,000. The power of time is the point. Start the 529 the week after the baby shower.
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