Where should you keep the money you save for a car?

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Hint: This should be somewhere where your principal is protected.


Key points

  • Even if you take out a car loan to buy a car, you will usually need money for a down payment.
  • The best place to keep this money is in a savings account, where you don’t have to worry about losing money.

Whether you’re buying your first car or your fifth, you probably know that even if your plan is to finance that vehicle, you’ll need money for a down payment. Or, if you don’t want to deal with monthly car loan payments, your goal may be to buy a car outright.

Saving for a car can take time, so it’s important to find a good home for your money as you work towards your goal. And for the most part, a savings account really is your best bet.

Stick to a savings account

The money in your savings account probably earns interest, but it might not earn much. This applies particularly in the current interest rate environment. On the other hand, if you were to put your car funds in a brokerage account and invest that money, you would stand a chance of a much bigger return.

But as tempting as it may be, savings accounts offer one big advantage over brokerage accounts, and that is that your money is protected for up to $250,000 per person as long as your bank is FDIC insured. . This guarantee alone is worth giving up for a higher return on your money.

As a general rule, it’s not a good idea to invest money that you think you’ll need soon. This is because the stock market can be very volatile, and if you don’t give yourself enough time to weather the downturns, you could end up with losses.

Let’s say you have $8,000 on hand and your goal is to save $10,000 and buy your car by the end of the year. If you were to put your $8,000 in a brokerage account, by November the value of your portfolio could decline to $6,500 if the value of the stocks drops. And that’s not a good thing if you want to buy your car in December. On the other hand, if you put $8,000 in a savings account today and don’t touch it, you’ll have that $8,000 at the end of the year, plus an extra touch of accrued interest.

And the CDs?

Certificates of deposit (CDs) tend to offer higher interest rates than savings accounts, so you might be tempted to keep your car funds in one. But right now that doesn’t make much sense. CDs don’t pay much more than savings accounts these days, so for that minimal increase in interest, it’s not worth locking yourself into a preset CD term.

If you end up having to cash in on a CD early, you’ll usually be penalized several months in interest. And while that’s not a huge loss with today’s lower interest rates, it’s also a situation not worth getting into.

Saving for a car takes effort. While you may be inclined to invest your car funds to reach your savings goal sooner, there are a lot of risks involved in going this route. You’re better off keeping that money in a traditional savings account and doing your best to keep adding to it until you have enough to drive away with the vehicle of your choice.

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