Where To Park Car Savings?

John writes in with a question about parking medium to long-term savings for a car replacement fund.

Here’s my situation: my car is 7 years-old with only 60,000 miles on it. It’s in good condition and definitely dependable; I plan on using it for another 5-10 years (five being the least). I figure that after 7 years of saving I would have about $8,400 plus the trade in value  for my car  – we’ll say that’s $1,000 for a total of $9,400.

My question is what do to with those savings? I don’t want to just let them sit there in my savings account, although it does have a decent APY of 1.40%. Should I put a sizable chuck into a 5 year CD and then continue to ladder it in CDs of decreasing term lengths until I need  the money to buy my car? Or should I just put it in a money market account, or higher yield savings account?

I want to maximize the money earned on that fund with out totally sacrificing my ability to withdraw it should an emergency come up, or I need to buy a new car sooner. What would you recommend?

John also shared with me that he is nearly debt free and will begin this car replacement fund after building a small emergency fund. Normally, I would recommend investing money that is to be used greater than five years out in a mix of fairly conservative mutual funds, such as a broad index fund with a low-fee brokerage like Vanguard.

However, this case is a little different because John is dedicating these funds as a car replacement fund. As such, the need to use these funds could arise any time between now and the six or seven years he plans to save. My own experience with Murphy’s Law leads me to believe John’s car will die the exact moment there is a market downturn, causing John to pull out savings at precisely the wrong time.

Instead of dabbling in a risky market, I would suggest parking the savings in an online savings account or money market account, and possibly a CD. I’m hesitant to fully recommend a CD because John mentions the possibility of tapping the funds in an emergency. To do so, he’d have to pay a penalty for cashing out the CD before the term expires.

Sometimes we have to sacrifice a little earnings for peace of mind, and I think this is the case with John’s car replacement fund. I’ve taken the same approach with my own set of sinking funds and targeted savings accounts. For now, they are stashed away in an online savings account at ING Direct.

Funds I don’t plan to use for a number of years will soon be laddered in CDs to increase the rate of return slightly. I’m comfortable reserving market investments for long-term saving goals.

Do you have any additional advice for John? Where are you currently parking savings for large purchases?


    • I’ve stumbled upon this post in 2013, and gasped at the thought of any high yield checking paying 4%, but then I realized that comment was from 2009. My high-yield savings here is 2013 is paying 0.9%, but that’s higher than most CDs I can find these days, so that’s where I’m parking my car replacement fund for now.

  1. I’d recommend keeping the savings as liquid as possible as well. We did pretty much the same thing –after we finished paying for our car loan, we kept making payments to ourselves and put the money in an ING account. We were hoping our old car would last for at least two more years before we had to purchase another, but when we were one year into our savings plan, my husband’s car was totaled in an accident. It was nice to be able to purchase a new car when we needed it instead of worrying about penalties or market timing.

  2. This is a great question because I don’t know what to do with my savings either. I’m thinking about putting some into CD’s and laddering them, but also having emergency cash handy as well. That’s what I would do, but I haven’t yet so we’ll see if it actually works!

  3. I don’t see the point of having a dedicated “Car replacement” fund. A sub-account at ING may work for a short term goal like vacation or even an emergency fund, but I think the money for a long term goal (5-7 years) like a new car should go into the highest paying investment you’re willing to risk. Having an account that says “New Car Fund” would entice too many to buy a new car when the funds reach a high enough level, whether they need the new car or not.

  4. I am about to be faced with this same dilemma and plan to stash my “new car fund” in a Vanguard Lifestrategy Fund, either the 3-5 year Income fund (VASIX) or the greater than 5 year Conservative Growth fund (VSCGX).

    I may also consider a tax exempt municipal bond fund, such as the VMATX which has been paying over 4% tax free for more than 10 years.