I barely drive my Volvo SUV — but I can't decide if I should downsize to save money or hold on to it for a few more years. Will trading it in sooner save me much more money?

When it makes sense to downsize

The two factors that you’ll need to think about when deciding whether to downsize are finances and lifestyle.

Finances

Downsizing a car to save on costs could be worth it if you can justify the savings. For example, if you’re swapping a foreign luxury SUV for a smaller domestic model.

Switching cars could be a smart move if the new vehicle costs significantly less and you can get a decent trade-in price for your current one. That’s assuming you take on a new auto loan and the monthly payments or interest charges are lower than what you’re currently paying.

Same goes for saving on other expenses, like your car insurance. Owning a more expensive or larger vehicle could mean higher premiums. By downgrading, you could save on your policy.

Saving on depreciation costs could also be a reason to get a smaller vehicle. As soon as you drive a car off the lot, the value of it starts going down.

According to Kelly Blue Book, new vehicles typically depreciate around 30% within the first two years and about 55% by the fifth year. A Consumer Reports analysis found that it's typically better to replace a vehicle that's several years old to cut your losses, in terms of depreciation, and purchase a cheaper car model.

In fact, a vehicle that’s five years old — even if it’s paid off — could incur higher expenses, in terms of fuel and maintenance, compared to a smaller vehicle. Or, if you purchase a used vehicle, you can avoid steeper depreciation, saving you even more.

Be sure to review all related expenses of downsizing, like taxes, registration fees and loan costs, to ensure you’re truly maximizing the financial benefits of this change.

Lifestyle

Switching to a smaller or cheaper vehicle works if the car will also meet your lifestyle needs. A large family may feel cramped in a small vehicle. Or, a couple that works from home may not need to keep a big SUV that just sits in their driveway most of the time.

Take the time to think about what you use your current vehicle for and whether the one you want to replace it with will tick off all the boxes.

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Adjusting the budget after downsizing your vehicle

If you choose to downsize, you have plenty of options when it comes to allocating any cash you’ve freed up.

Before choosing any of those listed below, carefully track your budget to see how much you’re spending on related costs. This includes your new car loan payment, gas and maintenance.

Use this amount to compare to how much you used to spend. The difference is the extra cash you’ve freed up.

These savings could go towards your financial priorities, like starting or contributing to your emergency fund. Having savings set aside gives you more solid financial footing in case of unexpected circumstances, like a job loss, home repairs or an unexpected medical bill.

Investing for the future, like for a home down payment or towards retirement could also be a good use of the money.

Allocating the money towards other necessary expenses can also make sense. Maybe you were hoping to increase your food budget to account for rising costs or create a sinking fund for regular spending on, say, birthday gifts or vacations.