Well, I’m here to tell you that it is possible to pay cash for your car. You can get out of that vicious car loan cycle with a little bit of planning and a couple of years of sacrifice.
Pay off Current Car Loan
The first step in getting out of the cycle is to pay off your existing car loan. Rearrange your budget to put extra payments towards paying off that car.
Build a Car Savings Account
Once you have paid off your current car, you then need to refocus on building a nest egg for the next time that you need to purchase a car. Set up a savings account which you will only use for car purchases. This can be done at any online bank where there typically isn’t a minimum required to open the account. Then set up a monthly transfer from your checking into that savings account.
You can determine the amount to transfer in one of two ways:
- Make the transfer the amount of the old payment that you were already paying on your car.
- Determine what you’re going to spend on your next car and budget out that amount to be transferred. As an example, if you’re going to buy a $15,000 car in 4 years you can take the 15,000, divide that by the 48 months you have to save, and that is how much you will transfer in ($312.50).
The second approach is the one that my husband and I use. A few years out from buying a car, we will put a dollar amount down as far as what we’re aiming to spend on a car, do an estimate on what we can get for our existing car and then get that amount of money set aside into a savings account.
Extra Time to Save Money
While you are building up your car nest egg, there are some things you can do to not only reduce your auto costs, but to keep your car running longer so you have more time to save the money for your next car.
To get the most use out of your car, you’ll want to drive it for as long as possible. Avoid getting a new one every couple of years; try to keep your car for at least 5 years. My personal aim is always to keep a car until it is 10 years old. If I buy a 2-year-old car, I’ll keep it 8 years until it turns 10.
You also want to service your car regularly. You might think this will just cost more money out of pocket, but when you take care of regular maintenance your car will last longer. The longer your car lasts, the more time you have to save, not to mention it lowers your monthly cost of the initial purchase price.
The other thing that you can do to prolong your car’s life is to use it less; walk whenever you can and maximize your routes when doing things like errands. For example, we live about ¾ of a mile away from my son’s school. So when the weather’s nice, we will walk instead of driving. Additionally when I am running errands, I will list everything and then come up with a plan where there is no back tracking and the stops are a minimal as possible.
Finally, when you’re buying a car, buy used. I’m sure you’ve heard before that the value of a car depreciates greatly over the first couple of years. Getting a car that is one or two years old makes a big difference in the purchase amount and will really take your buying power further. It also means you need to save up less than you would for a new car.
Ultimately, remember that a car is a depreciating asset; meaning the value is always going down. The longer that you can use your existing car and the more that you can pay cash for your car, the less money you’re going to lose. Taking the time to pay off your car debt will keep you out of the debt cycle, and will save you money for years to come.
Need help getting out of debt? Check out our ebook on what you need to finally get that debt paid off. Debt Pay off ebook.