I was recently privileged to purchase my latest new-to-me car, a 2008 Ford Taurus SEL. My 1997 Ford Ranger is still doing fine, but is not very family-friendly and the gas mileage on my 80 mile commute (round trip) was definitely a concern. So for a few months I’d been looking for something to fit our family and save us some gas money in the process. This is the third vehicle I’ve bought for us using $100 bills and several of you have asked me how to pay cash for your vehicles and/or how to break the cycle of car payments. I dedicate an entire chapter in my book to that topic, but I thought I’d give you the gist of it through a post today.
The Normal Approach
The average selling price of a new car is over $31,000, with an average monthly payment of over $400 (closer to the $450 mark). That being said, the Myers do not buy new cars. When I look at how much value is lost in the first 2-3 years of ownership on a new car, I just can’t bring myself to go there. The “normal” approach is to buy new, finance for 60-72 months and trade it in as soon as it’s paid for (or sooner). This will never work. It only perpetuates a cycle of indebtedness to the finance company.
Breaking the Cycle
As I see it, you have two options for breaking the car payment cycle and ultimately being able to pay cash for your vehicles – let’s discuss both.
Option 1: Keep Driving It
If you are used to making $400 monthly car payments, why don’t you just keep driving your paid-for car for a little longer? If you can put $400 of “car payments” into savings for just three years, you’ve got $14,400 (plus interest) to go buy a new ride. A quick glance at a local car dealer’s website told me $14,400 would buy a nice two-three year old car with no trouble. If you keep up this savings cycle and replacing your car every three years, you’ll always drive cars that are five or fewer years old and never have to pay a dime to a finance company for your car again. You can make this even easier on your budget or upgrade to a nicer vehicle by driving the cars longer.
Option 2: Be Embarrassed For a Few Years
Option 1 assumes you have a decent car right now that can last a while longer. Some of you are not that fortunate. You’re in a car that desperately needs replacement or you don’t even have a car right now but need something to get you back and forth. If you don’t have any cash in hand, let me offer some simple guidance – borrow LESS. If you can’t pay cash for a car, take out a loan. BUT (notice it is a big BUT…hahaha) be willing to buy cheap and stick it out. About the cheapest I can find a reasonably reliable car I’d be willing to drive for a long period of time is $4,500 or so. If you’re desperate and need point A to B only, $1,000 cars can be found that I would trust to last a year or two if cared for.
Before you go shopping for the next car you’ll be financing, make two commitments: 1) I will finance this car for no more than 1 year, and 2) I will drive it for a minimum of five years or until the wheels fall off. If you do that, you’ll realize that at the end of 1 year with $400 car payments, that bad boy is yours. Drive it for four more years, and you’ve got almost $20,000 in the bank to go buy a car you won’t be ashamed to be seen in.
Some of you are pumped about these ideas and ready to get started. Some of you are saying, “yeah, but…” Let’s deal with some of those objections before we wrap this up:
- $400 per month is too much (or not enough) for my situation. Okay, the math is pretty simple – choose numbers that fit your budget and redo the math. It isn’t about the numbers, it is about the change in behavior.
- What about a lease? Umm…no. Please read my thoughts on leases.
- But I want a new car! I want my children to sleep through the night from birth and I want my yard to mow itself. I want our government to quit wasting all my tax dollars and screaming they need more. Quit whining.
- I’ll have to spend money on repairs. Cars are machines. They will break. I’m not just referring to engine repairs, but there’s also tire and windshield replacement, and even auto electrical repairs. My brother works as parts manager for a dealership and I’m constantly amazed at how often NEW cars have to have major repairs done. While you should expect an older car to need some maintenance, buying a new car so you’ll have “no repairs” is false security…and expensive.
- I can’t find a car for $4,500 (or $14,400…etc.). I’ve visited this topic. Have a look at a couple of articles I’ve written on knowing when to buy and getting a good deal.
- Gas is expensive. My current car just costs too much in gas. Gas mileage should factor into your purchase decision, but don’t buy something just because of it.
- What about tax incentives? Hopefully you know the government offers those usually because we wouldn’t buy the product otherwise. If you’re gonna buy something anyway, take the tax break. But just like with MPG, don’t buy something just because the government gives you a tax credit for it. That’s not very smart.
Well, I guess that about sums it up. If you want greater details, I would encourage you to spend a few bucks on my book, From Debtor to Better: The Details of Debt and How to Get Out! Your turn – have any good car stories of success or stupidity?!