Driving is one of the biggest expenses that we have in American life. Aside from a home, buying a car is probably the heftiest purchase you’ll ever make. And you’ll buy several of them throughout the course of your lifetime. Since it’s such a big part of our financial obligations, shouldn’t we we really strategic about the way that we buy cars?
I think we should. We’ve already discussed how borrowing money for cars is a dangerous mistake, how buying brand-new cars is a bum deal, and how leasing is the most expensive and least wise way to drive. So what’s the best way to go? Paying cash for used cars.
I know what you’re thinking: “Used cars are no fun.” And sometimes they aren’t. Some used cars are rust buckets, scrap heaps driving around on wheels. But others are really decent cars, especially late-model used cars manufactured by reputable companies. Buying used cars doesn’t have to be a miserable experience. You can get a used car that’s also a fun car, a cool car, a safe car, a fuel-efficient car. Whatever it is that you value in cars, you can find in a used vehicle.
So why should you buy used? Because you get more for your money that way. When you buy a new car, you pay a high premium for the “new factor.” The car loses a lot of value the moment after you drive it off the lot, and continues to plummet in value during the first four years of ownership. But after those four years, the depreciation levels off to a much slower pace. So if you buy a used car, you’re letting someone else lose the money on the “new factor,” and then getting a good, late-model car that will hold onto much of its value while you own it.
Why should you pay cash for used cars? Because paying cash saves you from making additional, expensive interest payments on car loans. It keeps you from the possibility of getting underwater on the loan (owing more on the loan than the car is worth). And most importantly, it keeps you away from financial and spiritual bondage of debt.
Okay, this all sounds great in theory. But how do you actually make it work? After all, a decent used car costs several thousand dollars. And unless you’re a prodigious saver, you probably don’t have that kind of money lying around.
The answer is to become a prodigious saver. Think about it: If you borrow money to buy a car, you’re going to make monthly car payments for two to five years, or maybe even more. If you buy five new cars during the course of your driving life, that can amount to 25 years or more of car payments. But what if you made those payments to yourself instead of the bank?
You see, the truth is that since all cars depreciate over time, and since they all eventually fall apart, you’re going to have to buy numerous cars during your life. And that means you’re going to have to spend a significant amount of your monthly budget paying for your cars. But if you save for cars ahead of time instead of borrowing to buy cars when the need arises, you’re making those payments to yourself.
Making car payments to yourself has several advantages. When you make loan payments to a bank, you are also paying interest, which means that over time, you pay much more money than what the car is actually worth. But when you make payments to yourself in the form of car savings, you don’t have to pay anyone interest — which means that every single cent that you save is money that you can use toward the purchase of your next car. It’s the most efficient way to spend money on a car. Plus, if you save for a car in a bank savings account, you actually collect interest from the bank, giving you that much more money to spend for a car!
Which do you think is better — paying interest to the bank, or having the bank pay interest to you?
Car savings takes discipline, of course. But that’s true of any financial strategy that really makes a difference. If you can train yourself to begin saving several years in advance of when you’ll need to buy your next car, you’ll be pleasantly surprised how well your discipline pays off.
If you apply some savings and some strategy in the way you buy cars, you’ll even find yourself able to purchase better and better vehicles as time goes on, even without increasing the amount of money that you save. We’ll teach you how in the next article in this series.
Photo by Zyada. Used under Creative Commons License.