However, it is often easier to spend more, versus less, when buying a car. One reason is that the cost can be spread out over 4 to 6 years of monthly payments. At a loan rate of 7%, the cost of an extra $1000 is between $17.05 per month (for a 6 year loan) to $23.95 per month (for a 4 year loan). It's easy to justify a premium stereo for "only" $17 to $24 a month. That's barely the cost a meal. The salesman knows that, the finance manager knows that, and the buyer knows that. Before long, one is paying about $200 more per month to get a car that cost $8000 more.
For me, the solution is to get the comparison back to the real numbers. That's where paying cash for a car helps. It puts the decision on the real money difference, not the monthly difference. It's not $24 a month more for a premium stereo, it's $1000. For $24, I barely think about it. For $1000, I think hard about it and pass. Paying cash causes me to ask the question, "Do I really need that?" when considering car options.
So how can one save enough to buy a car? It's easy if one is already making a car payment. The secret to keep the car several years after it is paid off AND keep making "car payments" to one's savings account. Thus, after 5 to 6 years, there is enough money to purchase the next car with cash.
Here's an example of how it can work. After paying off the car loan in three years, I continued to make "car payments" to myself. Because I kept the car for 10 years, I made $232 "car payments" to a savings account for 7 years, resulting in over $19,000 saved. That money was used as a cash payment for our next car.
For more on The Practice of Personal Finance, check back every Wednesday for a new segment.
Photo Credit: morgueFile.com, Daniel T. Yara
This is not financial advice. Please consult a professional advisor.
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