Cars are expensive. The average American spends almost $9,000 per year per vehicle on repairs, fuel, insurance, taxes, and car payments. Add on that cars rapidly depreciate in value and it is quick to see why decisions about purchasing a vehicle significantly impact your financial picture.
But you aren’t reading this post to be convinced that cars are expensive; you already know that. Rather, this article focuses on the costs of car ownership that you can control. Namely, this article shares how to eliminate car payments altogether by paying cash for your next vehicle.
First, why pay cash? Simply put, paying cash for a vehicle will yield significant long-term savings.
Why Paying Cash Saves You Money
1. Interest Is Expensive
Consider a $20,000 car purchase, which is well below the average purchase price for a vehicle. Someone with good credit might get a 72-month (6-year) auto-loan for 5% interest. That comes out to nearly $3,200 in interest payments over the life of the loan.
$20,000 (Purchase Price) x 5% ( Interest Rate) x 72 months (Term Interest Expense) = $3,200
2. 0% Financing Is Costly After All
The words “free money” are often associated with offers for 0% financing on a vehicle purchase. Yet that money really isn’t free at all. What often goes unmentioned is the discount received by cash buyers that forego financing. If you opt to pay cash there will likely be a significant price drop to the actual sticker price of the car. In essence, dealerships bake the financing charge into the advertised price of the car. Cash buyers save this money right away.
3. Financing Encourages A More Expensive Car
No doubt there is a psychological element to car buying. Financing our purchase encourages us to focus on our wants. Using our hard-earned cash to buy a car encourages us to focus on our needs. Remember, we already established that a car is a quickly depreciating investment. Therefore, it is better to stick only to what you need.
4. Better Uses For Monthly Car Payment
According to recent data from Experian Automotive, the average auto payment for a new car is $554 per month! What could you do with this money if you no longer had a car payment? Sure, a portion of it should be saved for your next vehicle, but the rest could be used to save for retirement, pay down student loans, or give generously to organizations or people that you care about. Don’t each of these things sound more exciting than paying off a car that is going down in value each year?
How To Pay Cash For A Vehicle
1. Get Out Of Your Current Loan
Be aggressive about paying off your current loan and eliminating the payment. If you stretched too far for your current vehicle then consider selling your car and getting into one you can pay off quickly or even buy outright.
2. Put The “Would Be” Car Payment Into Savings
Now free from a car payment, you can focus on saving by allotting the “would be” car payment (and any additional funds) to a liquid savings account. I highly recommend opening a separate savings account – that has no minimums or fees – to specifically save for this purpose. Consider even going as far as titling the account “Next Vehicle.”
3. Set A Goal And Make A Plan
Don’t listen to anyone telling you to spend a certain percentage of your income on a car. No financial picture is exactly alike. Therefore, there are no magic formulas for car buying. Instead, identify what you and your family’s needs are while considering what you are able to save each month. Target an attainable price range and time frame that fits both.
For example, if your goal is to purchase a $9,000 vehicle five years from now, then set up an automatic monthly transfer of $150/month to your savings account titled “Next Vehicle.” Now is also an especially important time to pray about this decision. Ask God to guide this process and give you wisdom on the right type of car to seek.
4. Shop Multiple Vehicles; Including At Least One Used Car
When the time comes, look at vehicles from multiple dealers or sellers. Not getting attached to one car helps you maintain a logical approach rather than an emotional one. It also helps with negotiating as it is easier to walk away from a deal if need be. Having at least one used vehicle in the mix will force you to deeply consider and analyze whether a new or used car is right for you.
A helpful tip: don’t be afraid to look online at other markets! The same car may cost significantly less in another city. It may be worth it to travel to get the car and drive it home. Plus, if it’s a used car in a warm climate, then it is likely that the car wasn’t susceptible to harsh winters. Rust and other weather-related issues should be less of a concern. Five years ago, I flew down to Texas with a friend to buy my family’s minivan off of Craigslist for this reason. I even got to drive through hail and a tornado on the way back!
5. Negotiate Before Buying
Cash buyers have much more bargaining power than those buying on credit. You’ve done the hard work to get into this position. Negotiate for the best possible price on each vehicle you are considering.
6. Start Saving For Your Next Vehicle
Enjoy being debt-free and having years to save for your next vehicle!
What about you? Have you ever been able to pay cash for a vehicle? Would you like to be able to do so?
Cars are big commitments that drastically impact your overall financial picture. Car purchases should, therefore, be considered closely and in the context of a wider financial plan. Guide Financial Planning helps individuals understand all areas of their finances, including big purchases like vehicles. You’ll feel empowered to make smart decisions towards a healthy and Christ-centered financial outlook. Schedule a call today so we can discuss a financial plan that is right for you.
About Guide Financial Planning
Guide Financial Planning is led by founder Ben Wacek, who is a Christian fee-only Certified Financial Planner™ and Certified Kingdom Advisor®. He has a passion to help people of all income levels make wise financial decisions and steward their resources from an eternal perspective using Biblical principles. Based in Minneapolis, MN, he works with clients both locally and virtually throughout the country and abroad. You can follow the links to learn more about Guide Financial Planning and our team and the services we offer.