Saving for the Next Car
We rely on our vehicles (cars, trucks, minivans, SUVs, motorcycles, scooters) to get us from point A to point B. The car was a critical invention in the evolution of our economy and how we were able to move about from place to place. Having a mode of transportation that allows us to cover hundreds of miles in about half a day is valuable.
But, as with most inventions, first came the basics and then came the bells and whistles. Fully covered cars to keep us dry from inclement weather. Windshield wipers help us drive through the rain. Headlights guide us as we drive through the night. A/C to keep us cool on hot summer days, and a heater to keep us warm in the winter. Radios have evolved as well. Wifi in cars will become the new standard, and we’re certainly getting closer by the day to self-driving cars.
I share this because the vehicle we drive will be one of the larger expenses over our lifetime. (Assuming you will always drive a vehicle.) Our family is a two car family at this point in our lives. The car I drive now is a car that was manufactured in 1998. For the most part, it’s been really good to us. Would I like a different vehicle? Of course, if we had the money to buy a newer car, I would. At this point, we are saving up for the next vehicle.
What we purchase next will largely depend on the cash we have saved at the point in time we decide to make a change. I’m sure it may seem weird to some that we wouldn’t just go get a car loan and get a newer vehicle. It comes down to priorities for us. Once we had a game plan with our money and decided to pay off our debt and start a family, vehicles were intentionally put on the back burner. We upgraded to a minivan shortly after Rooney was born because we had a Jeep and it was difficult to get an infant carrier to fit behind the driver’s seat. And we’ve loved our minivan! It’s served us well (although it has a lot of miles and is starting to rust).
And the rust is a good reminder to us that cars are just for getting from A to B. Beyond that simple utility of a vehicle, the rest is luxury and lifestyle choice, and we’ve chosen to sacrifice those at this point in our lives for other more (important to us) things. Finding happiness in the work we do, family memories, and building our net worth for the future to name a few.
In the midst of all we've accomplished, upgrading vehicles didn’t fit into our plan. We’ve now started to save for the next vehicle, but I really don’t like the thought of paying so much money for something that depreciates so fast. In terms of cost over time for the purchase, the maintenance, insurance and replacement of vehicles, they are one of the most expensive things most of us will own. So, how do we save for a vehicle? How do you break the cycle of car payments and save up enough cash to replace your next vehicle?
From Car Loan to Paying Cash
The trouble with cars being so expensive and taking up so much of our budget is that once we are done paying off a car loan, we instantly want to use those dollars for something else. Typically a few hundred dollars or more that have been shackled to the depreciating asset and once the loan is done, we want to use them for something else. Maybe even something fun, or more lifestyle. And then after a few years of that, we want a newer car, and get another car loan, and keep the increased lifestyle from when we paid the last one off.
This is what we did (although we didn’t increase lifestyle at that point, we used the dollars to pay off more debt), our problem was that we never came back to fund our car replacement category until recently. Life got in the way and it hasn’t been a priority until now. We’re starting to feel the pressure as our car and minivan get older that now is the time to save. Instead of a car loan, we are paying ourselves until something happens and we need to get another vehicle, or we have enough saved for the next vehicle we want to purchase.
Same applies if you currently have a car payment. Aside from working the rest of your debt snowball, commit to rolling that car payment toward your next vehicle once you have it paid off. After driving a paid for car for a few years and seeing your car replacement fund growing, you might change how you think about purchasing your next vehicle.
How to Pay Cash for Your Next Car
If you have a current car payment of $300 per month and just finished paying off that loan, start saving that $300 toward your next vehicle for two years.
$300 X 24 = $7,200
The other side of the equation is the dollar amount you can get from trading-in or selling your current car. If that $300 car payment bought you a new car with a typical five year loan, and you spent two years after paying it off saving for the next car, you would have a seven year old car to sell or trade-in plus $7,200 cash to pay for your next vehicle.
You would want to check the value of the vehicle at Kelley Blue Book or Edmunds to see what a fair value for your car at that time would be, but let’s just say you could get $5,000 out of your seven year old car...
$5,000 + $7,200 = $12,200
Your savings rate per month is likely greater than the rate at which your car is depreciating at this point and you can save for however long you need in order to get the next car you want with cash.
Car Buying Needs Vs. Wants
Again... we need a car to get us from point A to point B. The line between needs and wants gets blurry when we start looking for a vehicle.
There are so many options, and the used car market is constantly changing. Cars are typically something we have a difficult time living without for an extended period of time so the urgency often clouds our decision making process as well.
Let me be clear... The fact that we drive old high mileage vehicles with rust on them doesn’t mean I don’t struggle with car envy. It digs at me a lot and can be a challenge. It leads me to crunching numbers more often than I care to admit. But, at the end of those number crunching sessions, I’m left with the realization that we haven’t had a car payment since Christmas 2010.
And not having a car payment is awesome. We just need to save to replace our cars now...