Thinking About Your Next New Car

By L. Lori Irwin, MBA, CFP®, Financial Planning Association Member and Coordinator for Virginia Saves

Aside from a home and funding our retirement, our transportation needs often consume a large portion of our monthly costs. For those who do not live where there is reliable mass transit, buying a car becomes a necessity we need to build into our monthly costs.

Retailers benefit when we don’t have substantial savings or good credit. Our options are far more limited and we are forced to focus on the payments we can afford rather than the total cost of the purchase. In this article, I would like to outline a plan that might just get you out of the car payment cycle forever:

1.  Pay off your existing car

Many of us are already in a payment cycle, so continue paying off the existing vehicle loan is our first step. If you are not making payments on your current car, you can begin to make payments on your future car; just skip to #2.

If you are interested in accelerating that repayment plan, there is a great free web tool at www.powerpay.org to build a debt snowball and get the debt monkey off your back. Most people will either replace their car at the end of the loan or redirect that car payment to funding other lifestyle choices; these habits keep us in the cycle of debt.

As an example, I chose a loan of $10,000 for my car for 60 months at 5% interest.

Principal:

$10,000

Interest Rate:

5%

Term (Months):

60

Payment:

$188.71

Total Paid

$11,322.60

Total Interest

$1,322.60

% Interest Paid

11.6%

By default, I am paying about 11% more than the purchase price because of the interest I pay on the loan. Note: interest rates may vary depending on credit score and any special promotional offers at the time of purchase.  

#2.  Redirect your car payment

Keep making the car payment even after the debt is paid, but now direct it to a savings account to build up a reserve for car replacement in the future.  At four years old, the car should still have a lot of life in it. If the car is maintained, it can give a lot more life. In this example, I drive the car for five additional years. I can save not only the principal, but I can also have more than $1,000 to maintain the car or to upgrade my ride when the time comes. 

#3. Sell your car

A nine to ten year old car is usually worth less as a trade in than what you could sell privately. But selling your car privately will also require some patience and perhaps some cost in placing an ad. In my example, I found that I could get between 15% - 30% of what I paid for my car if it is in good condition. I might net $2,200 – $4,400 for my sale. Add that to my savings and I have a tidy nest egg to go shopping.

#4.  Buying your new car

Cash has always been king when it comes to buying; particularly larger purchases. Since you don’t have to worry about financing now, you call the shots when it comes to your next car buying experience. You can choose from new or used. I have found some really sweet deals private sale, but I always have them checked out by a good mechanic before purchase.

#5. Repeat

Now that you have your new wheels payment free, all you have to do is repeat the process. In repeating the process, you will find that it takes less time to get you to replacement phase of your car purchase. So there you have it: a plan for breaking free from the payment trap!

To learn more about saving for a car and set your goal with the America Saves pledge, visit AmericaSaves.org/pledge.