One of the talking points of personal finance that many “experts” can agree on is that taking out a loan on a depreciating asset is foolish. You are making payments on something for years that will never be worth more than the day you bought it. The biggest example of this is a car.
While eliminating a car loan is something that most people can’t do, it’s something my family did in 2016 when we purchased my Honda Accord. We paid for it in cash and I’m going to outline how we did it in a few easy steps. If you have the desire to pay cash for your next vehicle, read on.
Step 1: Know What You Want To Spend
Do a little homework and get a good estimate of what your vehicle will cost. I prefer to buy used to make my money go further, but that choice is yours. Don’t forget to include tax and registration if those apply in your state.
Step 2: Setup A Separate Savings Account
Open a savings or money market account just for this purchase. I highly suggest you open the account at a different bank than where you have your checking account. I recommend Ally if you aren’t sure where to open the account. They pay a good interest rate and have a very accessible website. Out of sight out of mind is the goal here.
Step 3: Calculate A Monthly Saving Goal
You did complete step 1 right? Take that amount and divide it by the number of months remaining before you want to purchase the vehicle. If you need $10,000 and you have 4 years to save, that works out to about $209. This is the amount you need to save per month.
Step 4: Automate It
Setup an automatic monthly withdrawal from your checking account to the account you created in step 2. If you forget this step, you’re going to fail. You need to make this dead simple and something you don’t have to remember to do every month.
Step 5: Repeat
Now you just have to wait until you have saved up the desired amount. Since you automated the savings, it’s just a waiting game. That monthly withdrawal will get you to where you need to be.
Step 6: Buy Your Vehicle
I will admit, this wasn’t as exciting as I thought it would be. The Accord I purchased was at a dealership down the street from me and was fairly priced so I didn’t haggle with the price. When I said I didn’t want a loan and was a cash buyer, the salesperson didn’t put up too much of a pitch for a loan.
Bonus Step: Next Level Goals
So you just bought your new to you (you did buy used right?) car in cash, congratulations! Now you have all that money to spend that you had been setting aside every month. Wrong! You need to start saving for your next vehicle now. Get a rough idea of what you might spend on your next vehicle and make the same calculation you made in step 3. Continue making this “payment” each month into your savings account until you think you have enough saved for that next vehicle. Since you’re beginning your savings goal so early, the monthly amount you are setting aside will likely be less than what you were previously saving.
Don’t pay interest on a depreciating asset! Take the time now to calculate your savings needs and follow the steps above to pay for your next vehicle in cash. You CAN do it!
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