Do you have a car loan? You might be surprised at just how many people do. Why? I think it’s because we are a society that is used to getting things immediately. Most of the time this can result in a family taking on something like a car loan. Can car loans be avoided? Yes, it is possible and here’s a few reasons why you should:
- They typically have high interest rates.
- They can have high payments if your credit score isn’t high enough.
- If you miss one payment, your credit score is affected and you may risk a repossession.
However, paying for your next car in cash is an awesome choice. There is no interest to worry about, it belongs to you right away, and you’ll even earn a bit of cash in interest while you wait to get your new car! I don’t know about you, but anytime I can make my money earn more money, I’m game.
So are you sitting there now thinking it sounds great, but it’s too hard? Really, it’s not. It’s actually quite simple to do, especially if you were already looking at taking on a car payment to begin with. I would recommend that you have a separate savings account if possible unless you are 100% sure that you will not spend the money that you’re saving for your new/used car.
3 Steps You Can Take To Pay Cash For Your Next Car
1. Determine how much you want to spend.
Determine how much you want to spend on your next car and whether you want to buy new or used. Buying new isn’t recommended simply because you lose so much of its value the moment you drive it off of the car lot. However, if you’re going to buy used, be sure to plan for enough cash to buy a quality used vehicle. You will also need to have an idea as to how long you can wait to replace your current car. In this case, the longer you can wait, the better.
2. Create a new budget category.
In your budget, you’re going to create a new category called…ready for it? “Car Payment.” I know, I know. You’re trying to pay cash for that car and now I want you to budget for a car payment? Yes, but remember you would have a car payment anyways if you took out a car loan. This “car payment” is a lot less and won’t last as long. Once you’ve got the new category set up, pull out your trusty calculator and divide the amount you’ll need by the total amount of months you can wait. For example, if you want to have $10,000 saved and you need to replace your car in 24 months, you would dive $10,000 by 24 to get $416.67.
3. Start saving.
Now take your newly calculated amount and add it to your “car payment” budget category. That is now your monthly car payment. Each month you will “pay” your car payment to your savings account. At the end of your time period (whatever length of time you chose), you will have enough cash saved (plus some interest!) to pay cash for your next car!
See? That wasn’t so hard! Now I know finding a surplus of income in an already tight budget might be difficult, but there are several ways you can start increasing income and decreasing expenses:
- Start a work from home business on the side.
- Lower your grocery bill.
- Save on clothes.
- Use coupons.
- Stop sabotaging your budget.
- Live on less income.
This is a great way to teach yourself discipline and to avoid taking on new debt. The other plus side to buying a car this way is that if you truly have a family emergency or loss of job, you can simply put off saving for a month or two until things straighten back out. However, don’t make a habit of doing that or you’ll never buy your car!