Saving for a new car to avoid the car payment trap
Saving for a New Car
by Gary Foreman
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Is there ever a good or creative way of saving for a new car? My husband's car is shot, and I've been entering sweeps to help him win a new hybrid car with no luck. Any ideas?
Brenda asks a good question. According to the U.S. Dept. of Transportation the average life span of a vehicle is about 125,000 miles or 12 years. Recent estimates put the average car at a little over 10 years old with 100,000+ miles. Put those facts together and that means that many of the cars we drive are rolling into their sunset years.
So while we wish Brenda the best with her sweeps entries, it's probably a good idea if she comes up with a backup plan. That plan should contain three elements. First, she should plan to put money aside to cover repairs on their current car and ultimately buy a newer car. Next, she should make a decision on how to save money for the car fund. Finally, she should have a desire to maintain their current vehicle to help it last longer and increase its value as a trade.
The first step is to create an auto account. Preferably it should be one that makes it easy to deposit money, but a little harder to withdraw it. You'll want to add money each month. The only withdrawals should be for maintenance and repairs to your current vehicle or to buy a newer car.
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How much should you add each month? Ideally you'd save about as much as you'd be willing to spend on a car payment. In other words, begin making a car payment to yourself. This offers a big advantage. Instead of paying the loan company interest for the money you still owe them, you'll be earning interest on the money that you've already saved.
Finding money to add to the account is Brenda's next challenge. Remember that if you take on a car payment, you'll have no choice but to come up with the money each month. So if a newer vehicle is important to you, be willing to make some sacrifices to save for your auto fund.
For many families, the best source of savings is in the area of food. Feeding the average family costs between 10 and 20% of their income. Each day most of us have many opportunities to save without making significant lifestyle changes. These small savings add up during the month.
Wherever you find the savings, make a commitment to reach your goal each month. If you miss a month, it'll be tempting to shrug your shoulders and forget about it. It's true that you don't need to worry about your car being repossessed, but each month you miss will only delay your auto-shopping trip.
Next, expect to use your fund for routine maintenance and repairs. A common reason that people give for replacing their car is that it has become unreliable. The best way to keep a vehicle dependable is to perform the maintenance that's specified in your owner's manual, even if that means catching up on things that you should have done earlier. Having money saved should make that easier.
Don't feel bad about using money from your auto fund for repairs. Yes, it does mean that you're further away from that new ride, but the money is there to keep a good set of wheels under you.
Finally, if Husband's car is truly shot, how would they know when it's not worth repairing? A general rule is that you don't want to pay more for any single repair than the car is worth. You can find out what your car is worth at Kelly Blue Book. Until the repair is larger than the value, it's almost always cheaper to repair your current vehicle than to replace it.
What should you do if you're forced to buy before you saved the amount you planned to spend on your next car? If you can find reliable transportation for the amount saved, pay cash for this car and then keep saving for your next car.
If you don't have enough saved for a dependable car, you'll need to borrow this time. But once the car is paid off, keep making payments to yourself for its replacement. It'll take a little longer until you can pay cash for your cars, but if you persist, you will get to that point.
Compare auto loans before you car shop.
And, in the meantime, Brenda can keep entering sweepstakes. Who knows? She just might win some day.
Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money and CreditCards.com. Gary shares his philosophy of money here. You can follow Gary on Twitter or visit Gary Foreman on Google+. Gary is also available for audio, video or print interviews. For more info see his media page.
Take the Next Step
- Open a savings account dedicated to your auto fund. Find the best rate so you can earn the interest you deserve.
- Determine how you will contribute regularly to your auto fund. Consider these ways to earn extra cash or trim an area of your budget, such as reducing your grocery bill.
- Make sure you are not overpaying for auto insurance. See how much you could save with just a few clicks. Fast, free quotes and online comparisons.
- Get all the facts before you buy or sell a vehicle. Edmunds.com will give you what you need to know to make a confident deal.
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