Let’s say that tomorrow morning you wake up to discover that overnight—gulp!—your car was destroyed beyond repair. You’re not covered and you’re devastated.
You can’t live without a car. But you have no money—not a nickel in savings. So what do you do? If you’re like most people in that situation, you head to the only dealer in town who’s offering $0 down financing and a monthly payment that somehow you’ll figure out how to afford.
Realistically, what payment can you afford if you pull the plug on cable TV, stop eating out, and basically cut out all frivolous spending? $200? $300 $600?
Okay, back to reality. Your car isn’t destroyed, and you’ll keep driving it for a while. But remember the amount you said you believe you could afford each month if you really put your mind to it? Let’s say it’s $300. Keep reading.
The Bank of You
Open a savings account somewhere convenient and begin immediately to make $300 monthly payments into that savings account. Just as if you were in that terrible scenario mentioned above. Every month. Make the sacrifices now, cut the spending now. Be strict with yourself—rigid and unbending! No late payments, no slacking.
In the meantime, and as you are making these big new payments to yourself, continue driving the car you have now for at least one more year, even if it is a real clunker. You can endure anything for a short time when you have a plan for it to end.
Soon, you will begin earning interest —Ally.com currently 2.20% APY—on the growing balance instead of paying interest on a conventional auto loan.
At the end of one year—12 payments to yourself—you will have accumulated $3,600 cash plus interest. Not bad!
Sell the clunker
Now sell your clunker. I don’t know what you have or what it might be worth but let’s say you can’t stand it for one more day and you can sell it for $2,000. Put that money with the $3,600 and best clunker you can find for $5,600 all cash. By now you’ve become used to making $300 payments to yourself, so don’t stop. It’s becoming a habit, and a very good one at that!
At the end of another year, sell the current clunker for say $4,800 and put that money together with the $3,600 you have saved during the year by making payments to yourself. Now buy the best used car you can find for your $8,400. And continue making those $300 monthly savings deposits in the Bank of You.
The power of habit
At the end of year three, sell the current that car for say $7,800, and together with the new $3,600 from your savings, buy the best $11,400 car you can find. Notice: Your selection of good used cars is getting better each year. You have graduated from clunkers to much more respectable automobiles.
In year four, sell the most recent car for say $11,000, add the $3,600 accumulation, and buy a $14,600 used car.
Keep doing this and by year five, you have at least $17,000 cash to upgrade to an even better car. By year six, you should have at least $20,000 cash to buy a car.
Keep repeating this once each year—upgrading, paying cash for a better car, and still a better car. As you become more adept, you will lose your fear of buying and selling cars.
Keep this routine of saving first then upgrading once a year. Within five or six years you will have accumulated enough cash to buy a brand-new car—ALL CASH! You will have more than $20,000, plus all of the interest you have earned each year on your $300 monthly deposits.
Cash and personal power
Imagine your confidence and personal power, knowing you are not at the mercy of any salesman, bank, or finance company as you look for a car. You can negotiate hard because you have cash!
Buying a brand-new car will certainly be an option. But I predict you won’t. By that time, you will be so good at buying late-model, domestic, low-mileage cars for a fraction of the price of a new one, you will scoff at the folly of buying new and feeling that big 20% depreciation hit on the front end.
Still, you will have the option to do exactly as I promised: Buy a brand-new car—the car of your dreams, for all cash. And who knows? You just might.