A car parked in a parking lot

Rules for Buying a Car for All Cash

An automobile is a major purchase and the consumer purchase most likely to throw a major kink into your fragile financial situation. But it doesn’t have to be that way. What’s required is a little radical thinking and forethought.

A car parked in a parking lot

Here are the three rules to follow when buying a car:

RULE 1. Pay cash. Hang on. I know you may not be able to do that right now. Just be patient and I will teach you how. This principle is so important that I will repeat it: Pay cash for your car.

RULE 2. Opt for a late model. Make sure you are not the first owner. Let someone else take that 20 percent depreciation hit. Your goal is to drive the best late-model, previously owned car you can afford paid for with the cash you have.

RULE 3. Always make payments. I hope that got your attention! On the one hand, I just told you always to pay cash for your cars. And now I am telling you always to make payments. Both principles are true. You must adopt the attitude that as long as you intend to own a car you must cover the the cost by making monthly payments to yourself ahead of time—in anticipation of your next car. This way you are always earning interest (because you hold that money in a savings account), not paying it.

Even if your current car is doing well I can promise you that car will not last forever. That’s why I want to challenge you to start today so you can pay cash for your next car. 

Open a special savings account somewhere convenient (credit union or local bank( and begin making that monthly payment into the account. Pay $300 to yourself every month and funnel it directly into that account—just the way you would have to pay that to a finance company if your current car died a  tragic death in the next week or so. That’s right, make these payment to you. Be strict with yourself—rigid and unbending! No late payments, no slacking. Continue driving the car you have now as long as you can, even if it is a real clunker. A year from now, you will have accumulated $3,600 cash plus interest in your account in the Bank of You. Not bad!

Now sell your clunker. I don’t know what you have or what it might be worth, so let’s say you can sell it for $2,000. Put that money with the $3,600 in the savings account and buy the best car you can find for $5,600 cash. By now, you’ve become used to making $300 payments to yourself. Don’t stop. Not now, not ever. It’s a habit, and a very good one at that.

At the end of another year, sell your current clunker for say $4,800 and put that money together with the $3,600 you saved during the year by making those payments to yourself. Now buy the best used car you can find for your $8,400. Then continue making those payments.

At the end of year three, sell your current car for say $7,800 and together with the $3,600 from your savings buy the best $11,400 car you can find. 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 your most recent car for say $11,000, add the $3,600 from savings, and buy a $14,600 used car. 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 process once each year—upgrading and paying cash for a better car. As you become more adept, you will lose your fear of buying and selling cars. And imagine your confidence and personal power knowing you are not at the mercy of a salesman, bank, or finance company as you look for a car. You can negotiate because you have plenty of experience.

After five or six years, buying a brand-new car will certainly be an option. But I predict you won’t. Why? Because by this time you will be so good at buying late-model, low mileage cars for a fraction of the price of a new one that you will scoff at the folly of buying new and feeling that big depreciation hit on the front end.

Still, you will have that option, And who knows? You just might take it.

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11 replies
  1. janice says:

    I had a coworker that used a system somewhat like Mary’s, but did not depend on purchasing cars every year. He banked with a credit union, had his paycheck direct deposited, and an auto deposit/transfer monthly to a separate “car” account (a savings account) which matched his car payment. The credit union financed his cars and would auto deduct the car payment from this car account. Once he finished paying for the car, he did not change his practice of having the automatic transfer moved into the car account. He treated his finances as if he ALWAYS had a car payment. By the time he had to purchase a new car, he had a nice down payment for his next car. The “car payment” to his savings account was automatic so he was not temped to spend that money instead of making the transfer. If you can afford an extra $50 a month, set your transfer amount above your payment amount. In his case, he purchased new cars. However I agree with Mary, buy a used one with low mileage and a couple of years old. However this system works no matter what you buy. Do not finance for 6 years. If you use this effectively you can reduce the loan term length each time you make a purchase. Eventually you can pay cash, but it takes a lifetime of frugal living. Avoid income creep….that is the practice of increasing your standard of living each time you receive a raise. A car is not a status symbol, it is transportation. Drive your car until it is unreliable, for me that is about 8 years. I am 58 years old and just purchased the 6th car of my lifetime, which i will likely drive until retirement. And yes, I can retire because those savings are in my retirement account.

  2. Tori Raddison says:

    I like how you said that your goal is to drive the best late-model so that you can get the best deal for it. That way you’re not paying for an entirely new car and the cost is much lower. How do you find a car that’s cheap enough to pay cash for it? https://cedarcreekautobuying.com/austin

  3. Another Mary Hunt says:

    I could use a little more information. Are there any used car buying resources and tips you can recommend? Like where to shop, what’s important to look for (so you don’t get stuck with a lemon), how to know what’s a fair price, how to sell your clunker? Thanks.

  4. Shauna Adair says:

    How do I do this when I am already making car payments? I am upside down on my car right now because I got bamboozled into a dumb warranty plan when I was trying to sign papers and had my kids with me and wasn’t paying close enough attention. That added a couple thousand extra onto the price of my used vehicle which was already at book value at the purchase price without the extra. I’d like to get out from under this, but I need a decent vehicle because I drive approximately 60 miles round trip to work everyday. I would love feedback.

  5. Emily Booth says:

    I bought a new car with cash 2 years ago. I took the $$ out of my Roth. I was replacing a car that had been in an accident. Because I had low mileage on a 13 yo car, I got $2000 on the trade-in even with the repair. I paid a little over $18K. But, over $2K was for taxes and the destination fee. Altho I did my homework, I was caught off guard when the salesman initially offered me $500 for the trade-in. The next time I buy a car, I am going to Car Max and buying used.

  6. Tightwad says:

    I was hoping this article would have info on getting a good deal when paying cash. It seems like a lot of dealers aren’t keen on negotiating if they aren’t going to be financing it for you. Even used cars have gotten ridiculously over priced since I last had to buy one.
    I’m not sold on the idea of continuing to trade annually. I try to find a quality car that will last. I’ve had my current vehicle for 13 years and it was 4 years old when I bought it. Once it was paid off (I financed way too long – 60 months), I didn’t “pay myself”, but I didn’t blow the money either. I thought of it more as my emergency fund.

  7. Grandmaof5 says:

    I like this idea but currently we have two car payments of $300 each since both our cars died a year apart. So we can’t save for next car until we pay off the loans we have on current cars. One of our cars is currently 9 years old we bought it used when it was 5 years old but still had to borrow money to purchase it.

  8. Pigoff says:

    When I need a new car cause my old one is on its last legs I call a person that I know that goes to auctions. he has a place of business where he sells some of the cars that he buys but he isn’t a dealer I guess in the traditional sense. I tell him what I want (my brother and daughter use him too, especially after he bought a bad car and gave me my money back and then found me another car) and he goes and finds me something in my price range with everything I tell him that I want. It isn’t easy cause I only drive standard transmissions which isn’t always easy to find. I pay him cash and I have a new car. He got my brother a mustang and it had issues after he bought it and he had it towed to a shop and repaired and my brother went and picked it up and didn’t pay a dime. Monty also said if he still wanted it painted a different color to call him and he would have it done and we would only pay cost. Just wanted to share in case you could find a dealer like that around you. My brother got his 2009 mustang for 4000 and it runs great. I hope he finds me something cool. My brothers are tired of replacing my throwout bearing every year.

  9. verna brandt says:

    I also know that in Missouri we also get hit with taxes and transfer fees every time we purchase a different car. Also be sure you check with your car ins. agent. If the car is quite new the ins. is higher even with just the basic. So you may have to go car ins. shopping too.

  10. Ottakee says:

    I agree with everything except selling and upgrading every year. At least in Michigan you get hit with taxes and transfer fees each time you purchase a different car and those really add up quickly, esp if you are doing this every year.

    • Bookworm says:

      I think Mary was only saying that you do it every year until you get a really good car that will last you many years. And you could do it every other year, or whatever interval works for you.


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