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!