Dave Ramsey‘s site has one of the best money hacks I’ve seen recently. Drive Free, Retire Rich explores the impact of carrying a car payment, and offers ideas on how your money can be used more wisely. Though the sentiment is familiar, I find Ramsey’s approach novel.

You want a brand-new sports car that would normally cost you \$475 a month. The car you’re driving now is worth around \$1,500. If you take that \$475 and pay yourself instead of paying the dealer, you’ll have \$4,750 in just ten months. Add that to the \$1,500 you can get for your current car, and you can pay cash for a used \$6,250 car. That’s a major upgrade in car in just ten months — without owing the bank a dime!

But let’s keep going. If you kept saving at that rate, you’d have another \$4,750 in another ten months. Chances are, less than a year later, you could sell your \$6,250 car for about what you paid for it. This means that you can step up again — with cash — into an excellent \$11,000 used car just twenty months from today. Not bad!

Not bad, indeed. Ramsey goes on to explain how you could actually get “free” cars by investing your \$475/month and using the returns to purchase your vehicles. (The assumed 12% return is a stretch, though the overall point is valid.)

How might I make this idea work for me?

• Instead of buying a new car from a dealer, I could set aside the amount I”m willing to spend on a monthly payment. The presentation uses \$475/month as an example. I could never pay this much for a car. I’d be willing to go as high as \$250/month.
• After a year, I’d have saved \$3,000 for a car. According to kbb.com, the trade-in value on my current car is \$3700. Using these two sources, I could buy a better used car for \$6,700.
• Here’s where it gets interesting. If I kept making \$250 payments to myself, I’d have another \$3,000 saved at the end of the second year. Let’s say the \$6,700 car lost another \$1,000 in value and was now worth \$5,700. I could trade it in and use my saved money to upgrade to an \$8,700 used car.
• I can continue this cycle until I reach the level of car with which I’m comfortable. After that, the amount I need to save each year would decline sharply. I wouldn’t have to save to upgrade my car, simply to maintain the level of quality.

I’ll certainly remember this for the future. As soon as I’ve repaid my home equity loan — by March 2008 — I plan to begin saving for a car!

[Dave Ramsey: Drive Free, Retire Rich]

Note: I’ve never heard Ramsey speak before. Can anyone confirm whether that’s his voice in the presentation?

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