The drive free method: Dave Ramsey’s advice on buying a car
Eager to know how to retire rich? It might be surprising that 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 10 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 10 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.)
Car Values and Financial Freedom
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 $3,700. 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, I plan to begin saving for a car!
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There are 69 comments to "The drive free method: Dave Ramsey’s advice on buying a car".
While that’s not his voice in the presentation, I have heard him give the same exact advice on his radio show. And good advice it is.
It makes no sense to me how a car worth a meager $1500 today will still be worth $1500 ten months from now. Just sayin.
This is all great, but it assumes very little depreciation in the car you’re driving. Reality is, cars depreciate faster than this and repairs only add to it. Not to mention buying a newer car also includes sales tax, title, and licensing. You really have to be saving more than that each month in order to see any real difference. I know, I’ve been trying this approach for the last four years.
In answer to your question, no, that’s not Dave’s voice. I’ve listened to some of his podcasts and seen him on Movie and a Makeover on TBS of all places. It’s definitely one of the messages he presents a lot and relates to his catchphrase, “Live like no one else so that one day you can live like no one else.”
Excellent post. After attending a 13-week Dave Ramsey course a couple years ago, we just paid off our last credit card and are now aimed at our final car payment and student loan. Good stuff. (Also per your note, that is not Ramsey’s voice in the presentation.)
The only thing I can’t comprehend is why does anybody need Dave Ramsey (or anyone else for that matter) to do such intuitive AND obvious thing?! Do you really need to attend 13-weeks (!) program to understand that savings is the key?! Live within your means, save – and you (as I am) will be fine
Clearly, you don’t need to be on this post if you’re doing so well for yourself. Dave Ramsey doesn’t hold the hand of anyone. He’s more motivational. He’s a great speaker, and an excellent author. He’s good at what he does, and he’ll always have you haters.
@YG —
You may have the self-discipline to do the wise thing with your income, and that’s great, but most people don’t. Many people know they need to do something different and want to do the wise thing, but need some kind of encouragement and a plan to get started and keep going toward the goal. That’s where Dave Ramsey comes in.
Yes it is $100 or so to take the 13-week class, but how much more than that would people spend on interest if they just keep paying their credit card minimum payments for the rest of their lives?
It’s the same principle as with weight loss–someone may know they need to lose weight, but it helps their self discipline to have a a plan to follow and encouragement from people trying to accomplish the same thing. I don’t fault Weight Watchers or Jenny Craig for selling their plans. They help many people–but there will always be some without that struggle who will say, “I don’t know why people need to pay someone to help them lose weight–all they have to do is eat less!”
Great post! I find stuff like this fascinating.
To address your question about it being his voice: I’m a professional freelance writer who has done a lot of ghostwriting. I’ve also taken Ramsey’s course. Ramsey’s a very busy guy and I’d highly doubt he sat down and wrote that himself. That said, usually clients like this give you stacks of CDs and transcripts and you write their material in their “voice.” So, I’d say that it’s definitely Ramsey’s idea and execution, but probably written by a freelance writer. 🙂
It seems that Dave Ramsey assumes these cars won’t have any mechanical problems crop up — always a risk with any car, increasing in probability with age. One major mechanical problem would throw this plan out of whack, because you’d be forced to use the savings to pay for the repairs. And if you’re really unlucky, like I was a few years ago, you could end up with a $1500 car that needs about $3000 worth of repairs in the first year!
Ben, this is only a small part of Dave Ramsey’s overall plan. You would not even BEGIN to save to upgrade in car until after you’ve saved a $1,000 emergency fund, paid off all consumer debt except the mortgage, and then saved 3-6 months of an emergency fund. You would also have working “sinking funds” for car repairs and maintenance (as well as other recurring expenses). Dave also outlines ways to find great deals on low-mileage cars while you’re trading up and how to make sure you don’t get a lemon.
Yeah, after I paid off my last car, I wanted to do something similar, though maybe not to that extreme. So, 8 hours after I received my title in the mail, a deer runs into my car and totals it. After that, I have to buy a used car. Sigh.
If you live someplace where you can commute by train or bus (and look, first, don’t just assume – I’m always visiting friends who were shocked to discover their city has a perfectly good bus system), it’s worth at least running the numbers to see whether you would come out ahead ditching the car entirely, saving your insurance money, and just taking taxi’s / renting cars when you need them. As extravegant as taxi’s and renting sound, it can be shocking how often you can use them and still come out way ahead…. (plus, of course, on the bus you can read a book; with a rental, someone else pays for the repairs; in a taxi, noone has to be DD…)
I have a friend who came to this country with very little. He bought a super crappy Honda and changed cars every six months using this strategy. In five years’ time he had a new BMW 3-series. No payments.
Try living without your car for a while before selling it for good. When I went without a car I rarely took a taxi but I did rent a car a couple of weekends a year for 200-mile trips and for buying large things.
Now I do a compromise between Rebecca’s no-car approach and Ramsey’s good-car approach.
I like to buy ten-year-old cars in reliable models and drive them for ten years. This gives me a lot of time to save, so I only save $50 per month toward my next car. The first car I bought using this approach cost me $1850, the second, $3000. After one good car, you can have enough saved up so that if you buy a lemon, it’s no big deal because you still have enough money to buy another car instead.
You definitely want to use Lemon Busters or a similar car inspection service–it’s amazing what they can find. On my first car they found two problems which allowed me to talk down the price and which didn’t actually need replacing for a full year after I bought the car.
I save a lot on insurance, too, because I don’t get collision insurance. I figure if I wreck the car and it’s my own fault, I’m willing to pay. Also, even the tiniest little thing is considered “totalling” your car when you have a cheapo car like mine, so the insurance wouldn’t help much anyway.
In all it costs me about $175/month to own a car including gas, insurance, taxes, maintenance, repairs, and saving for the next one. That’s significant money, but much less than most people pay.
Go to daveramsey.com and use the “Find a Station” or subscribe to his podcast now. He could change your life. Personal finance is 90% behavior, and that is exactly what he helps you change.
A while back, I was about to drop 32k on a brand new car, but I decided to keep my Corolla and drive it into the ground instead. That saved me about $500 per month for 4+ years (and counting). My Corolla has 193,000 miles on it and it’s still going. I used to hate this car, but now I love it because it has helped us turn our financial lives around. We now have no credit card debt, a 6 month emergency fund, a substantial college fund for our kids, significant retirement funds and we paid off the line of credit on our house ($41,500 worth).
Not having any car payments (my wife’s car is paid off as well) has played a huge part in our financial makeover.
When this Corolla dies, I’m going to buy another used Corolla with cash and we’re going to put the $350 payment we would have used on a new car towards our mortgage. That extra $350 per month is going to cut the 26 years left on our mortgage down to 17 years and it will save us $157,000 in interest.
Rebecca,
You make an excellent point. It seems to be human nature to accept a fixed monthly cost which is way above actual usage instead of incremental costs which end up being much less.
You can see this same behavior when people purchase a gadget based on ‘features’ they will never use instead of focusing on its performance on the task it will actually do 99% of the time.
I use a pre-paid cell phone because I use very few minutes. This makes most people nuts. I hear “But costs $0.10 a minute!” and “Don’t those minutes expire?”. They can’t get off the per minute rate. There’s that clock in the sky just TICKING away and BILLING them.
My cell phone bill for two phones went from $860/year to ~ $350/year. Who cares what the per minute rate is if the annual cost is less…
This is the same concept as you suggest. Taking cabs can be cheaper than a car depending on your usage and destination. It is probably counter-intuitive to most people.
I don’t know about you guys but I live in a relatively small city (Kalamazoo, MI) there’s an adequate mass transit system, and the cabs are costly, but there are several very, very good bicycle paths.
My wife and I bought two eGo electric bicycles last April and used them to buy groceries, go shopping, and go the movies. Cost $1300 each. Later in the summer, I started taking it to work and charging it back up in the office. The thing runs at 25 MPH and has a range of 25 miles. It was fun to whiz by the traffic every morning! I had computed that in bad traffic, my car was making 15 MPG and it took me 30 minutes to go to work. Using the eGo, it took me 35 minutes to go to work and I saved all that gas and polar bears (one would hope)…
Although it did not pay for itself in those first 4 months, it definitely helped cut down on paying for $4 gasoline (who wants to bet we’ll have $5/gal gas this summer???).
Other than the savings on interest for the loan, I don’t see how this is any different then starting out with the high-end car and making payments.
The only difference is your making the payments to yourself, and then handing the money over all at once instead of making the payments over time to someone else.
If you had a 0% car loan, it seems to me that the only difference would be if you are earning interest on the money as your saving it up.
You’re forgetting one thing Rob – depreciation. You lose a ton of money in the first 2-3 years of new car ownership. Some people say that if you keep your car ’till the wheels fall off then depreciation doesn’t matter – but it does. You still have asset that lost a tremendous amount of value. Doing it Dave’s way you don’t get bitten by the depreciation bug.
How many people actually qualify for 0% loans anyway?
This makes sense for older cars. But there are two things that may not make it a great of a payoff as you continually upgrade.
First, as others have mentioned, is repairs. On newer cars the warranty covers you, but on a 10 year old car a major repair is more likely. A costly repair could set you back a year of savings easily.
Second, Saying your car is worth the same after a year is not true. Sure on a car that is 10 years old this is probably viable, but as the saving and trading up progresses and you buy newer cars, one needs to think of the depreciation costs. Lets say you are now driving a car that is less about 3 years old. If you have saved cash for the year, and try to sell your current car most likely it will be worth less than you purchased it for. Your upgrade for the year would not be as substantial as prior years.
I think the sweet spot would be buying up to cars 4-5 years and maintaining that level.
Just me thoughts.
As usual, Mr. Ramsey’s advice is very sound. It works. The key is knowing when to stop. If you keep using this strategy year after year and end up with a high value luxury car, you have gone too far. All a smart money person needs is a reliable, simple, economical car. Once the upgrading goes beyond that, you are starting to receive rapidly diminishing returns for your investment. The money would be better saved (spent) elsewhere.
I say invest in a really good car, and drive it until it dies. I am driving my Honda that is 10 years old, and it is a truly great car. Many makes aren’t made to last or have very costly repairs, but if you get a good make that is common (so if you need repair it won’t be costly), you should be able to drive it until it gives up. So, imagine if you were setting aside your “car payment” for 10 years or more!! I sure wish I had done that, I would have lots of money for either a newer car when the time comes, or anything else for that matter.
Rob, it’s not just saving interest on a loan that this method helps with. It also allows you to make some money with the interest on the money you are saving up. Maybe not a lot if you keep the money in a simple savings account. However, as a previous post on GRS pointed out, little things add up.
Rob, the difference is that if you lose your job and can’t afford your payments, your paid-for car doesn’t get repossessed the night before your next job interview. You just quit adding to your savings for a while.
DC, sometimes even though you (me/us) are a smart money person, you want a nice toy or car, because it is a hobby and even though it depreciates it is an good “investment” in ones personal life. Am i making any sense? 🙂
Only in very rare cases (e.g., collector’s cars or antiques) will you ever sell a car for more than you paid for it, so people should never consider a car an “investment.” The goal is just to limit your losses.
I agree with the strategy of buying a fairly new reliable car and hanging onto it. In the 1980s I went through a string of 6 or 7 Subarus (they weren’t as well made back then as they are now), and after sinking thousands of dollars into repairs plus the cost of the cars themselves I realized that I would have done better financially by buying a reliable newer car. In 1990 I bought a Honda Civic and drove it for more than a decade with no major repairs necessary, putting 250,000 miles on it. I sold it and the new owner put another 100,000 miles on it before he sold it to someone else.
Everytime I’m tempted to get a high-end car, I look at the price difference between a simple utilitarian car and the more expensive one and think of all the cool things I could do with that money. For my last car purchase I thought about getting a Toyota Prius but got a Matrix instead; the $10,000 I saved by doing that enabled me to take three unforgettable vacations in Arizona, Vancouver, and France. And I’m happy with the Matrix, it’s a great car and is very fuel-efficient for a conventional vehicle.
Andrew, I have owned 4 Lexus vehicles in my life. I thought that they were good personal “investments” because they helped me to feel good about myself. I have come to recognize that these luxuries, particularly those tied to trying to impress others, have been the greatest hinderance in my ability to achieve financial stability and overall happiness. The rush of a fancy luxury car wears off rapidly, and you are left feeling like a fool.
Their are many other costs associate with an expensive car that you don’t have to worry about with a less expensive car (like my used Corolla). You get hit hard on all of the following:
o Insurance
o Registration cost (in NH it costs me $25 to register my Corolla, but my friend pays $600 for his $35k SUV).
o Gas (if your car requires premium).
o Tires (I paid $45 each for my replacement tires, while a friend with a Nissan Maxima paid $130 each for his)
If you are trying to get ahead of the game financially, your car can seriously hold you back.
I have always been of the same mindset as Aimee (#19 above), but this has made me reconsider. I am currently driving a ’96 Honda Civic, and since I don’t drive much, it only has 62K miles on it. A quick search on our local craigslist reveals many 1-2 year-old models of Honda Civics with typical mileage for about $4000 lower than the 2007 model, with similar features. I plan to drive my current car until the repairs start to annoy me (it has only needed 2 repairs in 10 years, both with the exhaust system), but next time I’m in the car market I think I’ll shed my “never-a-used-car” philosophy.
Interestingly enough, it appears the most common reason for people to sell relatively new Civics is that they need a car with more kid-room.
I wish I could access his site, but it seems to use Flash or something. Overall, this is an interesting hack, but one needs to realize it’s just that. The 12% is a huge stretch because after inflation and taxes you are doing well to get more than 4% growth.
I’m still not sure how it counts as a “free” car if you are using the $475 that you would pay the dealer to someone else for a used car in a year or two years. It seems like either way you are paying someone the money. The only thing I can think of is if that 4% compounds enough to buy you the car. It might, but it’s going to take some time.
I think GRS Slowly has it right with his example. It’s always good to have a growing car fund and it makes sense to trade in your previous car when you get a new-to-you car. Unless, I’m missing something this is something fairly common.
I guess I’m not a big fan of these psychological hacks.
Sorry, I fail to see the novelty in this plan suggested by Dave Ramsey.
The way I see it you can take two routes:
1. If you save $250 a month, you can upgrade every year to a car that is $3,000 more expensive. By year five you would be driving a car that costs more than $15,000.
or
2. You can drive your beater car for 5 years and save $250 every month. At the end of the five years you will have $15,000 to spend plus your beater to trade-in.
In both scenarios you end up with the same car you wanted, except in case 2 you didn’t have to pay sales tax FIVE TIMES.
Of course I bet most people who have the discipline to save for a new car for five years will probably realize that their savings they’ve accumulated is more valuable to them than blowing all of it on a single purchase.
Why not just buy a decent used car and invest the rest instead of trying keeping up with the cycle of buying a car. It’s not an asset.
New cars are for suckers, but there is a huge segment of the population who “have” to buy them. Most people who buy new cars do not “run them into the ground,” they trade them in on another new car in two to three years.
Especially on luxury cars, which generally have much less frequent styling changes, you can buy a nice condition five-year-old car for a fraction of the cost of a new one, and still feel like you’re living it up.
Or, buy a good used machine that’s a few years old from a make you like.
One other thing to consider: If you’re the type to run over curbs, accumulate door dings, never wash your car and spill lattes all over the interior, your new car is going to be worth a fraction of what it otherwise would have been worth on resale, which should further prod you to consider a used car where your lax habits won’t mean taking such a financial hit.
This assumes a car valued at $25k plus ($475/mon) is equally satisfying as a $6,250 used car?
This assumes your original car is WORTH $1,500 and the dealer will actually give you that much as a trade in?
After 10 months of saving, a $1,500 car is not even worth $1,500 anymore.
If you think so, it assumes you will actually sell it for that much if you decide to do a private sell yourself?
If you sell it yourself, do you SUBTRACT the expense of advertising it or fixing it up to make it presentable? I’m sure a $1,500 car is crappy looking.
Then, as you go through this UPGRADE process, does the car depreciate in value AT ALL? This example assumes it doesn’t.
Further, if someone has dreams of driving a BRAND NEW SPORTS car, then an $11,000 USED car after 20 months of delayed gratification just aint gonna cut it.
I like DR, but this piece of advice sounds silly to me.
I like point #28. Saving $50/week for 5 years means roughly $15000. Put that money into a high savings account during that time and you’ll earn decent interest too.
hmmm 2012, can’t wait to get a newer car :p
Though this is a very good idea, i doubt many people out there can keep the big picture in their mind for THAT long of a time; probably, they would end up using the saved money on something else, like a vacation or an over-priced, anniversary gift for their significant other.
It’s all about keeping the big picture, which I doubt many of us can accomplish.
I too question the logic of this method.
As others have said, you simply cannot sell a car a year later for anything close to what you paid for it.
Another option would be to just buy the car you want and just keep it. Sure, your payments might be high in first 3-5 years, but in years 7-10 your payments are $0. With Ramsey’s method you are making “payments” either to the bank or yourself forever. That’s’ not a whole lot different from leasing, except his payment is lower and the car is crappier.
Where I live public transportation isn’t a viable option. I need my car to be reliable and available every day, so buying a good quality new car every 10-12 years has worked well.
Also, buying new, you can frequently get better financing that you can buying used.
Why not save even more money and go car free or as family go to one car? Here is an interesting post on the subject.
IU agree with Single Ma “After 10 months of saving, a $1,500 car is not even worth $1,500 anymore”
exactly I think DR forgot to tell us that.
I also agree with Rob “Other than the savings on interest for the loan, I don’t see how this is any different then starting out with the high-end car and making payments.”
Either way you are putting aside the same amount of money. So where is the Drive Free, Retire Rich comes from.
Cars do not last a lifetime. You will always put money into cars whether used or new.
Pardon.my.lack.of.spacebar.
My.other.computer.is.being.fixed.
1.Somewhere.along.the.line,I’m.getting.that.people.are.thinking.that.you.are.paying.yourself.$475.a.month.for.car.payments.forever.
Not.so.
After.a.certain.amount.of.time,you.will.have.enough.saved.to.draw.for.a.12000.used.car.and.even.if.you.never.make.another.payment.you.can.draw.
another.12000.five.years.later.without.affecting.the.principal.
Say.you.do.continue.to.make.payments.of.$475.to.yourself(while.simultaneously.upgrading.to.a.reasonable.used.car.every.five.years)for.40.years.instead.of.to.the.car.companies.
You.will.have.over.5.million.
2.Even.if.you.got.a.zero.rate.of.return.instead.of.the.12%(the.stock.market.average.over.the.last.75.years…but.I.think.6.or.7.percent.is.more.reasonable)used.in.the.illustration,there.are.benefits.to.buying.in.cash.
For.instance,if.you.total.the.car,
you.may.actually.owe.more.than.the.car.is.worth.
Leaving.you.with.remaining.car.payments(unless.you.carry.gap.insurance).and.no.down.payment.and.no.car.
How.much.better.to.save,pay.cash,continue.saving,and.at.least.if.something.happens,you.can.afford.SOMETHING.to.drive.
3.Repairs.on.older.cars,even.in.worst-case.scenarios,don’t.equal.large.car.payments.
We’ve.”sunk”.two.tranmissions.and.a.refurb.engine.into.my.husband’s.pickup.over.the.last.three.years.
Pretty.unlucky,don’tcha.think?
Total.for.all.three.MAJOR.repairs?
2800.over.36.months.
Less.than.100.a.month,
leaving.us.plenty.to.save.toward.a.better.car
in.the.future.
Just.my.two.cents
(and.a.whole.lot.of.periods!)
Five years ago I bought a repossed, 6 year old Olds with 45,000 mi. from a finance company for $3,000. My wife has put 100,000 miles on it commuting to work. I’ve spent maybe $300 on repairs – Exhaust, brakes, water pump (preventative). People should learn to do some things for themselves to really save money. I could sell the car today for $1,000. 100,000 miles for $2,300! Buy a new car and it costs you that much to drive it off the lot. I’m watching now for that 5-6 year old car with similar low miles so we can do the same thing again. The bigger GM cars get almost as good of milage as the Toyotas and Hondas, have a lot more room, and can be purchased used for 1/3 the price, but they won’t go the 300,000 miles. Get rid of them before they hit 200,000!
The one thing that is wrong in this article is the words “trade in”.
Dave NEVER says to trade in. You always SELL your old vehicle to maximize the $$ you get out of it.
Case in point, I traded a paid-for 97 Jeep wrangler in on a 6 year old BMW 3 series. Private party value on the Jeep was $7700, the dealer gave me $6000, and then they put it out on the lot for $10900.
$1700, heck even $1000 more would have helped, but I did that because I can’t sell a thing to anyone, and I would have had to wait longer.
If I hadn’t got that nice paying job 55 miles away, I would still have the Jeep (18 mpg would run me 4-500 a month in gas alone).
I’m glad the Saturn Vue was redesigned, and made more powerful in 2006. I plan to get one of those in about 4 years 😀
Paul, regarding the “selling” comment you made. This is not an issue with selling your car outright. I am not a seller by any stretch of the imagination. Two years ago I sold my 2004 Camry to get rid of the payment. I wrote up an honest description of the car with a couple of pictures, set the price according to Kelly Blue Book private party sale (kbb.com) and listed it on craigslist.org (free advertising site). I told friends and family, and parked the car with the for sale sign prominently displayed when I had a garage sale. It didn’t take long to start getting calls. On a Saturday about 2 weeks later, a guy whose wife had her car totaled in an accident and needed a car, looked at it, drove it, and an hour later we exchanged a cashier’s check for the title.
You can do it!!
I also recently sold an 88 Jeep Cherokee to a relative’s coworker. Again, I set the price according to KBB, and negotiated the price fairly. The KBB was @ $2000, guy offered me $1600, but I just put $200 worth of repairs into it, so we settled on $1800.
In most states all you need is a Bill of Sale you both sign, and sign as the seller the title over to the buyer. Don’t accept anything other than hard cash (not a personal check) or cashier’s check drawn on a local bank. Don’t be afraid to call the bank to verify funds before you give up your car.
Finally, I believe in the drive free theory as well as many other ideas Dave talk about. The idea is to not be slave to the bank or accept debt in your life anymore. With this new outlook comes power over your financial decisions. Stop asking for a loan and start getting exactly what you want because you have cash to back it up. One thing that was not touched on was this:
Dave is not totally against new cars. If you have no debt and the cash lying around and you choose a crappy investment such as a brand new car, then do it. But be aware, that doesn’t change the fact that you lose 60% of the value in the first four years.
I plan to take God’s and Grandma’s plan a step further. Rather than upgrading in car every year, buy a good used car you really like and drive it until you have to replace it. I don’t know about you, but growing up, my grandparents only had 3-4 cars their whole adult life. They drove it til it wouldn’t go no more! Take a look around, do you see a lot of junk car lots and cars being processed for disposal? The simple fact is that we go through way too many cars. It is very wasteful and keeps us in debt all our lives.
Debt is normal! Do you want to be normal???
You speak up what people needs to hear, although I try they don’t listen. I have saved thousands since listening to you. I have become a published author: Free Of Me
Self-marketing is the only bad thing. So please I need all the help I can get to get my book out there. Thanks and keep the great work up.
Dari Carroll
This is not the Dave Ramsey Plan. Go to his web site to see his actual plan. The author took a couple ideas that he liked and changed it a bit.
Before putting it down, go to the source. everyone who put it down sounds like idiots.
There is another problem with this plan and it is common to all those who jump on the (older) used car bandwagon.
The problem is risk. As a vehicle gets older, the chance that it is going to break down becomes greater. Yes, the make and model have a huge effect on this but it is universally true. So what is the problem with breaking down?
Well, if you are in less than excellent financial straits, the unexpected repair bills can throw you back into debt quickly. But this is probably not a big deal for those reading this.
The bigger problem is when and how a vehicle breaks down. What if you are on the way to work? Being late might not get you fired, but the damage to the trust between you and your boss/co-workers could lower your future earning potential. If you think that is far fetched (and it may be depending on your job) how about something like an engine failure happening in a dangerous place such as a highway. Would you endanger you and your family to save money?
I agree with #45… Listen to the source. Dave Ramsey has a very good system to “change” the way you think about your money.
It’s more than just driving an old car and saving money….It’s about faceing the person in the mirror, You!
I’ve listened to Dave’s radio program for years and he is very motivational!
Life is short, take control of your finances!!
I think #46 has a good point – some people can not afford any extra risk. Breaking down *should* be a consideration.
However, I don’t think the message should be, “Don’t buy older used cars.” I think the message should be, “Be selective about risk, and recognize the risk.” Our family opted for a high-risk old car with known issues because we could buy 9 or more used cars just like it for the price of a new car *and* we could afford the risks. I have a car-free commute, we drive on mostly quiet roads at relatively slow speeds, we had the money for our next used car saved when we bought the first, and we could go without our car indefinitely with only minor inconvenience.
Our friends made a very different decision for all the right reasons. They bought a much newer used car for their main vehicle, and are even going to buy a second car that is nicer than our only car. However, they cannot afford the risk that we can. Their schedule is much busier, and they have many more important reasons to travel and will be in trouble if their car breaks down. They take whatever risk they can afford, and pay for reliability up-front.
But what we do have in common is that we aren’t paying more than we need to for a status symbol. I think *that* is mostly the point of the whole “buy used!” movement. The “beware of breakdowns” caution is a good one. However, the risk might be worth it for some families. But risk needs to be a factor in the equation, that’s true, and it’s also true than many people don’t give risk enough weight.
This discussion reminds me of the time my DH and I were looking to buy a Range Rover. We were looking at a 10yo RR, and my DH happened to find the insurance papers and sales receipt from the previous owner in the glove box. They had paid about $2,500 less (five years previously) than the dealer was asking us to pay. When we pointed it out, the dealer told us “a Range Rover is an appreciating asset” at which point my mother (who’d come with us just for the day out) piped up and asked if we could look at the new Range Rovers then, because if it’s an appreciating asset then new would cost less than used! LOLOLOL!
We walked out of the dealership about ten minutes later, the salespeople were slimey and got quite narky that we’d found the papers and challenged them on price.
LOL what a great story Melinda. Gotta love mom’s sensibility.
I appreciate your take, Ethel. For our family, having a car breakdown wouldn’t be a good time. Add to that, we have at least four children in the house (two under 5!) at any given time. So, our family is limited on what kind of car we can have (minivans it is – and even used they are not cheap) and it MUST be reliable.
So, we buy what we can afford comfortably for the family vehicle. My husband’s car will be paid off in two years, and that will be driven until it dies.
I appreciate Dave’s advise, but some of this seems like obsession with money and saving,etc. Buying this car, driving it for so many years, selling, buy an upgrade, saving more, selling, etc….just seems like obession with money and savings to me. Just make sensible decisions with your finances, but dont’ spend all your waking hours obssessing about them.
Dave Ramsey is very good at remembering things like fees, interest, and depreciation when they support his arguments, and very bad at remembering them when they don’t.
Like a lot of what he says, this advice is pretty sound in its general intent–drive less expensive cars, and save rather than borrow–and pretty terrible when it comes down to the specifics.
Older cars have more mechanical trouble. It’s not a question of setting up sinking funds or anything else–you have to pay more to keep an older car running than a newer one. The total cost of ownership–which is what matters here–includes payments, taxes, insurance, and repairs. And even “repairs” has to take into account what you do to get to work or whatever if your old beater is in the shop again. Rental car? Miss a day of income?
It’s very like Dave to “forget” that in his detailed example and focus on the one item–payments–that helps him make his point.
Dave hammers on depreciation when it comes to new cars, but, somehow, that $1500 banger doesn’t lose any value at all during the year you drive it. I’ve bought a thousand dollar car or two, and they’ve pretty generally been scrap within eighteen months. I’m not hard on my cars; I’m just not an amateur mechanic.
Then there is the very worst piece of advice in the entire segment–that you should invest money in aggressive growth mutual funds that you are going to want within the next 5 years. That you should plan on getting %12 returns, year on year, is nothing short of insane. It is pretty close to malpractice for a “financial advisor” to suggest such a crazy thing. How about you just take your money to Vegas and put it on red? Stock funds are for a time horizon measured in _decades_.
Anyone invest in those “aggressive growth funds” five years ago to buy a new car today? How’d that work out for you?
In fact, it’s even worse than it seems at first, because Dave is forgetting (how convenient!) inflation, taxes, fees, and so forth as he extrapolates your “car payment” fund off into the limitless future. You just keep making 12 percent, year on year, and cars never get any more expensive! And you never pay tax on your gains!
It’s past ridiculous.
Yes, buy less car than you can. Yes, prefer saving to borrowing. But invest a car payment in a mutual fund for six years and buy cars with the interest for the rest of your life? Keep dreaming.
Pretty typically, Dave Ramsey is a genius at debt counseling (you don’t need that sportscar), and barking mad at investing (a mutual fund will return 12% yearly after taxes, fees, and inflation).
great stuff. i love it. dave is a real headcase
The 12% is definitely a stretch (especially in today’s market) but the advice is great overall. This is one piece of advice that I agree with from Ramsey but as far as his advice concerning credit cards that just bothers me to no end and is dead wrong (and I can prove it: http://www.creditcardchaser.com/dave-ramsey-credit-cards-i-love-ya-dave-but-you-are-dead-wrong/ ) 🙂
As a woman who comutes home alone 28 miles at night, I am willing to pay extra for reliablity. Having an unreliable car is not an option.
I just took my 11 year-old Nissan (which was starting to have issues) and traded it in for a new Honda Accord. I’ll probably keep the Accord 10 or so years. I did my homework and bargained well for both the Accord and the trade-in. My only regret is that I probably should have gotten a Civic and saved $4000.
One thing to keep in mind is that if you decide to sell your old car private party, you either have to sell it to someone you know or go along for the test drive (also not a good option for a single woman) or trust the person to bring the car back to you after a test drive. If they don’t, you can’t file a stolen car report since you gave them permission to drive it (it becomes a civil case) and, I believe, you’d be responsible if they have an accident. If you trade it in, the dealer needs to make about $1000 on the deal to cover their inspection expenses and make a profit. Also, at least in the state of Washington, you can deduct the value of your trade-in from the price of the new purchase for the total you will pay tax on. For instance, if your trade-in is worth $9,000 and you buy a $20,000 car, you will be taxed on $11,000 (which saves you $8hundred-some; if you did sell it private party at $10,000, you’d be $100-$200 ahead).
The people who are critical of this method need to get DR’s book and read the whole thing not this synopsis. He addresses pretty much every hole you guys ‘find’ in this theory.
The most common one I’ve seen pointed out here is that a car loses a lot of value after 1 year. This is not true for most older cars. According to his statistics, cars with over 80,000 miles lose about 5% of their value year over year. New cars lose 20% of their value the second you drive it off the lot and then 10% of their value each year after until it becomes a higher mileage older used car. If you don’t believe these numbers go to KBB or MANA and check them. He also shows the math over 2-3 year periods, not yearly. At the end you are driving a car worth 20k that will lose 3k of its value for the years you drive it instead of financing 30k and losing 9k of value over the 3 years you drive it. Sure you have 4k+ more for your trade in but you just gave 4.5% to a bank instead of making 4% on your money. That’s a 8.5% swing in interest.
The other thing I see people talk about is catastrophic breakdowns. First off, this is part of his program the Total Money Makeover. This isn’t his suggestion for everybody to buy a car. It is part of a system. If you are following the system, you have a catastrophic account for unexpected expenses. You build this before you even address your debt. That’s how important it is to his system. Second, if you are facing 3k in repairs on a car worth 1.5k you would never fix this car. You call a junkyard and get $250 for you car, take the money you had been saving and you go buy a different car.
The last thing to address is…of course most people can’t keep the big picture in mind when saving for a car. That is why ‘most people’ live in debt, have $500 car payments and think they are investing their money on a commodity that depreciates.
I stumbled on this article researching something else and I know it’s old and I’m not angry or anything despite the way the tone reads. I just found it disheartening to see such a simplified version of what I think is the perfect way to buy a car.
I just recently saw this video on Dave’s website and I loved the idea immediately. It makes complete sense to “pay/save” what your typical car payment would be instead of paying that money to the bank or dealer plus interest! My husband and I began this savings process immediately after we finished paying off his car. Just having the savings for a new car building automatically makes the stress of replacing a car within the next couple of years melt away. Thanks for posting this…3 years ago. Better late than never I guess. 🙂
I do have to say that one needs to keep taxes in mind with the scenario; I bought two used cars recently and paid $750 for one and $661 for the other for taxes and tags; that’s no small change…
I do agree overall with the theory of ‘paying yourself’ over time to save for the better car (would be better than financing at 6.9%). It shows you very quickly what it’d be like to have that payment missing from your monthly cash flow. Might even change your priorities rather quickly (from wanting a nicer car to wanting a nice, fat emergency fund!).
Well that is good advise and all, but what about taking the Ramsey hack and turning it into potential cashflow (over a period of a few years of course). Since most millionaries stop at 13K cars as the median in the Millionaire next door. Then why not?
Go with a 2K car. Sell the 2K car and put the 2K towards getting a 5K car. Sell the 5K car and put the amount towards the 13K car. Drive the used 13K car and sell it again for 13K and go back to the 2K car. (Netting you a bunch of free rides and 11K!) Wash, rinse, repeat.
Don’t buy too big of a hunk of junk though. My mom bought $500 beater cars every six months to a year when I was growing up and it was the worst. We got stranded so many times, had car fires, couldn’t get to school, and even drove a car for about a year that wouldn’t go in reverse (we couldn’t park downtown unless we found a corner space!). It was a nightmare. Because of this, although I am frugal I will never drive a car once it starts breaking down more than once or twice a year.
If you had followed Dave Ramsey’s investment advice you would have lost money. He always advocates for real estate (no matter how inflated the market is) and magical mutual funds with 12 percent returns. That is not a realistic long term expectation. He says you can pull money for the fund to buy cars, but the money will still compound into millions. You certainly couldn’t do both. There is a whole list of inaccuracies in his free car video.
http://www.ilogicbomb.com/topic/8/Will+Dave+Ramsey+get+you+out+of+debt+just+to+make+you+poor%3F++
This is funny…
Everything in Daves course is based on you saving your own money and not spending someone else’s money. I thought thats obvious, but I guess some people need to be taught about it?
I like Dave’s thinking but that 10 year old car that is worth $1,500 dollars is going to be really heavy on maintenance to keep it running. I question whether you could consistently save the $475 per month or if you will be spending that to keep the ole beater running.
Overall I like Dave but this plan is really not going to work for most people…. Especially if they are a one car household. First of all Dave does not take into account maintenance costs at all. The maintenance cost on a an old beater is 2 to 3 times the costs of a new car with a warranty. Yeah your paying interest to the bank you also pay nothing when the fuel pump goes out and the alternator blows….. I know some people driving beaters who pay more each month to keep them running then if they did have a car payment.
It is complete fantasy to think you are going to be able to sell your car a year later for what you paid for….. Lets say that $5000 dollar beater #2 blows an engine or transmission…. There goes your $5,000…. Guess you are back to driving beater #1.
Fantasy #3 is that you can keep paying $475 per month every month into a car savings fund. You are going to have to divert a good portion of that into keeping your beater running or constantly replenishing your emergency fund.
I think Dave makes good points but some of his facts are off. Cars do not lose 70% of their resale value in the first 3 years. Not sure where he came up with this figure. I sold my 5 year old car, to a dealer no less, for 65% of the amount I paid for it. This means it depreciated 35% in 5 years. I could have sold it for 80% of the original value if I sold it to an individual. One can buy a new car and keep it for 10 years with very little maintenance costs besides tires, battery, coolant flush, transmission flush and Brake fluid flush for less than $2,000. A used car would take at least double this amount if not more. (timing belt, brakes, suspension parts, spark plugs) After a new car is paid for in 5 years you could still save the car payment each month to pay for your next car. Ramsey always talks about interest rates on car loans being some ridiculous amount. I get loans for 0 – 2.9% not 7 – 12%. To get a car for $10k you would need to buy a car with close to 100k on it, unless you buy some small compact car which I would not drive. The car would not be trust worthy.
Totally stupid post!
How can I buy a car for 6700,- from a dealer and 1 year later I will receive 5700,- from him? :)))
The dealer needs to make money too. The sales to sales price might decrease about that amount, but that would mean you have to buy it from a private party and sell it buy yourself to a private party.
With the dealer margin in between that is impossible.
Besides that, the higher the value of your car, the more you will loose when you sell it after a year….so saving less the longer you do it will not work.
You need to save more and not less!
If you buy a car for 20000,- instead of 6700,- you might be able to sell it for 16000,-.
So would need to save 4000,- just to “hold your level”.
You can see here that this is pure theory and the author has never done this by himself. :))))
Of course…the basic idea about saving 450,- instead of going directly to a dealer and buying a new car makes sense…but that’s about all that makes sense in this text.
If you want to save money on a car…buy a 10 year old and keep it for years and then repeat the cycle.
Makes the most sense in from the money point of view….mathematically proven!