Driven crazy by car loans
My long commute means my car has a lot of miles on it. Right now, it's cruising up to 180,000 miles and still going strong. While we're hoping to make it to 250,000, approximately 30,000 miles goes on the odometer each year.
My Car-Buying Philosophy
In a rare piece of verbal financial advice from my father, he told me to always pay for my vehicles with cash. He said, since they depreciated, I should pay for basic cars with cash and throw my money at something that appreciated.
Since my father is deceased and I can't get any more advice from him, I've tried to adhere to his advice. It's not easy, though, and it keeps getting more difficult. So far, I've owned four used cars. The first two were inexpensive, paid for with cash and thoroughly unimpressive.
My third car story was slightly better. My first year out of college, I kept my low-consumption lifestyle. With no debt and a decent income, I was saving at least $1,000 a month. My goal? Save up enough money to pay for my third car with cash. When it came time to buy the car, I followed personal finance blog advice. Used. Check. The least expensive car that still met my needs. Check. Buy and hold approach. Check. Cash. Big check.
I had that car for six years and expected to drive it for several more. Because I didn't plan on replacing it so soon, I saved no money for another car.
Then the unthinkable happened.
About five minutes into my commute one foggy morning, I was crawling along until a “T” intersection sign materialized through the fog. I slammed on the brakes, jumped the ditch, and ended up in the field.
Unhurt, but scared, I called my husband. “I just wrecked the car. Can you come get me?”
A few minutes later, I heard a truck approaching the intersection too quickly to get stopped. He slammed into the ditch.
It was my husband.
When I called the insurance company later that day, I begged the guy not to tell anyone about the crazy couple who wrecked at the same intersection on the same day. He just laughed.
Because I failed to plan on an emergency, we had to finance our fourth car. We paid double some months and quadruple other months, so we ended up paying off the car months early.
Even though we had shaved almost three years off our loan, those 26 months of car payments drove me crazy. I didn't want to finance a car again. Still, it took us 18 months after we paid off the car to start saving for the next one, the one we're planning to buy in a couple of years.
Cash for Cars
I don't know about you, but purchasing a car with cash feels overwhelming. Sure, I'd done it three times, but that was before a mortgage, higher standard of living, more expensive cars, etc. It's harder now.
But I really disliked having a car loan. And I didn't want to do that again.
So in May 2011, we started a new car ING savings account, automatically depositing money each month. Because our car payment had been about $300, we started with that. When things got tight, we dropped the monthly contribution down to $100, but as soon as we could, we increased it again.
As of today, we have almost $4,800 saved for the next car. If our car makes it for another 26 months, our current savings rate will add another $7,800. At 250,000 miles, our current car will be worth little to nothing, so I can't expect much there.
Hmm, somewhere around $13,000. In two years, our family dynamic could look very different. $13,000 may not be enough to meet our vehicle needs at that time. Plus, our income may be significantly lower by then, so do we want to tie up that money?
And that brings me to my burning question: Does paying for cars with cash really make a difference to my bottom line?
I mean, I'm either paying $300 to the bank or $300 to my savings account. What's the difference?
Interested in Saving Money
Well, interest for one thing. As of today, my car savings account has earned $31.38 in interest over 20 months. By using The Motley Fool's “Should I finance or pay cash for my vehicle” calculator, I found that my last car would have cost me $2,219 in interest over the length of the loan (if we hadn't paid it off early). Current savings interest rates mean I should earn almost $120 by the time it's time to buy a new car. And while that's not much, it's better than paying $2,219 in interest.
But here's where it gets less simple. What if I found another investment that paid me more than I paid the bank for my car? If I were disciplined enough to invest elsewhere for a higher return, financing the car makes sense.
And even more complicated is how our life may be changing. Right now, we have a little emergency fund, no dependents, no consumer debt and 2.5 very stable jobs. As you know, we're adding to our family. When our financial picture changes, we may not want to put $13,000 into a car; we may need it for something else. Our emergency fund isn't large – but that's because it hasn't needed to be. Maybe we'll need to merge the car savings account and our emergency fund.
I don't know the future, but I do know myself. I want to do everything in my power to avoid a car loan, so I don't care if it doesn't make sense: I wouldn't take out a car loan and invest the money somewhere else. As far as the emergency fund, I'll wait and see on that.
In the meantime, we will try to
- Increase our savings rate
- Drive our current car longer
- Keep our eyes open for a less expensive car
Do you think it's important to pay cash for cars? Have you ever financed a car that you could have purchased with cash, just to have a cash cushion?