Over 80 percent of the people that I see for a debt consultation have a car payment. When it is a married couple that I see for a debt consultation, most of them have two car payments. Since the average car payment is over $460 per month, a married couple with two car payments may have car payments of about $920 monthly. Every so often, I’ll tell a married couple in that situation that it looks like they wouldn’t be in my office if they didn’t have those car payments. Every single couple agreed with that statement.
For years I’ve been telling clients that it may be better to use their tax refund money to help them purchase a cash car and then save the payments. Saving the average car payment $460 for 12 months equals $5,520 in savings. Going from sending $5,520 over a 12-month period to a car lender to saving $5,520 in a year is a difference of $11,040!
It is easy to say that it is best to not have a car payment, but it is much tougher to actually make it happen, especially when you already have a car payment. Unfortunately, I had to learn this lesson the hard way. I remember buying a brand new Ford Taurus on payments when I was 24 years old, and I still remember the monthly payment amount: $323. It was tough to make that payment, and each monthly payment I made was a reminder that I didn’t want another car payment in my life.
When I was a five-year attorney, I bought a $3,500 Toyota Camry that had over 80,000 miles and a rip in the driver’s seat. I could have easily bought a nicer car on credit, but I didn’t want a payment. That Camry lasted about three years until the air conditioner went out. At that point, I sold the car for $2,000. It was at that point that I learned that there is a minimum selling price for a vehicle that runs. I got calls on that vehicle for a month after I pulled the ad from the newspaper. I had people calling for weeks saying that they would pay $2,500 for the vehicle even though they had never seen it.
My next car was a Honda Accord that I bought for $7,500. When I called on the ad, I mentioned to the seller on the phone that it seemed like the price was a bit low considering the age of the vehicle. He said it was low because he had three different people offer to buy it, but they could not get financing since the Accord had 85,000 miles on it. That didn’t bother me because I was paying cash for the vehicle. At that point, I learned that it is somewhat of a buyer’s market when you are buying that type of vehicle with cash. I bought the vehicle, and two years later I sold the vehicle for $5,500 to a physician. The value of the vehicle only declined $2,000 in two years! Try that with a new car bought on credit.
Based on these three car-buying experiences, I am convinced that it is always better to buy a cash car and save the payments. I’ve endured the pain of making a new car payment for years, and I’ve enjoyed the pleasure of saving money that would otherwise have been used to make car payments. I wish that someone would have taught me this lesson before I bought that Ford, but there is one positive effect this lesson has had on me: it has provided me a fair amount of insight into the biggest problem most of my clients have, which is having vehicle payments.
I was discussing this point with some of my legal assistants, and one of them asked how you buy your next car with cash when you don’t have any cash. I pointed out that the steps are rather simple: The first step is to finish making the payments on your vehicle. The next step is to continue making those car payments – but instead of making them to the lender, you make them to your savings account. I recommend making payments to your savings account for the same number of months it took you to pay off your vehicle.
When you save all that money, don’t rush out to buy a brand new car. Instead, take only one-half of the cash that you’ve saved and go buy a used Toyota Camry or Honda Accord. Be sure to change the timing belt, tires, brakes and oil. The rest of the cash should remain in your savings account, and you should add to it by the amount of the car payment that you would have had if you didn’t buy the car with cash. That way you are still making a monthly payment like your neighbor, but guess who sleeps better at night? Your neighbor you who is paying a car creditor, or you who is making payments to a savings account?
Most marital discussions are about money, but they are not about having too much money in the bank. Your wife will sleep much easier when there is some measure of financial security because there is cash in the savings account. Trust me on this: if you go at least a year without making car payments, you will never want to return to that way of life.