Managing Money

1099 Words on Paying Cash for a Car

October 19, 2011

This week we did something we’ve never done before. We paid cash for a car.

It’s not a fabulous car, mind you. It’s a (very) used Saab that we bought for our teenage son.

But the experience of saving up and paying cash for a car was a new one. And it’s the second biggest financial win we’ve had since I started this blog. (Paying cash for college was the first one. Paying off all our non-mortgage debt will be the third.)

The Income Stream That Bought the Car

I’ve written before about giving jobs to different income streams:

Paying off debt with found money.
Using the social security tax break to save for retirement.
Using freelance writing income to pay cash for college.

Paying cash for this car was another example of giving an income stream a job.

Earlier this year I began to direct the money I earn from the bookkeeping work I do to an ING savings account, earmarked for a car. (I’m making a note right now to write a future blog post about ING Savings accounts and all you can do with them. They’re awesome.)

Anyway, I had $4800 put aside and actually thought we’d be saving for a few more months.

The car that found us.

But last Friday night this car found us. And we had more than enough money to write a check for it. Win!

The Benefits of Skipping Car Loans

The upside of paying cash for cars would seem to be all about the interest saved. After all, if you’re saving up cash for a car, you won’t be paying any interest, and may actually earn some along the way.

But here’s the best-kept secret about the benefit of paying cash for a car:

When you pay cash for a car, you spend less.

There’s some conventional wisdom that says that when you pay cash for things like clothing, gifts, and groceries, you spend less than when you throw down the plastic.

That makes sense. Cash hurts more.

So, if it’s true for jeans and peanut butter, can you imagine how much more true it is for a car? Consider this:

According to Bankrate.com, the average interest rate on a 48 month auto loan in my zip code is right around 4%.

At that rate, for every $1000 extra you spend on a car, your payment will only go up by $22.58/month.

That seems like nothing to me. It probably seems like nothing to you too.

And that’s why it’s so easy to overspend for a car.

So forget about the interest, when you approach car buying from this monthly payment mindset, it’s really nothing to add an extra $2000, $5000, or even $10,000 onto the purchase price of the car.

On the other hand, when you’re forking over cash (or writing a check that’s drawn on the cash in your account),  every $1000 you spend is much more real.

So the tendency is to pay less. Sometimes much less.

It’s a mental shift that can save you thousands and thousands over your car-buying lifetime.

A lower purchase price can translate into other savings, too:

• Lower sales tax
• Lower property tax
• And lower insurance rates

And let’s face it, those are the things we tend to forget about when we’re buying cars. The cost of driving a car is so much more than the cost of the car itself.

Should Paying Cash for Cars be a Goal?

I’m going to level with you here. Despite all I’ve written so far, we’re on slightly different pages about paying cash for cars at our house.

I love the freedom of having no car payments so much that I’m willing to drive my very uncool, work horse of a mom van (aka a paid-for 2005 Honda Odyssey with 88,000 miles) as long as necessary. (Although that SUV I rented while in Chicago gave me serious pause. How do I drive without a backup camera, anyway?)

My husband, however — and this is important — is in his car much more than I’m in mine and loves cars much more than I do. Therefore, he puts paying cash for cars squarely in the “it would be nice, but I’m not completely committed to it” category.

So all that means that while we’re currently car debt free, I’m not sure we can save up cash quickly enough to stay that way.

But we’re increasing the odds that we will by:

1. Continuing  to set aside the bookkeeping income stream for car repairs/replacement.
2. Taking the payment amounts of our last non-mortgage debts (two debts left, six months to go) and funneling at least part of them into car replacement.

How to Save Cash for a Car

Look, for most of us, cars are hard to do without.

I live in the suburbs of Kansas City where things are

S P R E A D   W A Y   O U T

and public transportation is almost non-existent.  Chances are you live some place like that too. Or you just love your car. Americans love cars.

Either way, owning a car isn’t as much of an option as, say, going on a cruise or buying new furniture or remodeling the kitchen.

But if you don’t save aggressively, chances are good – very good – that you will end up with a car payment.

If you currently have a car payment, there’s a really simple way to make sure it’s your last one ever:

Once you’re done paying off the car, keep putting the car payment amount in savings and do it for at least as long as you financed the car in the first place.

That’s it.

If you do that, you will have turned the ship around and will be in a position to pay cash for your cars from there on out.

If, like us, you didn’t do that, you still have some other options:

1. Pay off other debt and set those payments aside for car replacement.
2. Start a new income stream and earmark it for car replacement.
3. Slash your budget somewhere else (eating out? travel?) and earmark it for car replacement.
4. Or finance a car, but buy less than you can afford, put as much cash down as possible, pay it off as quickly as possible, and then start setting the payment amount aside.

The key is having the discipline to plan for it without needing the bank or credit union to provide that discipline in form of a monthly payment.

So what about you? Have you gone from financing cars to paying cash? Is it a goal? Should it be? Add your thoughts!

This post is part of Works for Me Wednesday at We Are THAT Family and Frugal Fridays at Life As Mom.

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  1. Great tips! I hope to drive our SUV into the ground. By that time, we should be done with the car payment and can begin to save that money in the someday-I’ll-buy-a-new-to-me-car-with-cash savings account.

  2. We are currently in the middle of saving cash for a car. We will probably be moving within the year and my husband will probably need a car. He walks to work now.

    We aren’t using our side income though. We are just saving monthly. Right now our side income is focused on building our efund.

    Congratulations to you for paying cash for a car!

  3. Congrats on paying cash for the car! It looks like a nice one. I haven’t bought a car in 20 years, but I have no intention of ever borrowing money for a car (or anything else) again, so yes, I would pay cash for one.

      1. Yes, although most people who live in this exact same area would not agree with me. I live in metro Phoenix, land of very little public transit. (Although we’re getting there, compared to when I first moved here years ago.) There ARE bus lines, and now a light rail system, and plenty of bike paths too. I also live within walking distance of pretty much everywhere I go except relatives houses and Costco.

  4. We’ve always paid cash for our cars – the problem then of course is the ongoing and much more expensive maintenance! Still beats having a loan on your back, though.

  5. Hi, Im from Costa Rica, things are a little different here, cars are much more expensive (50% tax), and insurance not as reliable or quick as in the USA, my question is this, If you have the money to pay cash for a car, and the loan interest is small, assuming that you’re gonna save each month the amount of the payment for a future car replacement, isnt it better to finance the car, and keep the money for an emergency. lets say that you totaled the car a month after using it, if you paid cash you will have no car and no money until the insurance kicks in, and after that you will be left out of the deductible.
    I dont support debt, in fact I would love to not have this kind of debt, but its just a thought I had.
    Thanks

    1. Good question, George. Presumably you would have both a paid-for car AND an emergency fund. And insurance usually pays quickly and reliably. Plus, this is a car for my son. We can afford to be without it if it got totaled. 50% tax on cars in Costa Rica? Seriously?

  6. Congratulations!
    I have had two cars in my life, both bought new with cash. (Well, check actually! Paid in full with my own money is what I mean.) The first time, it drained my life’s savings, which made me very nervous, but by not adding to my monthly bills I was able to start immediately replenishing my savings.
    When that car died, I bought a hybrid car, which saves money by using less gas although it did cost more than the cheapest new cars available. Of course, the real savings come from driving less! We enjoy living and working in walkable neighborhoods with public transit, and we are a one-car family driving about half as many miles per year as the average American individual driver.

  7. I’m driving a ’94 Town & Country mini van that’s been touched up with matching spray paint that our 16 yo son also uses. Our 19 yo daughter drives a ’95 Mustang convertible we paid $2800 for, but she must take care of all upkeep. My wife has an ’05 Trail Blazer bought used at 1/3 new cost that will be paid off soon. We hate car loans!

    Hope to never have another one!

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