The “Car Payment” post I’ve been meaning to make for a while….
This is the methodology that I’m applying to my own life. I discovered the basic theory behind it in a post on GetRichSlowly.org
*How to Drive a “New” Car Every Year…Like A Boss”
I’m going to use my own situation as an example:
* Use KBB.com to determine the private party sale price of your current car (and thus, the ‘downpayment’ on your new car. ($6500)
* Figure out what car payment you could afford ($189)
* Put that amount into savings each month for 12 months ($2268)
* Next year, sell your car and buy a car for ($8768) cash.
Now comes the brilliant part.
* Drive this car for a year. Keep “making payments” on it. ($2268)
* Keep up on the routine maintenance, like oil changes and tires. ($500-1000) You would do this on a car you were making payments on.
* Next year, sell that car for roughly what you paid for it ($8500 OBO) and put the money together with your “car payment”.
* Buy a new car for ($10768).
* Lather, Rinse, Repeat.
This gets you out of the trap of making interest payments on a depreciating asset
* It’s *impossible* for you to go ‘upside down’ on your car, since you paid cash.
* If your financial circumstances change, you’re not locked into a specific payment under penalty of having your car repossessed. You’re allowed to set yourself a more modest goal if your budget becomes more modest…
* You sell your current car before it loses a ton of value.
* You have **NO IDEA** how much negotiating power an envelope (or briefcase) full of $100 bills has at a car dealer. Do you homework and pick out a car that is what you want, AND is worth (and advertised for) an easy couple thousand dollars more than you have. Check the car out to your complete satisfaction. Offer them your lowball offer ($16000, out the door for a 2005 Wrangler Rubicon – KBB value $17900). Watch them scoff. Make them the same offer, cash. Watch them fall all over themselves to make you that deal when you get up and walk out with ALL THAT MONEY….
*DOWNSIDES*
* You need to develop the consistency to put away ALL of your Car Payment, EVERY MONTH. Doing an automatic withdrawl/Direct Deposit to an Orange Savings Account (or similar) is a great way to automate this.
* You’ll need to find other ways to improve your overall credit rating, if that sort of thing is important to you. An alternate source might be using credit cards with big airline mile bonuses for a minimum spend… (cuz, hey, free travel on top of a new car every year? Can’t beat that with a stick…)