Over the past several weeks we have been talking about car payments and how to avoid them. We’ve discussed the benefits of being without a car payment, the importance of keeping up with routine vehicle maintenance, and the real hurdle of preparing for the unexpected in terms of vehicle replacement. Now let’s talk about how to plan for a vehicle purchase in such a way that you are able to buy without remaining in a cycle of debt and car payments.
After reading how my wife and I have gone about purchasing vehicles, you may be thinking we are crazy (you wouldn’t be wrong). Perhaps you cannot imagine buying a cheaper vehicle as we have done. That is totally okay! I am going to walk you step by step through how you can work your way out of payments through planning, intentional saving, and self-discipline.
First, you’ll determine your budget for your vehicle upgrade. The way you do that won’t be like how you may have purchased vehicles in the past. To start, you should be able to afford to pay it off when financing it over 36 months. Since that is close to half the time the average person finances a car, it will almost certainly alter what you have to choose from.
Our estimation is that a good starting point would be to target a $10,000 vehicle to begin with. At that price, you can purchase a 3 to 5-year-old vehicle that is in good shape and should last. It won’t be a clunker, but also won’t be as nice as you might eventually like. If you have money you can pay down in advance, you may be able to purchase a nicer vehicle, but the premise works the same.
By the end of your 36-month loan term, you’ll have paid your vehicle off. However, if you want to truly move forward payment free, you don’t stop making payments. Since you are already used to your monthly payment, once you’ve paid off your vehicle, you’ll simply divert that amount each month into a savings account. If you do this faithfully for 3 more years, you should have saved what you spent to purchase your current vehicle.
Now you have a couple of options. Your vehicle at this point is nearing the ten-year marker and probably could use an upgrade. If you just want to be done with payments, you could look for a vehicle that was in the same price range you purchased previously. You would have enough savings at that point to simply buy the vehicle outright. Choosing that option means that if you kept paying yourself that same monthly payment, you’d really be in a position to buy a really nice upgrade after the 6-7 years you should be able to get out of your second vehicle.
However, if you would rather stick with a payment and get a nicer car than you previously did, that is an option as well. Since you should have saved quite a lot, you could go for a car that costs about 50% more than your previous vehicle, and finance the amount above your down payment over a short 24-month loan. That should allow you to pay off that vehicle in short order, and then simply revert back to paying your car payment into your savings account in preparation for the time when you need to upgrade again.
The important thing with either way you go is that you don’t stop setting aside that monthly payment. If you get a vehicle paid off and decide to use that extra money on some other luxury, you’ll find yourself right back in the habit of taking out those nasty 72-month loans to get a vehicle. You CAN do it, but it is going to be hard work!
Good luck!