How to Get Rid of Your Car Payment And Pay Cash for Your Next Car
Remember when your car was a symbol of your independence? Having your own set of wheels meant having the freedom to go wherever and do whatever you wanted—well, within reason for a 16-year-old.
As an adult, your car is essential to everyday life. It gets you to work, your kids to school and your errands accomplished—all day, every day. But you probably don’t see your car as an emblem of your freedom anymore. In fact, with car payments at their highest point in history, your car may sometimes feel like an anchor weighing down your budget and keeping you from accomplishing important money goals.
We often accept that life with a car payment is an unbreakable cycle—if you want to drive, you gotta pay the price, right? But it’s a myth, and you don’t have to accept it! With smart budgeting, it is possible to get rid of your car payment and save up to pay cash for your next car. How can you do it? Let’s start by taking a look at everything that goes into your transportation budget.
Transportation Budget Breakdown
Transportation is one of the first categories you need to budget for each month along with food, shelter/utilities and clothing. Line items in your transportation category include your car payment (if you have one), gas and oil changes, repairs and tires, auto insurance, license and taxes, and car replacement.
Let’s play with some numbers to see how all this fits into the budget of a person with a $50,000 income. We’re using figures from Experian and AAA’s 2014 edition of “Your Driving Costs” based on person who owns a mid-size sedan and drives 10,000 miles a year. You can get a more accurate idea of your expenses by tracking your spending in these categories for a couple of months.
|Category||Per Month||Per Year|
|Repairs & tires (includes oil changes & routine maintenance)||$45||$545|
|License and taxes||$53||$640|
Stop Your Car Payment From Busting Your Budget
That’s a lot of money going to your transportation budget every month! By far, the largest chunk is the car payment—$482 a month. Get rid of your car payment, and you’ll eliminate the most expensive line item in your transportation budget.
Your first step is to put your car payment, no matter how much it is, into your debt snowball so you can pay it off as quickly as possible along with your other debts.
While you work your debt snowball, don’t worry about your car-replacement line item. Focus all your energy and extra money on becoming debt free!
Now Start Budgeting for Your Next Car—Without a Payment!
If you don’t have a car payment (or any other debt) you can begin working on your car-replacement fund. The number-one thing you are not going to do is go out and buy a new car with a new car loan. Why should you sign up for monthly payments and thousands of dollars’ worth of interest when you don’t have to? Save up and pay cash and you’ll never have a car payment again!
Using our example above, once your car is paid for, your monthly budget for transportation is just $290. With no debt hanging over your head and a good handle on your money, you can choose a monthly amount that works for your budget. Doesn’t that sound great? You get to choose!
Let’s say you allocate $350 per month to your car-replacement fund. In just two years, you’ll have $8,400 plus your trade-in to buy a new-to-you car.
That may not sound like much, but you’re not done yet. Let’s say that new-to-you car is worth $10,000. Continue saving $350 a month in your car-replacement fund for an additional two years and you’ll have another $8,400 plus your trade-in to upgrade in car again. Since we’re dealing with such a short time frame, your car will have retained most of its value, so this time you aim for a $15,000 car.
See where this is going? By saving up cash, spotting great deals, and staying conservative in your purchases, you can upgrade your car every couple of years without ever taking out another car loan!
If you have a longer window of time to save before you’re ready to buy a new car, you can set a savings goal amount—say $18,000, the average price for a used car—and divide that by the number of months you have to save.
For example: $18,000/48 months = $375 per month
In four years, you’ll be ready to buy a car with cash—no payments necessary!
Simplify the Process With Powerful Budgeting Tools
Your EveryDollar budget will give you all the tools you need to take charge of your transportation expenses, track your car-loan payoff, and get started on your car-replacement fund. Keep in mind, though, that getting rid of your car payment means more than simply making the numbers work. It means making a change in the way you think.
You have to stop believing you’ll always have a car payment and start believing it’s worth a bit of sacrifice and discipline to eliminate car payments from your budget for good!
Ready to get started? Create an EveryDollar budget today!